private briefing on sustainable investment in private ...€¦ · 28-11-2011 · sustainable...

Briefing on Sustainable Investment in Sub-Saharan Africa Report (IFC, July 2011) November 2011 | © SinCo 2011 | sincosinco.com

PRIVATE BRIEFING ��ON SUSTAINABLE INVESTMENT IN PRIVATE EQUITY IN AFRICA 2011

Private briefing by IFC + SinCo on lessons, findings and possible actions from research on sustainable investment in PE for practitioners in private equity and asset management in South Africa, Nigeria, and Kenya, and action plans for 2012. ��

Sustainable Investment in Sub-Saharan Africa report (July, 2011) was commissioned by IFC through its Sustainable Investing Unit in the Sustainable Business Advisory Department. The conclusions and judgments contained in the report should not be attributed to, and do not necessarily represent the views of, IFC or its Board of Directors, or the World Bank or its Executive Directors, or the countries they represent. IFC and the World Bank do not guarantee the accuracy of the data in this publication and accept no responsibility for any consequences of their use. Report was written by Graham Sinclair of SinCo, with Roselyne Yao. Analysis based on research 2010 – 2011 by SinCo and RisCura, led by Malcolm Fair. Project management by Cecilia Bjerborn IFC.

Monday 28, November 2011 - 7.00am to 8.30am Italian Restaurant, Intercontinental Hotel Nairobi, Kenya

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sincosinco.com

sincosinco.com

ifc.org/sustainableinvesting


1. SI REPORT ��2. PENSIONS ESG TOOLKIT ��3. IFC PE SUPPORT

AGENDA

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sincosinco.com


Sustainable Investment in Sub-Saharan Africa [SiinSSA] Project

ifc.org/africa sincosinco.com/ssinssa

Project: Client:

sincosinco.com


Project: …partners and scope

•  About IFC ifc.org/sustainableinvesting –  Private sector arm of World Bank with goal to enable people to escape

poverty and improve their lives. IFC’s investments in sub Saharan Africa topped $2 billion for the second year running in FY11, supporting private sector growth and helping create jobs in 31 countries in the region.

–  For the past 5 years, IFC’s Sustainable Investing Team has provided technical, financial support for projects that mobilize sustainable capital flows into emerging markets, providing support for private equity and portfolio companies to manage ESG risks and opportunities in Africa.

–  Research sponsored by South African and Norwegian governments.

•  SI in SSA Scope •  Sixth in series of EM specific research. •  To determine the current state and

trajectory of development of SI

•  In the South Africa with supplementary focus on other Sub-Saharan African markets (proposed Nigeria and Kenya)

•  Mainly focusing on private equity, also listed equity as an indication of overall trends for sustainable investment.

•  To clarify the drivers and barriers for sustainable investing IN ZA, KE, NG

•  Provide recommendations for actions to stimulate the development of market

•  7 point IFC framework: Economic indicators, Review of country regulation, Sustainability issues, Sustainable investment market snapshot, Sustainable investment demand conditions, Sustainable investment supply conditions, Analysis and recommendations

•  Exhaustive secondary research as well as primary research; 13 asset owners, 37 asset managers, 52 private equity investors, and 59 investment stakeholders interviewed.

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•  About RisCura riscura.com –  RisCura Fundamentals is the leading provider of independent

valuation, risk and performance analysis services to investors in unlisted instruments in Africa. Offices in London, Cape Town, Johannesburg, and Windhoek. Premier independent financial analytics provider and investment consultant with significant expertise in Africa.

•  About SinCo sincosinco.com –  Boutique sustainable investment advisory specialist in sustainable

investment in frontier and emerging markets. Delivers innovative policies, strategies, and indexes that move our clients up the learning and experience curves.

–  Since 2006, SinCo has integrated ESG factors into investment processes for institutional investors, PE funds, stock exchanges, and international organizations promoting long-term sustainable investment performance.


