How can responsible private investment contribute to the SDGs?

Photo: CDC. AU Financiers.

 

Emerging markets private equity investment reached its highest level in 2014 since the Financial Crisis, with investors committing $33.75 billion to 1,246 deals compared to $26.77 billion and 1,058 deals a year earlier, according to the Emerging Markets Private Equity Association.  Sub Saharan Africa in particular has attracted record amounts of private investment, attracted by the potential of a young population, a growing middle class and increased macro-economic stability.

The key role of private investment in driving economic growth and job creation is increasingly emphasised by governments and donors.  The Financing for Development Summit, taking place in Addis Ababa in mid-July and aiming to secure the means for implementing the Sustainable Development Goals, highlights the key role of private investment.   At the same time, it also emphasises the need for investors to adopt principles and reporting standards for socially and environmentally responsible business, which includes good health and safety, constructive community relations, preventing pollution, protecting workers rights and biodiversity, preventing and fighting corruption, illicit financial flows and tax evasion.

As CDC, the UK development finance institution and among the largest players in emerging markets private equity, launches its updated ESG Toolkit for Fund Managers, this online series will examine how improvements in responsible investment practice can improve business performance and development outcomes. 

Key questions to address include:

  

1. How can responsible investment practice contribute to improved business performance in developing countries?

 

2. Where are we seeing the most progress in managing environmental, social and governance issues in developing countries, and where do the greatest barriers remain?

 

3. How can the adoption of responsible business practices in developing countries amongst local firms improve their competitiveness and opportunities to access global supply chains; and how can large companies play a role in supporting local firms to improve ESG performance?

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I'd add that just asking the right questions is a really important starting point.  So many company staff say to us how disappointed they are, as they try to place human rights issues more centrally within their internal discussions, to find that when investors are on the phone with their senior management they simply never ask questions about it.  So senior management assume it's not relevant.  This is the case even where the company has been in the news in association with a major incident - it just doesn't get raised.  If investors could simply raise one or two basic questions about how human rights risks are understood, it would really help give the issue traction internally.

Dr Sam Lacey said:

We completely agree Peter. Investors can play a number of roles. There is a place for hands on investors to roll up their sleeves to help willing companies to improve their environmental and social performance, even if from an initially low base. There is also a place for large investors who do not want to "get their hands dirty" to screen out the worst performing companies to send a signal to the market that bad E&S performance makes it harder to attract capital.
 
Peter McAllister said:

It's vital that investors send the right signal to companies  - that they recognise its in their long term economic interests for returns on investment.

The 'how' part lies around demanding a level of accountability & transparency - asking how their businesses are contributing to the SDGs.

Caroline, I totally agree with your point about the importance of looking at the impacts of their core operations rather than just the money they can give to good causes. We see this as a core part of our role and is essentially what we're trying to bring investors attention to in our Toolkit: http://toolkit.cdcgroup.com/ 
 
Caroline Rees said:

Hi everyone.  Caroline Rees here from Shift.  We're a non-profit organization and experts in the UN Guiding Principles on Business and Human Rights.  We work with companies, governments and civil society to put the Guiding Principles into practice.

So we focus on the people part - the most acute environmental, social or economic impacts that companies can have on people through their operations and value chain.  And of course for businesses understanding these risks to people and managing them effectively is central to contributing to the SDGs.  It's of limited benefit for companies to pursue social investment or philanthropy to advance development if their core operations are - often unwittingly - having the opposite effective.  

Investors have a key role to play in bringing this holistic understanding to companies.  More on that shortly.  I'm happy to join the conversation!

