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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You can find the link to the statement and signatories here, Mike, along with an on-line way to join the group.  Thanks for the interest!

Mike Wisheart said:

Thanks Caroline - very helpful. I'll be sure to take a look at UN Guiding Principles Reporting Framework. Could you say a little more about the coalition of 81 institutional investors. Does the coalition have a name? Where can we find out more about it and potentially join, support it etc

Thanks, Mike

Caroline Rees said:

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

The UNEP FI offers programs for banking, insurance and the investment industry. The PRI was set up by UNEP FI to concentrate on supporting investors in responsible investment, given their strategic importance within the investment chain. Given that stock exchanges have short term incentive structures, it was decided that a dedicated initiative was required - this is managed jointly by UNEP FI, PRI and our other UN partner the UN Global Compact and UNCTAD. Happy to put you in touch with my colleague Will Martindale, Head of Policy at the PRI if you would like to get a better understanding.


Mike Wisheart said:

Thanks Natasha - very helpful. Its a complex area to get to understand. Is there a doc or website which explains how these initiatives are related to each other and (hopefully) how they complement each other? Mike

Natasha Buckley said:

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?

Just to add that that work by ETI and others to support a transparency in the supply chains provision in the UK Modern Slavery Act was terrific and shows how business can really lead in this field.  Indeed, for those working hard on tough supply chain issues, transparency is a great leveler - it shines the same spotlight on others and helps to raise all boats.  This is a good example of leading business and government showing how to advance a key human rights and development issue.

Peter McAllister said:

Again on Question 2:

We're starting to see collaboration among businesses around Pillar 1 of the UNGPs.

At ETI we can point to work such as the Bangladesh Accord, plus efforts in Myanmar & Cambodia to influence the enabling environment - to support responsible business in areas where there's an absence of good governance.

We've also done a lot of advocacy to ensure a transparency component was included in the UK Modern Slavery Act.

We agree that it is certainly easier to make progress when there is some collaborative momentum behind an issue. I think that sector initiatives like the RSPO and FSC are good at addressing such issues within individual sectors. However, I don't think companies can use the lack of progress of their peers to avoid taking responsibility for their own impacts. One company needs to make a start and lead the way. To your child labour point, it could be as simple as a company setting up a community meeting to discuss the problem of child labour and to hear the community's views of what can be done about it and go from there.
 
Caroline Rees said:

One additional reflection in response to question two.  Many of the real barriers lie in systemic challenges.  How do you respect children's rights when child labour is endemic in part of your supply chain, and simply pulling out will often mean even more destitution for those children and their families?  How do you address poverty level wages in your supply chain when rushing to drastically increase wages in your own supply factories can have all manner of perverse consequences, including, through inflation, for human rights of the poorest?

The learning about how to address these kinds of issues shows that the solutions have to be collaborative.  More companies need to be teaming up with others in their industries, with governments, civil society, international organizations, or other experts to work on these issues together.  It's happening in many areas, but a great deal more is needed.  Investors could be a voice in pressing companies to show how they collaborate where these kinds of systemic risk are linked to their business. 

We see a lot of our member companies working with suppliers to help them improve their ESG performance and I think a lot of firms need to do a better job in communicating how they work with their supply chains to promote sustainable development. There is a great story to tell…

One problem we see though is where you have small companies supplying a range of multinationals each with their own bespoke policies and requirements. I remember talking to a few mid-sized companies a few years ago who were struggling to internalize a broad spread of new anti-corruption requirements from their (MNE) customers following the entry into force of the UK Bribery Act. I suspect there is a similar problem in other ESG areas too. What we think is needed is greater international standardization by way of using recognized tools and frameworks. We hope our new Charter will help here and we’d be happy to support the promotion of other available tools to our network. 



Zahid Torres-Rahman said:

Thanks for all the comments and contributions!

Let's move on to our third question:

Question 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?

Thanks for joining today's live chat! We'll leave the discussion open, so please do continue to post your comments and ideas.