Perspectives: …verbatim comments on sustainable investment

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African Stock Exchanges: …three stages in development

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Top 5 African Africa stock exchanges by market capitalization (above USD 10bn) Other operating Africa stock exchanges

Source: SinCo analysis 2011; : SinCo+RisCura data; 2011 © International Finance Corporation (IFC)


Drivers: …investing in Sub-Saharan Africa

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“Negative perceptions and the engrained bias that this has created remain Africa's greatest challenge in attracting investment. Private equity is still a young asset class for Africa and despite well known fund managers like Actis and ECP, there isn’t a long track record of success to point to when making the case.” – PE Fund

Source: SinCo analysis 2011; : SinCo+RisCura data; 2011 © International Finance Corporation (IFC)

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17

17

15

25

28

38

44

11

15

22

19

28

18

34

42

0

0

14

29

29

29

0 20 40 60 80 100 120 140

Overhang of capacity

Liquidity

��Environmental or social risks

Portfolio diversification

Data on good performance

Political/economic risks

Corporate governance/standards

Attractive risk-adjusted returns

Identify the importance of these factors in choosing whether or not to invest in Sub-Saharan Africa today Ranking results identified as "very important" on 4-grade scale

[frequency ranking from 8 options; n=48 PE investors + 44 asset owners and asset

Very important - Private Equity Investors

Very important - Asset Owners and Asset Managers

Stakeholders - Very Important


Defining sustainability: …ESG and a string of issues

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Source: SinCo analysis 2011; SinCo+RisCura data; 2011 © International Finance Corporation (IFC) 2

3

3

8

9

9

10

13

13

14

19

27

28

3

1

4

8

5

5

2

7

6

8

26

25

24

3

4

2

12

10

13

8

10

7

13

22

34

30

0 10 20 30 40 50 60 70 80 90 100

Non financial risks (risk mitigation) and

Other (e.g. depending on client mandate, triple

Political stability / sustainability

Long term period factor

Infrastructure factors (including legal and financial

Conservation factors

Economic factors (esp. country and individual

Financial factors

Stakeholder factors

Business Performance factors

Governance factors

Environmental factors

Social factors

How do you define "sustainability"? What sustainability issues - environmental, social or corporate governance - are front of mind for you in Africa today?

[open-ended; top 10 responses; n= 52 PE investors + 46 asset owners and managers + 59 stakeholders

PE investors

Asset owners and asset managers

Stakeholders

•  Definition of “sustainable investment” used by the IFC - "an umbrella term for all investment techniques that integrate environmental, social and governance (ESG) value-drivers into financial research and investment processes”


Sector awareness: …extractives are high-impact, high-visibility

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Source: SinCo analysis 2011; SinCo+RisCura data; 2011 © International Finance Corporation (IFC)

3

6

7

12

8

11

14

8

6

5

12

7

31

39

2

4

5

2

8

4

5

9

14

15

11

22

26

25

3

3

3

2

4

6

4

6

7

10

8

34

19

22

0 10 20 30 40 50 60 70 80 90 100

Automobiles & parts

Transport and shipping

Food, beverage and tobacco

Chemicals

Travel & leisure

Gas, water & multi-utilities

Forestry & paper

Construction & materials

Pharmaceuticals/healthcare

Telecommunications

Electricity

Banking and financial services

Mining

Oil & gas producers

Stakeholders' perspectives on ESG awareness from industries in Africa are today [14 options + "other" option; n = 47 stakeholders; January 2010 - April 2011]

Environmental

Social

Governance


Ten years: …range of ESG issues, and prioritization

10

6

6

8

12

13

16

17

18

21

21

24

29

31

44

9

12

12

13

24

21

15

16

22

27

17

20

32

37

15

11

5

18

23

8

12

16

17

31

15

16

37

34

0 20 40 60 80 100 120 140

Biodiversity.

Micro-finance, micro-insurance.

Gender Diversity.

Emissions of greenhouse gases.

HIV/AIDS.

Broad-Based Black Economic

Product Health, Safety and Nutrition

Human and Indigenous Peoples Rights.

Jobs creation [“decent paying” jobs].

Water scarcity or sanitation.

Environmental Management

Employee Relations, Safety and Worker

Infrastructure Development.

Corporate Governance.