We have two web sites: www.fooddevco.com and www.pivnitabunicii.ro

We have also recently produced a documentary Taste Transylvania - links on our web sites and also available  on You Tube

Jim Turnbull said:

I have been an international development consultant for over 40 years, working worldwide on donor funded projects and for the  private sector. In 2008/09 a group of us realised that an new approach was needed to achieve sustainable enterprise development. We established a company  in the UK in 2009 and raised over half a million pounds in impact investment from 23 private individuals. This has been invested  in a social enterprise in Transylvania, but our approach could  be replicated anywhere in the world. Our enterprise is small, in the so called missing middle and unsuitable for institutional funding, we are small with only eight employees but the largest employer  in town. We sustainably wild harvest from the forests and have over 1000 of the poorest members  of the community collecting - our social impact is considerable.

It would  be a great help if institutional  lending could somehow support pump priming activities in this area of the missing middle - which is where many of the opportunities to address the Sustainable Development Goals can be found.

Jim Turnbull, CEO, Food Development Company Ltd

 

Caroline - what could civil society organisations being doing more of to support investors in really taking seriously the ESG performance of companies in their portfolios? Thanks, Mike

Thanks for the question. The PRI supports investors at different levels of implementation. Some investors are at the start of their responsible investment journey, others are more advanced. Levels of implementation also vary by asset class. We recognise that there are many ways in which one can be a responsible investor, for example - strong stewardship, exclusions, best-in-class, ESG integration and so on. Ultimately we recognise that awareness of responsible investment has been achieved and yet significant challenges remain. Our mandate is now to achieve impact within the capital markets. For example, our signatories have an annual reporting requirement. Through our Reporting Framework, we are seeing a growth in RI practices - look out for our Report on Progress which will be published in September.


Mike Wisheart said:

Hi panellists

Natasha – very impressive to hear that over half of the world’s investible assets are invested in line with PRI. If the principles are having the desired effect, there is presumably a very significant impact. Can you describe what this looks like?

Thanks, Mike



Dr Sam Lacey said:

There is growing evidence across industry sectors that when environmental, social and governance aspects are proactively managed by a business, they generate opportunities to improve business performance. This of course benefits both the business itself, and also in time, the investor.

 

There are opportunities for improved business performance in a range of different areas of environmental, social and governance. Examples include: improvements in labour practices – if you treat employees well, protect their safety, improve their livelihoods and economic well-being, you have a more productive and committed workforce. Other examples are efficient use of resources, e.g. energy and water use or reducing the cost of doing business, e.g. by eliminating bribes and facilitation payments



Zahid Torres-Rahman said:

Ok - let's kick off with the first question:

Question 1: How can responsible investment practice contribute to improved business performance in developing countries?

Natasha – very impressive to hear that over half of the world’s investible assets are invested in line with PRI. If the principles are having the desired effect, there is presumably a very significant impact. Can you describe what this looks like?

Thanks, Mike



Natasha Buckley said:

Hi this is Natasha Buckley from the United Nations-supported Principles for Responsible Investment (PRI). The PRI is an international network of investors working together to understand the implications of sustainability and to incorporate these issues into their investment decision making and ownership practices. 

We have over 1380 signatories to the Principles, representing US$59 trillion of assets - that is over half of the world’s investible assets. In implementing the Principles, signatories contribute to the development of a more sustainable global financial system. (See www.unpri.org

Once signatories have signed the Principles, the role of my team is to support them with the implementation of the Principles in their investment decision-making processes. We take an asset class specific approach, and I cover private equity.



Zahid Torres-Rahman said:

Welcome everyone to this live chat!

We're joined by a great panel to explore how private investment can contribute to the Sustainable Development Goals.   We'll structure this written discussion around the three questions outlined in the introduction.  Please post your comments and any other questions you'd like to put to the panel.

Before we begin, I'd like to ask our panellists to introduce themselves.

Another example Caroline, comes from a study we did a few years ago into the benefits of RSPO certification in the palm oil sector ( http://www.cdcgroup.com/Documents/ESG%20Publications/profitabilitya... ) whereby one company estimated that an investment of $30,000 at the beginning of a project to engage with communities and establish good community relations helped them to avoid protests and shutdowns that in the past had cost them over $1million in lost revenue in just a few days.
 