Thank you to all our panel for joining today, and for all of you who participated.

If you'd like to read more about this topic, be sure to check out the blog special we are running this week on Responsible Investment:

Thanks for the link!

Caroline Rees said:

You can find the link to the statement and signatories here, Mike, along with an on-line way to join the group.  Thanks for the interest!

Mike Wisheart said:

Thanks Caroline - very helpful. I'll be sure to take a look at UN Guiding Principles Reporting Framework. Could you say a little more about the coalition of 81 institutional investors. Does the coalition have a name? Where can we find out more about it and potentially join, support it etc

Thanks, Mike

Caroline Rees said:

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

Fully agree, Sam.  And the problems come when companies join collaborative initiatives to hide in the crowd.  But the really good initiatives are about scaling change.  So yes, we need individual companies to step forward and build these issues into the core of their business.  But to find solutions - or at least improvements - at scale, we need collaborative approaches that are about driving real change!

Dr Sam Lacey said:

We agree that it is certainly easier to make progress when there is some collaborative momentum behind an issue. I think that sector initiatives like the RSPO and FSC are good at addressing such issues within individual sectors. However, I don't think companies can use the lack of progress of their peers to avoid taking responsibility for their own impacts. One company needs to make a start and lead the way. To your child labour point, it could be as simple as a company setting up a community meeting to discuss the problem of child labour and to hear the community's views of what can be done about it and go from there.
 
Caroline Rees said:

One additional reflection in response to question two.  Many of the real barriers lie in systemic challenges.  How do you respect children's rights when child labour is endemic in part of your supply chain, and simply pulling out will often mean even more destitution for those children and their families?  How do you address poverty level wages in your supply chain when rushing to drastically increase wages in your own supply factories can have all manner of perverse consequences, including, through inflation, for human rights of the poorest?

The learning about how to address these kinds of issues shows that the solutions have to be collaborative.  More companies need to be teaming up with others in their industries, with governments, civil society, international organizations, or other experts to work on these issues together.  It's happening in many areas, but a great deal more is needed.  Investors could be a voice in pressing companies to show how they collaborate where these kinds of systemic risk are linked to their business. 

From a recent piece I drafted on the BFP site, SDGs: Will business take up the baton?

"Businesses, whether local to the global south or part of global trade, have multiple roles to play. Investment in productive capacity, skills and human development, creating local revenue and sharing wealth through salaries and paying appropriate taxes, and acting as a role model in society by leading on diversity and inclusion are just some of the important roles that businesses have played in the past – and can do more of to contribute to meeting the SDGs. This is in addition to the day-to-day role of developing and providing products and services that meet people’s needs.

However from ETI’s experience on ethical trade we also need to sound a note of caution. All business is not necessarily good business. If the jobs provided are mostly minimum wage, or worse, if discrimination against women is perpetuated, or investment is only made with significant tax holidays then the development impact of business will be blunted or worse, negative. The advent of the UN Guiding Principles on Business and Human Rights seems to me the ideal complement to efforts to contribute to development and the SDGs. Many businesses already know that in many emerging markets institutions can be weak, the human resource pool shallow, the checks and balances that prevent abuse and corruption are often absent or not well implemented. This offers opportunities for exploitation for the short-sighted and presents a challenge to responsible companies. We need to see business go beyond their normal comfort zone as they seek to understand their impact through a comprehensive and inclusive process of due diligence – and then act in a way that really makes a contribution to the SDGs. I believe that such a process is good for business in the long run, catalysing better markets and new consumers in stable societies."

We've always found huge value in bringing companies and civil society together. But it requires a willingness to engage constructively on both sides of the fence. When I was running ICC’s London office, we started talking to a range of MNCs a few years ago about (what’s now termed) modern slavery. The initial response from many was “that’s not an issue that affects us”. By getting them engaged with leading NGOs we were able—very quickly—to raise awareness of the issue in global supply chains. What was interesting was that the civil society groups we worked with started from the position that the agenda is about engaging business in the fight against slavery; rather than pointing the finger at firms for not doing enough. That’s the kind of constructive engagement we need to see more of in the context of the post-2015 agenda. 