Performance impact of ESG Factors 3-10 Years [n= 97 investors (51 PE investors) + 46 stakeholders; forced ranking 14 answers, very/somewhat/marginally/not important;

Jan'10-Feb'11; SinCo analysis 2010-11]

Private Equity - Very Important

Investors (excluding PE) - Very Important

Stakeholders - Very Important

www.sincosinco.com/siinssa



Supply: …ESG in PE investment lifecycle

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“Future: Fund-raising is incidental to the process and may screen out GPs unaware of ESG issues. ESG is helping mitigate risks in portfolio: ESG manages risks and enhances returns…Higher corporate governance means higher exit. Greater all around return…No view on exit. There will be demands from investors for higher ESG intergration going into the future.” – composite of investor responses


77% 82% 87%

59%

14% 13% 8%

30%

3% 3% 6% 5% 5% 8%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Fund-raising Due diligence Fund management Fund/company exit

How ESG is used in the PE investment lifecycle [Forced 4 answer choices; n= 48 PE Investors; January 2010 - February 2011]

Never Seldom Sometimes Often



6

9

19

20

21

25

30

6

25

20

17

18

23

25

0 10 20 30 40 50 60

Recruiting investment professionals

Research

New client asset gathering

Portfolio management

Investment selection

Marketing

Risk management

Investment Roles and ESG: how ESG will become more important in Next 5 Years [forced ranking; 7 options; n = 49 PE investors + 45 asset owners and managers; January 2010 - February 2011]

Private Equity Investors - Strongly Agree Asset Owners and Asset Managers - Strongly Agree

Roles: …whose job is it anyway?

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“We have a different background, for e.g. these factors cannot be included into the restructuring and divestment process….ESG will take some time… Work from markets is at the leading edge. Country reports are limited.” – composite investor verbatim responses.




Drivers and barriers: …carrots, sticks and muesli

The primary drivers of SI identified by participants in this study were:

1.  Good investment returns (a record of premium from ESG integration)

2.  Explicit and tangible ESG benefits/impact

3.  More information 4.  Government/regulator incentives 5.  Demands from clients/investor

mandate/shareholder pressure.

The top five barriers cited participants in this study were:

1.  Lack of adequate information to evaluate investment target ESG-related performance

2.  Lack of evidence that ESG factors increase financial returns

3.  High costs of implementing ESG investment 4.  Lack of appropriately skilled advisors and

necessary expertise

5.  Short-term reporting against prospect of long-term returns.

Barriers also include the “investment-as-usual” approach, the perception that SI consists of “ethical” investment and/or negative screening, and the specialized “language of sustainability”.

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“More capital available to pursue ESG mandates…Increased returns, higher exit values, due to ESG…There has to be a business by business basis to try and get help to improve attractiveness. Standards don't really help, but increased awareness on governance and more board training would help. Also being realistic about what can be achieved.” – composite verbatim comments



Drivers: …making sustainable investment attractive

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More capital available to pursue ESG mandates…Increased returns, higher exit values, due to ESC…Find a GP that is highly skilled and knowledgeable on ESG and the other risk issues…There has to be a business by business basis to try and get help to improve attractiveness. Standards don't really help, but increased awareness on governance and more board training would help. Also being realistic about what can be achieved. – composite answers


Perceived Key Drivers to Sustainable Investing in Sub-Saharan Africa open-ended; n= 41 asset owners & managers + 43 PE investors + 43 stakeholders; Jan'10-Jan'11; Interviews SinCo analysis 2010-2011

Private Equity Asset Owners and Asset Managers Stakeholders

Good Investment / Financial Returns 35% Good Investment / Financial Returns

44% Good Investment / Financial Returns 38%

More Information Available 26% Tangible ESG Benefits / Impact 22% = Tangible ESG Benefits / Impact = Incentives from governments, regulators

27%

Incentives from governments, regulators 22% Demand from clients; investor mandatel shareholder pressure

17% More information available 18%

Demand from clients; investor mandatel shareholder pressure

17% Incentives from governments, regulators

12% Proven risk reduction 13%

Explicit SI/ESG Impact 15% More information available 7% Demand from clients; investor mandatel shareholder pressure

9%

Please note: The respondents, answering an open ended question, could integrate more than one drive to their answers.



