CDC has a dual mandate, which requires it to meet both a financial returns hurdle for its shareholder, DFID, and to ensure that its investments have sufficient development impact (DI) both individually and at a portfolio level. All businesses that receive CDC capital must adhere to its Code of Responsible Investing ("the Code"), which stipulates CDC's ESG requirements. The Code was updated in 2017 to reflect lessons learned in the previous 5 years, as well as emerging legislation and informal norms / good practice in relation to ESG performance in CDC's markets (for example UNGP on Human Rights and Modern Slavery Act). These requirements are based on international best practice. The Code is publicly available on CDC's website and is structured to reflect our ESG requirements, recommended good practices and the components of management systems that CDC legally requires in all its investments. The Code sets out a hierarchy of ESG requirements, including an 'exclusion list' of industry sectors and / or activities where CDC's capital cannot be invested, specifying minimum ESG requirements of all businesses, and additional requirements for industries where the levels of ESG risk requires it (e.g. complex health and safety issues). Based on its Code, CDC works over time with intermediaries and companies in an approach that builds from compliance with certain basic standards and works towards the adoption of internationally recognised standards of good industry practice and areas of ESG value add to the business.
The Code consists of six schedules. Schedule 1 outlines the responsible investment management system that CDC will itself maintain. Schedule 2 specifies the management systems required of financial institutions and fund managers to manage portfolios which potentially contain complex assets from an ESG perspective. Schedule 3 of the Code sets out minimum ESG requirements for all businesses where CDC's capital is deployed. Meanwhile, Schedule 4 outlines additional requirements triggered by specific activities of the business. Schedule 5 lists the recommended ESG practices endorsed and promoted by CDC. Finally, Schedule 6 lists all industry sectors and activities where CDC's capital may not be deployed (the 'exclusion list'). CDC regularly reviews its Code of Responsible Investing to ensure that its investment standards reflect emerging good practices.
The Development Impact Grid is our investment screening tool, which scores every investment we plan based on two factors: the difficulty of investing in the country where the investment is to be made and the propensity of investments in the relevant business sector to generate employment. We prioritise sectors where growth leads to jobs – our decision-making process ranks sectors based on their likelihood of creating jobs. Our investment teams include product and sector specialists who look for businesses with the greatest potential for impact, whether through their ability to grow and create jobs, to address a lack of enabling infrastructure, to increase efficiency, or to increase opportunities for the poorer parts of society.
CDC is also committed to developing and promoting good practice guides and materials for investors, also reported here. In 2014, CDC developed a Climate Change Policy which seeks to assess climate change risks and opportunities in its investments. The policy has a specific focus on energy use efficiency, carbon intensity and on-site renewable; water-use efficiency and water-conservation measures; adaptation and resilience, and disaster risk management, especially in large infrastructure projects vulnerable to climate-related impacts. In 2016, CDC published its first Modern Slavery Act Statement, which sets out policies within CDC's own operations and through investment activities. CDC also launched its first web-based ESG Toolkit for Fund Managers in June 2015, which was updated in 2018 and is being further updated in 2020 to include resources for financial institutions and to enhance guidance on Business Integrity. The freely available Toolkit provides a wide range of guidance to fund managers on developing their own management systems and assessing risks and opportunities in their portfolio, among other advice.
CDC recognises that many businesses in Africa and Asia will not be in full compliance with its Code at the date of investment. In such cases, CDC, or those managing its capital, work with the business during due diligence to develop an action plan that seeks to achieve compliance within a reasonable timeframe, with clear deliverables and responsibilities. An action plan will take into consideration the risks and opportunities specific to the business and its current size and resources, and will typically be included in legal agreements.
An additional part of CDC's role as a DFI is to support funds and companies as they develop policies and systems and actively engage with them to manage the ESG risks associated with their operations, and to identify and realise ESG opportunities that may be evident. In this way CDC actively looks to add value to its GPs' underlying businesses and its direct investments through ESG improvements that go beyond compliance.