Dr Sam Lacey said:

We agree that it is certainly easier to make progress when there is some collaborative momentum behind an issue. I think that sector initiatives like the RSPO and FSC are good at addressing such issues within individual sectors. However, I don't think companies can use the lack of progress of their peers to avoid taking responsibility for their own impacts. One company needs to make a start and lead the way. To your child labour point, it could be as simple as a company setting up a community meeting to discuss the problem of child labour and to hear the community's views of what can be done about it and go from there.
 
Caroline Rees said:

One additional reflection in response to question two.  Many of the real barriers lie in systemic challenges.  How do you respect children's rights when child labour is endemic in part of your supply chain, and simply pulling out will often mean even more destitution for those children and their families?  How do you address poverty level wages in your supply chain when rushing to drastically increase wages in your own supply factories can have all manner of perverse consequences, including, through inflation, for human rights of the poorest?

The learning about how to address these kinds of issues shows that the solutions have to be collaborative.  More companies need to be teaming up with others in their industries, with governments, civil society, international organizations, or other experts to work on these issues together.  It's happening in many areas, but a great deal more is needed.  Investors could be a voice in pressing companies to show how they collaborate where these kinds of systemic risk are linked to their business. 

I like the emphasis on RESPONSIBILITY. If governments, companies and individuals can be responsible especially in developing countries in every of their practices then we can experience improved business performance in developing countries. CSOs (Civil Society Organizations) can also play a vital role by creating platforms for accountability and transparency to check negative practices and encourage good practices. CSOs can also create a responsible investment task force.

Absolutely, Andrew!  NGOs can play an important role in highlighting problems and abuses, but there is an equally important role to be played in being part of the search for answers alongside companies.  I see many NGOs evolving in this direction and some that manage very effectively to play both roles, though it's not always straightforward for them and their own positioning and business models.  But it's certainly central to making progress!

Andrew Wilson said:

We've always found huge value in bringing companies and civil society together. But it requires a willingness to engage constructively on both sides of the fence. When I was running ICC’s London office, we started talking to a range of MNCs a few years ago about (what’s now termed) modern slavery. The initial response from many was “that’s not an issue that affects us”. By getting them engaged with leading NGOs we were able—very quickly—to raise awareness of the issue in global supply chains. What was interesting was that the civil society groups we worked with started from the position that the agenda is about engaging business in the fight against slavery; rather than pointing the finger at firms for not doing enough. That’s the kind of constructive engagement we need to see more of in the context of the post-2015 agenda. 



Dr Sam Lacey said:

We agree that it is certainly easier to make progress when there is some collaborative momentum behind an issue. I think that sector initiatives like the RSPO and FSC are good at addressing such issues within individual sectors. However, I don't think companies can use the lack of progress of their peers to avoid taking responsibility for their own impacts. One company needs to make a start and lead the way. To your child labour point, it could be as simple as a company setting up a community meeting to discuss the problem of child labour and to hear the community's views of what can be done about it and go from there.
 
Caroline Rees said:

One additional reflection in response to question two.  Many of the real barriers lie in systemic challenges.  How do you respect children's rights when child labour is endemic in part of your supply chain, and simply pulling out will often mean even more destitution for those children and their families?  How do you address poverty level wages in your supply chain when rushing to drastically increase wages in your own supply factories can have all manner of perverse consequences, including, through inflation, for human rights of the poorest?

The learning about how to address these kinds of issues shows that the solutions have to be collaborative.  More companies need to be teaming up with others in their industries, with governments, civil society, international organizations, or other experts to work on these issues together.  It's happening in many areas, but a great deal more is needed.  Investors could be a voice in pressing companies to show how they collaborate where these kinds of systemic risk are linked to their business. 

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