Supply & Demand: Motivations for ESG Differs

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Key Motivations for investors integrating ESG factors

12 answer options + "other" option; n=45 stakeholders; Jan 2010 – Apr 2011

Perception from Stakeholders % of question respondents Regulatory and compliance issues 47% Investment or business merit 20% Founder or CEO philosophy 18% Marketing or PR profile 16% Client demand internationally 13%

Key Motivations for PE General Partners integrating ESG 7 answer options + "other" option; n=45 PE investors; Jan 2010 – Apr 2011

Perception from PE investors % of question respondents Help in fundraising, as limited partners demand for sustainable value creation is increasing 29% Support good investor relations 20% Higher returns through increased EBITDA 16% Mitigation of headline risk 13% Higher returns through higher exit valuation 11%

Key motivations for investee companies

8 answer options + "other" option; n=78 investors [PE+AM+AO]; Jan 2010 – Apr 2011 Perception from Investors % of question respondents

Mitigation of headline risk 21% = Better working environment, easier to recruit and retain best talent = Mitigation of risks of resource constraints, stricter standards by supply chain and trade buyers 18%

Growth /access to new markets 15% = Differentiation strategy = Higher exit valuation 8% Source: SinCo analysis 2011; SinCo+RisCura data; 2011 © International Finance Corporation (IFC)


Realities of Reg.28 in South Africa: ESG into pensions policies

•  Preamble •  A fund has a fiduciary duty to act in the best interest of its members whose benefits depend on

the responsible management of fund assets. This duty supports the adoption of a responsible investment approach to deploying capital into markets that will earn adequate risk adjusted returns suitable for the fund’s specific member profile, liquidity needs and liabilities. Prudent investing should give appropriate consideration to any factor which may materially affect the sustainable long-term performance of a fund’s assets, including factors of an environmental, social and governance character. This concept applies across all assets and categories of assets and should promote the interests of a fund in a stable and transparent environment.

•  Principles 2c(ix) •  …before making an investment in and while invested in an asset consider any factor which may

materially affect the sustainable long term performance of the asset including, but not limited to, those of an environmental, social and governance character.

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•  Pension Funds Act, 1956: Amendment of Regulation 28 of the Regulations made under Section 36


Markets: …numbers adding up to sizeable market

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1.  The percentage of respondents self-reporting that they manage assets for DFIs (which by definition requires ESG integration in investment mandates).

2.  The percentage of respondents (PE and general asset management) self-reporting their firms use a fully integrated ESG strategy applied to the majority of their investments.

3.  The self-reported gross AUM from members/signatories of initiatives such as the CDP or Principles for Responsible Investment.


Recommendations: …grow SSA sustainable investment market

Recommendations A systematic approach will encourage integration of ESG factors in investment decisions in Sub-Saharan Africa building on the momentum of the small but committed best practice examples in evidence, especially in the largest investment market, South Africa, as well as the enabling investment regulatory and investment policy contexts for PE and SI/ESG emerging in Kenya, Nigeria and South Africa. The report makes the following recommendations:

1.  Key influencers to drive messaging: The SI message should be presented in the language of

investors, and should be driven by the end clients – the asset owners – appealing to advisors and leading asset managers open to exploring advances in institutional investment practice.

2.  Streamline reporting: Reduce information gathering and execution costs by streamlining the ESG reporting approaches of major investors (especially the DFIs), and increasing comparability of ESG impacts (and therefore the utility) through common reporting guidelines for PE .

3.  Leverage local knowledge: Leverage local and regional insights in sustainable investment to integrate into new global best practices, profiling advances in integrating ESG factors into investment practice in frontier and emerging markets by asset owners and asset managers in the region.

4.  Make the investment case: presenting the sustainable investment case to make the proposition that SI has the potential to generate increased returns and/or reduced risks across all asset classes.

5.  Keep score: Performance metrics and analysis is fundamental to investment. Investors need to measure investment performance and ESG impact. Regular Africa and SSA surveys of sustainable investment products, portfolios, and performance are required, along with benchmarking through a regional sustainability index .

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Takeaways: …SI in SSA report, July 2011

•  Sustainable investment (SI) is an established niche in Sub-Saharan Africa, and predominantly in its largest institutional investment market – South Africa. This study recommends five measures to expand SI through 2020.

–  The report forecasts that over the next 10 years there will be considerable growth of ESG considerations in investment management in South Africa, Kenya, and Nigeria.

–  The strongest growth will be in the ESG-integrated segment driven by major asset owners, DFI-led PE investment, regulatory changes, and activities of SI/ESG-specialist investment boutiques.

•  In both the private equity (PE) asset class and in general asset management practice, SI as a pure-play, branded environmental, social, and governance (ESG) investment theme totals an estimated $5.5 billion in assets under management (AUM).