Caroline Rees said:

That's a great example, Sam.  It shows how respect for human rights is a key part of the picture and supports both development and successful business.  We did research looking at the costs to extractive companies of conflict with the communities round their operations.  The figures are quite impressive once you start to understand how many costs arise when you get these relationships wrong - security, senior staff time, permitting, operations disruption, opportunity costs and so forth.  One major company worked out it had lost $6.5billion over two years.  So getting this stuff right - and paying a bit up front to do so - really pays

Dr Sam Lacey said:

To give a bit of colour to my previous comment. An example from among CDC’s investments is Vlisco, a company which designs, manufactures, distributes fabrics across West Africa, has made a strategic decision to build a sustainable and localised supply chain, with good labour and health and safety standards. On the business side – this has improved its operational efficiency and reduced costs. On the development side – there has been a positive effect on local communities as the company has provided employment opportunities to underprivileged women and delivered training to local communities.

 
Dr Sam Lacey said:

There is growing evidence across industry sectors that when environmental, social and governance aspects are proactively managed by a business, they generate opportunities to improve business performance. This of course benefits both the business itself, and also in time, the investor.

 

There are opportunities for improved business performance in a range of different areas of environmental, social and governance. Examples include: improvements in labour practices – if you treat employees well, protect their safety, improve their livelihoods and economic well-being, you have a more productive and committed workforce. Other examples are efficient use of resources, e.g. energy and water use or reducing the cost of doing business, e.g. by eliminating bribes and facilitation payments



Zahid Torres-Rahman said:

Ok - let's kick off with the first question:

Question 1: How can responsible investment practice contribute to improved business performance in developing countries?

We see awareness of “sustainable development” as the biggest single issue. Many smaller companies we speak to see sustainability as a luxury investment or PR tool—rather than a driver of competitiveness. If companies don’t understand the issues or the opportunity, it’s unrealistic to expect them to take action.

That’s why we recently launched a new edition of the ICC Sustainable Development Charter last month. The 3rd edition of the Charter, which was first launched in 1991, has been designed to reflect a more holistic approach to business sustainability, drawing on the expertise of a broad range of international companies. Based around eight guidelines, the Charter sets out a strategic framework to enable companies to place sustainability at the heart of their operations—from staff recruitment through to the development of new products and services.

The Charter has been carefully designed to provide a common and accessible starting point for companies to develop a business sustainability strategy. While there are already many sustainability tools on the market, we hope that our Charter will better enable SMEs—particularly those in emerging market markets—to integrate sustainability considerations into their operations. To support this objective, we are planning to roll out a range of practical tools to help companies implement the Charter and we are keen to work with a range of partners as we do so.  



Zahid Torres-Rahman said:

Ok - let's move on to question 2:

Question 2: Where are we seeing the most progress in managing environmental, social and governance issues in developing countries, and where do the greatest barriers remain?

At CDC we have witnessed an evolution in this area over the last ten years – ESG issues have moved from the fringe to the centre stage both amongst emerging market focused private equity investors and amongst businesses themselves.

 

Why is this? Firstly, social injustice is no longer as distant as it once was. Social media has given people in developing countries the power to voice their experiences either directly or via viral global NGO campaigns.

 

If the company is trying to access global markets, multinationals need to manage reputational risks associated with investments – there is an ever-increasing pressure on global brands to demonstrate their responsible behaviour.

 

There are opportunities to boost the value of investee businesses through proactive approaches to labour relations or energy efficiency, good community relations, and the benefits of better corporate governance (as mentioned previously).

 

Private equity funds are expected to demonstrate their investments satisfy the investor requirements, many of whom have adopted responsible investment criteria.

 

More and more international banks are signed up to the Equator Principles so if businesses want to get loans from these banks, they also need to be able to demonstrated they are managing their key environmental and social risks.



