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CDC Group plc

PRI reporting framework 2019

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Pre-investment (selection)

PE 05. Incorporating ESG issues when selecting investments

05.1. During due-diligence indicate if your organisation typically incorporates ESG issues when selecting private equity investments.

05.2. Describe your organisation's approach to incorporating ESG issues in private equity investment selection.

ESG is integrated into CDC's investment process with the Environmental and Social Responsibility (ESR), Business Integrity (BI) and Development Impact (DI) teams, which provide specialist input into all stages of CDC's investment process (from screening and due diligence to legal agreements and monitoring) and present risks and 'value add' opportunities at Investment Committee meetings to inform investment decisions. Where gaps in compliance with CDC's Code or value add opportunities are identified, CDC will negotiate an action plan with the company to meet CDC's requirements within a reasonable timeframe and this is formally documented in the legal agreements through which CDC's capital is committed. ​

Beyond this standard approach during the pre-investment stage, there were instances in 2018 when specific ESG issues were considered in more detail due to higher risk or opportunity, for example:

​​-Risk assessment screening on potential water quality impacts into Ramsar Site by potential investee

-Specific screening for child labour in sectors and regions where this is endemic

-Additional consideration of gender opportunities in companies where women are underrepresented or have a high potential to take on leadership roles

-Conducted workshop on business integrity issues to ensure alignment and raise awareness following some BI concerns raised in due diligence

-Quality of education assessment including safeguarding to understand specific company policies and practices

As a DFI, all of CDC's investments are in emerging markets, but regulatory regimes in different countries and sectors can impact the way that ESG issues are considered. Strong environmental and social regulatory requirements better facilitate alignment with the IFC Performance Standards and the requirements of the CDC Code, but in countries and sectors where these are less robust, ESG issues are likely to have greater scrutiny in the investment selection process.

05.3. Additional information. [Optional]


PE 06. Types of ESG information considered in investment selection

06.1. Indicate what type of ESG information your organisation typically considers during your private equity investment selection process.

06.2. Describe how this information is reported to, considered and documented by the Investment Committee or similar.

Through the due diligence process, CDC collects raw data from the target company to assess capacity, commitment and track record on ESG issues (raw data may include documented E&S management systems, HR policies, ESG policies, serious incident data, information on energy and water consumption, compliance certificates, gender breakdown of employees at different levels, etc.), in order to assess actions that might be needed to bring the company into compliance with CDC's Code of Responsible Investing and to identify areas to add value. CDC assesses company performance against the IFC Performance Standards and sector-specific reference frameworks to develop an action plan to close compliance gaps; and also benchmarks against other companies in the same sectors and countries in which it has invested, to assess lessons learnt and realistic ESG targets for potential investees to aspire to. Certifications and internationally recognised standards (e.g. RSPO, OHSAS 18001, ETI) are also considered (often with advice sought from external consultants with specialist expertise). Key ESG information considered in the investment selection process is recorded in all investment committee papers at each stage of the process and raised by ESG staff during the IC meetings.

 


PE 07. Encouraging improvements in investees

07.1. During deal structuring,what is the process for integrating ESG-related considerations into the deal documentation and/or the post-investment action plan?.

If yes

07.2. Describe the nature of these improvements and provide examples (if any) from the reporting year

CDC's ESG requirements are outlined to potential investees before CDC progresses to due diligence to avoid progressing a deal where a company is not prepared to meet the requirements as set out in the Code of Responsible Investing. Due diligence assesses the capacity, commitment and track record of the investee to manage ESG issues and identifies gaps against CDC's Code. A SMART, legally binding action plan is agreed between CDC and the company to address ESG issues and opportunities identified. Post-acquisition, the action plan is monitored to drive continuous improvements in the management of ESG issues. CDC recognises that it takes time and money to change culture and embed international good practice, and works closely with companies to support them to implement action plan items. The action plans may include initiatives to add value through, for example, improving energy efficiency and water conservation in line with CDC’s Climate Change Policy or improving the workforce gender balance.

07.3. Additional information. [OPTIONAL]


PE 08. ESG issues impact in selection process

08.1. Indicate how ESG issues impacted your private equity investment selection processes during the reporting year.

08.2. Indicate how ESG issues impacted your private equity investment deals during the reporting year.

08.3. Additional information. [OPTIONAL]

As an example of ESG issues leading to abandonment of a potential investment, we considered investing in a company that manufactured chemicals. Early stage E&S due diligence identified that four of the chemicals were banned by our exclusion list. CDC communicated to the company that it could not receive CDC investment if it continued manufacturing those chemicals. 

An an example of ESG issues impacting the terms, CDC considered investing in a poultry company that did not meet its expectations in terms of animal welfare. After an extensive animal welfare due diligence process, CDC and the company agreed on expectations and these were included in the term sheet and legal documentation, committing the company to move toward international good practice over the course of CDC's investment.


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