–  1. ESG-branded investment, which describes funds marketed explicitly profiling their ESG characteristics including in the labeling

–  2. ESG-integrated investment, which integrates ESG factors, but may or may not be marketed as such (by implication, any ESG-branded strategy is also an ESG-integrated strategy).

–  However, using the broader definition to which this report subscribes, which defines SI as investment practice that integrates ESG factors in investment policy and/or process stages, this report estimates that SI in Kenya, Nigeria and South Africa stands at over $125 billion AUM (20 percent of total AUM).

•  The relatively high proportion of ESG-integrated investment is the result of: –  Largest asset owner in the largest African investment market, South Africa’s Government Employee Pension Fund

(GEPF) with $131 billion and

–  Asset manager of 92 percent of its assets, the Public Investment Commission (PIC), both adopting ESG-integrated sustainable, responsible and/or developmental investment policies since 2009.

–  Largest series of PE funds in the past decade have in part had DFI-sponsored PE mandates in Africa

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Briefing on Sustainable Investment in Sub-Saharan Africa Report (IFC, July 2011) November 2011 | © SinCo 2011 | sincosinco.com 20

About SinCo team

•  Graham Sinclair is Principal at SinCo, where his roles include sustainable investment strategist,

ESG architect and global project leader. •  Graham has eight years specialist experience in sustainable investment globally after eight years in

pensions consulting and investment banking in Africa. Recent consulting engagements in sustainable investment include leading IFC-funded research into private equity and liquid equity ESG strategies in sub-Saharan Africa in South Africa, Kenya and Nigeria to be published in 2011, developing innovative financing mechanisms strategy and ESG index architecture for developed, emerging and frontier markets for a Swiss-based international organization, and for a global institutional investment firm in New York with a USD one trillion AUM portfolio, designing ESG architecture across private equity, liquid and global real estate portfolios covering philosophy and process innovations and investment strategies.

•  As consultant to the UN, Graham developed strategy for 25 emerging markets and launched PRI in Emerging Markets project in Q3 2007 for UNEP FI, creating a network infrastructure, building relationships with 108 investor stakeholders including in Africa through 2008.

•  Before launching the sustainable investment advisory boutique SinCo in 2006 in Boston, he was Product Manager at KLD Research & Analytics, Inc adding to his background in pension funds and asset management. He is a former contributor to the CSR Initiative at Harvard Kennedy School, Distinguished Member of Net Impact, alum of WWF One Planet Leaders programme and the Tallberg Forum New Leaders Program. He currently leads the AfricaSIF Project building an independent, pan-African not-for-profit Africa Sustainable Investment Forum network at africasif.org, member of ASISA’s Responsible Investment sub-committee heading up the Prudential Assets Working Group [PAWG], and a member of the Network for Sustainable Financial Markets and the Investment Analysts Society of Southern Africa. He recently contributed chapters on Africa, Private Equity and Indexes to the Evolutions in Sustainable Investing [Wiley Business, 2011].

•  Graham earned his MBA on scholarship at Villanova University USA where he co-managed the Arnone-Lerer SRI Fund equity portfolio in 2004. He holds a B.Com from the University of Natal and LL.B from the Howard College School of Law as well as numerous industry specialist certifications. He holds diplomas in retirement funds and insurance law, and in 1998 he was one of the youngest ever dual-FILPAs.

Graham Sinclair Principal SinCo sincosinco.com

[email protected]

Briefing on Sustainable Investment in Sub-Saharan Africa Report (IFC, July 2011) November 2011 | © SinCo 2011 | sincosinco.com 21

As the sustainable investment architect we consider sustainability through the lens of environmental, social and governance factors are integrated in all investment decisions. Working with SinCo our clients have access to world-class strategy, plans and experience to quickly and effectively solve the challenges in making sustainable investment work.

SinCo …sustainable investment consulting firm with global practice

•  SinCo at a Glance –  Bespoke investment advisory focused on

sustainable investment architecture –  Architect + analysts with support team

operating projects with partners in Geneva, Seattle, London, Nairobi, Washington DC, Cape Town, Istanbul

–  Word-of-mouth, below-the-radar approach

•  Philosophy –  SinCo is a boutique investment advisory firm

specializing as an ESG investment architect for sustainable investment in frontier and emerging markets.

–  SinCo helps clarify questions, design & develop answers, and project manages thinking into action.