Zahid Torres-Rahman said:

Ok - let's move on to question 2:

Question 2: Where are we seeing the most progress in managing environmental, social and governance issues in developing countries, and where do the greatest barriers remain?

For investors to determine whether companies have  strong, long-term investment potential, these companies must disclose information about their ESG practices. This information is needed by financial markets to value the impact of ESG on financial performance. In emerging markets, the most challenging issue for our signatories is the lack of comparable ESG data to enable them to assess companies when making investment decisions. That is why the PRI co-convened the Emerging Markets Disclosure Project which aimed to increase sustainability reporting among emerging markets companies through research and engagement activities.

One of the main conclusions of the project was that local stock exchange listing and regulatory requirements are the most important drivers of sustainable reporting. This ties into the work that the PRI is doing with the Sustainable Stock Exchanges initiative (the PRI co-convened this initiative with our UN partners, the UN Global Compact and the UNEP Finance Initiative, and also UNCTAD). This is a peer-to-peer learning platform for exploring how stock exchanges, in collaboration with investors, regulators and companies, can enhance corporate transparency – and ultimately performance – on ESG issues and encourage sustainable investment. 23 leading exchanges have joined this initiative and made voluntary public commitments to advancing sustainability.

So Mike - to answer your question, you can support UNEP FI, PRI and the SSE knowing that we are all working closely together!



Zahid Torres-Rahman said:

Ok - let's move on to question 2:

Question 2: Where are we seeing the most progress in managing environmental, social and governance issues in developing countries, and where do the greatest barriers remain?

Great question, Mike.  I'll go back to my last comment about helping investors ask the right questions.  Investors can't be experts in everything, and typically have limited time to spend per company - even among the activists.  So if those of us who live in the weeds of these issues can help them see what smart questions to ask a company - questions that really show how the company is seeing the issues and which are tied to known risk areas, that could give them valuable material to work with.  

When you have events like Rana Plaza in Bangladesh or Marikana in South Africa, these provide important hooks for investors to ask questions across whole industries.  

More generally, we have just launched in February a reporting framework for companies to report on how they respect human rights.  It's the UN Guiding Principles Reporting Framework - the first and only comprehensive guidance on this issue, built around a really straightforward set of questions, and designed to complement other, broader sustainability reporting frameworks.  (See UNGPReporting.org).  

Unilever just published a stand-alone human rights report using the Framework, though most other companies using it will embed the human rights information in an existing report.  There is an investor coalition of 81 institutional investors representing $4.25 trillion assets under management backing the Reporting Framework and now pressing business grouping to use it.  That's because it doesn't just make sense to have answers to these questions for shareholders - they are questions any company should have answers to internally to know that it is understanding and managing risks to people.  

Mike Wisheart said:

Caroline - what could civil society organisations being doing more of to support investors in really taking seriously the ESG performance of companies in their portfolios? Thanks, Mike

we have two web sites www.fooddevco.com and www.pivnitabunicii.ro plus a documentary Taste Transylvania on YouTube but with links from both web sites

Zahid Torres-Rahman said:

Thanks Jim.  Where can people find out more?

Jim Turnbull said:

I have been an international development consultant for over 40 years, working worldwide on donor funded projects and for the  private sector. In 2008/09 a group of us realised that an new approach was needed to achieve sustainable enterprise development. We established a company  in the UK in 2009 and raised over half a million pounds in impact investment from 23 private individuals. This has been invested  in a social enterprise in Transylvania, but our approach could  be replicated anywhere in the world. Our enterprise is small, in the so called missing middle and unsuitable for institutional funding, we are small with only eight employees but the largest employer  in town. We sustainably wild harvest from the forests and have over 1000 of the poorest members  of the community collecting - our social impact is considerable.

It would  be a great help if institutional  lending could somehow support pump priming activities in this area of the missing middle - which is where many of the opportunities to address the Sustainable Development Goals can be found.

Jim Turnbull, CEO, Food Development Company Ltd

 

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