–  SinCo promotes answers to sustainability emerging from talent in frontier and emerging markets, as well as developed countries.

•  Experienced –  Established boutique in Boston in Q4 2006 :

Inaugural engagement for Wall St proprietary and third party manager with USD 900bn AUM, 200 analysts, mutli-asset classes

–  Since 2006, SinCo has delivered sustainable investment architecture globally to pension funds, asset managers and international organizations integrating ESG factors into investment practice.

–  Public projects and confidential “dark” projects for proprietary clients in listed equity, hedge funds, investment product R&D, investment bank derivative instruments, ESG impact metrics.

•  Proven Project Leader –  Multi-year, multi-stakeholder, multi-country

projects over milestones through time. –  Developed framework for 25 country rollout

by PRI in EM project –  Advanced PE framework, monitoring and

review protocols. sincosinco.com

IFC – POA PROJECT ON SUSTAINABLE INVESTMENT Sustainable Returns for Pensions and

Society 28th November 2011

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IFC/POA project on sustainable investments

"  New Regula=on 28 now states in its preamble that

prudent inves=ng ‘should give appropriate considera=on to any factor which may materially affect the sustainable long-‐term performance of a fund’s assets, including factors of an environmental, social and governance character’. This project will give prac=cal effect to Regula=on 28.

"  CRISA code gives guidance on what principles should be considered by asset owners as they integrate sustainable issues, including ESG, into long-‐term investment strategies. This project will give prac=ce effect to the CRISA code.

"  Other guidelines include the UNPRI principles and King III.

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Objec=ves

"  Build capacity among POA members and other investment prac==oners in Southern Africa on the integra=on of ESG;

"  Develop learning tools and case studies to enable more effec=ve ESG investment prac=ces (with reference to Reg. 28, the CRISA Code, King III, IFC’s Sustainability Framework, and PRI); and

"  Monitor integra=on of ESG prac=ces in mainstream investment prac=ces within the re=rement industry in Southern Africa.

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Partnership

"   Interna=onal Finance Corpora=on (IFC) to be a financial and technical partner

"  extensive experience and exper=se in designing and implemen=ng sustainability standards, policies and systems for the investor community.

"   IFC’s Performance Standards for Environmental and Social Sustainability are applied to all its own investments and, via the Equator Principles

"   IFC has also developed and tested tools for banks and private equity fund managers to manage E&S performance of investments

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STEERING COMMITTEE

"   a) The South African Ins3tute of Chartered Accountants (“SAICA”); "   b) The Ins3tute of Directors (IoD); "   c) The Financial Planning Ins3tute (the FPI); "   d) The Ins3tute of Re3rement funds (the IRF); "   e) The Associa3on for Savings and Investment SA (ASISA); "   f) Pension Lawyers Associa3on "   g) Banking Associa3on of South Africa (BASA) "   h) Na3onal Treasury South Africa " i) Financial Services Board South Africa (FSB) "   j) Government Employees pension fund (GEPF) "   k) Telkom Pension Fund "   l) Congress of South African Trade Unions (COSATU) "   m) FEDUSA "   n) Debswana Pension Fund "   o) Botswana Public Officers Pension Fund "   p) Government Ins3tu3ons Pension Fund Namibia (GIPF) "   q) NACTU "   R) SAVCA

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Governance structure

Steering CommiRee (strategic guidance)

IFC (30% funding)

Phase II consultant

Phase III consultant

Others (10% funding)

POA (60% funding)

Project Manager/ Phase I consultant

Phase IV consultant

Working CommiRee (Implementa3on and quality assurance)

Secretarial service

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Project phases

Phase I

Analysis of current (non-‐ESG) re=rement industry investment prac=ces in South Africa

Phase II

Adapta3on of the IFC Sustainability Framework and other appropriate frameworks as an implementa3on approach to assist pension funds and their services providers to iden3fy material ESG issues and sustainable investment opportuni3es in the Southern African context.

Phase III

Broad-‐based analysis of interna3onal experience and a set of detailed recommenda3ons on where, why and how ESG considera3ons could be integrated into SA pension fund prac3ces, including templates and case studies for doing so.

Phase IV

Tools and templates to assist pension funds to integrate ESG into their processes, procedures and contracts with relevant stakeholders in the investment supply chain

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Sustainable Investing & Resource Efficiency Support to Private Equity funds in Africa region

Cecilia Bjerborn 28 Nov 2011

[email protected] 29


IFC’s Sustainable Investing Advisory Service for PE funds in Africa:

  Goal: Help strengthen PE portfolios through integration of sustainability into investment process   Builds on IFC’s Performance Standards focusing on improvements that generate cost-savings,

access to markets, access to capital   Why: To realize opportunities to increase asset value from resource efficiency and other

sustainability and climate change related opportunities, and to avoid the risk of future value destruction from unsustainable business practices.

  Activities: Providing GPs and LPs with tools and support such as resource efficiency audits. 50%

cost share for Resource Efficiency assessments, cleantech sector research, etc.   Definition of Sustainable Investing / ESG factors / extra financials: Factors which are likely to

have at least long-term effect on business results but which are currently not integrated into traditional financial analysis.

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The impact of Climate Change

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Projected Change in Agricultural Productivity

Source: UNEP/GRID-‐Arendal Maps and Graphics Library,

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Opportunity for increased investments in climate friendly solutions

  High energy costs and low energy reliability hinder private sector development in many parts of Africa

  Increased costs for doing business ―  Electricity shortages lead to business

interruptions   Government policy & regulation to support

EE / RE ―  RE FiT ―  Energy Management Regulations (SWH

system for capacity >100 litres of hot water / day)

―  Bio-diesel strategy ―  Concessional funds/risk capital from

government & DFIs.

Financial and Non-Financial Barriers to SME Growth by Country Income Group

European Investment Bank

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E&S factors can create or destroy shareholder value Increased Shareholder Value -‐  Long-‐term dividend stability or growth -‐  Capital apprecia3on (stock price rise)

Decreased costs Lower cost of capital Increased revenues

Debt -‐ Cost -‐ Financial leverage

Equity -‐ Cost -‐ Financial leverage

Product Management -‐  Marke3ng -‐  Product design

Finance -‐  Raising capital

Capital assets -‐  Working capital -‐  Fixed capital

Opera=ons -‐ Produc3vity -‐ Opera3ng efficiency

Decision making

Contributors to value

Company objec3ve

Source: Adapted from LabaR, S & White, R: Environmental Finance – a guide to environmental risk assessment and financial products

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• Awareness raising, training and/or guidance provided by exchanges in Thailand, Malaysia, Brazil, China

• Typically evolves over 3me to more formal codes and requirements

Guidance to companies on ESG disclosure

• WFE members (e.g. Istanbul) operate over 40 ESG index products • Impact on companies depends on investor uptake -‐ variable ESG indices

• ESG integrated into corporate governance codes or lis3ng rules • E.g. Australia, South Africa, Singapore, China

ESG disclosure standards

• Clean tech (Toronto, London, NYSE Euronext) • Carbon markets (Toronto, Brazil, etc) • Impact investment e.g. microfinance (Luxembourg)

Specialised markets

• UN Principles for Responsible Investment • Interna3onal CommiRee on Integrated Repor3ng • ICGN and many other networks and ini3a3ves

Interna3onal coopera3on

Exchanges: main types of ESG initiatives

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…and, of course, private equity funds

Hear from our distinguished speakers including:

Holly HoltzSenior Director – PrivateEquity, High-Yield andDistressed Investments,TIAA-CREF

Wolfgang EngshuberChair, Principles forResponsible Investment

Hon. Thomas DiNapoliNY State Comptroller

Elliot RoycePartner, US FundInvestments,AlpInvest Partners

George RobertsCo-Founder, Co-Chairmanand Co-CEO, Kohlberg Kravis Roberts & Co

Anne SimpsonSenior Portfolio Managerfor Corporate Governance,CalPERS

Complimentary attendance

RESPONSIBLE INVESTMENTFORUM 2011June 2nd 2011 | The TimesCenter | New York

www.peimedia.com/responsibleinvestment11

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What is Resource Efficiency?

Energy Water Materials Technology Operations

Final Products

Reduced Solid and Liquid Wastes

Increased Yield And Efficiency

An assessment of processes, products and services to:

 Increase overall efficiency and productivity  Improve business opportunities  Reduce environmental risk

Reduced Emissions

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  Increase competitive advantage   Improve the company image   Reduce environmental impact   Reduce risks and liabilities

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Definitions of Resource Efficiency & Cleantech

Resource Efficiency (a process) Cleantech (sectors)

Sectors / Technologies

Sample Applications

Sectors with large potential: -Manufacturing -Agribusiness -Infrastructure -Oil & Gas -Hospitality & Tourism -Smaller-scale potential in other service sectors

RE technologies (90% of cleantech): -biomass (e.g., agri. waste, MSW, methane extraction) -geothermal -hydropower, solar, wind Other cleantech sectors include: -waste management -water management -alternative transportation

Energy efficiency (replacing equipment (boilers, motors, etc); lighting; HVAC), renewables Water savings (recycling, reuse) Waste reduction (recycling, reuse)

Resource efficiency applications plus: -RE (e.g., industrial/rural/household systems, landfill gas) - Other electricity (e.g., mini/micro grids, batteries) -Waste management (e.g, packaging, waste-to-energy) -Alt transportation (e.g., electric/hybrid/NG vehicles)

Financing Examples

-Audits -Equipment purchases, installation, O&M -Other consulting

-RE financing clients: equipment manufacturers, project developers, service providers, consulting firms -RE financing: PE/VC/venture debt for early stage companies; mezzanine, project finance for more mature/larger companies/projects

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Example: Resource Efficiency improvements with IFC clients Sectors/ companies

Opportunities Energy as % of total variable cost

Average energy savings

Average payback period

General manufacturing: Sao Hill Sawmill, Tanzania

-Energy Efficiency -Renewable Energy, biomass Combined Heat /Power plant -Waste reduction/recycling

40% 30-40% energy savings

1.5 years

Food & Beverage: Premier Foods, Kenya

-Animal waste management (methane capture) -Water efficiency

30% 30% energy savings

1-2 years

Hospitality sector: Hotel chains in Kenya and Mali

-EE / RE -Potential for bundle of small/medium homogenous projects (EE lighting etc) -Waste reduction

20% 20% energy savings (also water & waste)

1 year

Grappe Farming: Karsten Farms, South Africa

- Energy efficiency -  Renewable Energy, Solar water heaters for 10 farms

40% 18% energy savings

4-5 years

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15 MW Cogeneration Project – Sao Hill, Tanzania

  Fueled by wood waste   IFC co-funded feasibility study

Plant Load Factor 65% Capital Cost $21.6 million

Annual Electrical Genera3on 78,600 MWh Revenue – Electrical $5.5 million

Carbon Credits $3.3 million Total Revenue $8.8 million Opera3ng Costs $2.2 million

Fuel Cost ($10/m³) @ 65% $0.35 million IRR 18%

Project Economics

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Preliminary RE Assessment for a Dairy Company

Project ID Savings Potential Comments Water conservation - Improving washing reuse systems, recovery of water cooling systems and reducing leakages

Reducing 30% of well water intake ( 140,000 m3) and WW effluent discharge, saving about $ 25,000/yr

Investment will be minimal

Whey recovery in Cheese Production Whey based drink production increase by about 5%, reduction in Waste Water plant load by almost 10-15%,

A simple whey collection system required, approx. $10,000 in investment

Replace 2 Bunker-fired boilers with a single Biomass fired boiler

Reduction of 470,000 gallons of bunker, amounting to $ 160,000 /yr

Investment will be around $ 400,000 leading to a simple payback of 2.5 years

Cogeneration using bio mass boiler Save around 5280 MWH of electricity, amounting to $350,000/yr.

Investment will be around $1,000,000 leading to a simple payback of about 3 years

Recovery of condensates 25,000 gallons of bunker oil amounting $16,500/yr Simple piping and valves maintenance;

Generation of Bio-gas from Effluent plant

Save bunker oil or will complement the wood waste in the biomass boiler.

Further assessment is scheduled

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ES Toolkit for PE funds: www.estoolkit.com

https://www.estoolkit.com It shows you how to manage your E&S risks and identify E&S opportunities   This version is free

  Create login & password

  Any web browser 42

How to access the services

1. Sign 4 page Cooperation Agreement 2. Define project scope and TOR 3. Select consultants 4. Carry out RE assessments 5. Project implementation support 6. 50/50 cost share btw PE fund and IFC for consultant fees 7. Can facilitate links with partner banks and other sources of financing Typical project duration: 2-4 months depending on scope

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THANK YOU

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