Case study by CDC Group

LPs that are operating in emerging markets, particularly where they act as the cornerstone or sole investor, may have more comprehensive monitoring processes or reporting requirements in place than their counterparts operating in markets with lower levels of ESG risk.

As the UK’s development finance institution (DFI), CDC’s mission is to support the building of businesses throughout Africa and South Asia, to create jobs and make a lasting difference to people’s lives in some of the world’s poorest places. CDC’s relationship with its fund managers on ESG matters begins with verifying alignment on key principles and processes, before moving to oversight and support. CDC does not believe in a ‘one size fits all’ approach to ESG management. It offers guidance and its experience to its fund managers to help their companies become leaders in their markets on ESG management through a mixture of one-on-one advice and training sessions, including for underlying portfolio companies.

CDC’s engagement with fund managers takes a number of forms during the life of the fund:

  • Prior to investing in a fund, CDC will review the fund’s ESG management system (ESGMS) and, where available, its track record in implementing that system. Where there are areas that require improvement, CDC will agree an ESG action plan with the fund manager. The period post-close when the ESG action plan is being implemented will typically involve a higher level of ongoing engagement and communication between CDC and the fund.
  • CDC reviews the fund’s first three environmental and social due diligences to assess whether the ESGMS is being implemented effectively, and provides support where necessary. It also reviews all due diligences of environmental and social high-risk companies prior to the fund’s final Investment Committee decision.
  • Where CDC is invested alongside other DFIs in a fund, it aims to work with them to provide aligned feedback and support on ESG matters (i.e. through Advisory Committee meetings).
  • CDC conducts periodic site visits to funds and their investee companies to understand the progress and on-the-ground challenges encountered by portfolio companies and fund managers when implementing good ESG practices. They also enable CDC to better support and advise fund managers on how to tackle any challenges they face.
  • All of CDC’s fund managers are required to submit an annual ESG report. This includes details of progress on ESG and business integrity issues, challenges and plans for each portfolio company as well as any changes in the fund manager’s ESGMS. The report also includes information on the number and nature of employees and company performance to enable CDC to track its development impact. CDC will work with other LPs in the fund to agree a joint reporting template wherever possible to ensure all LPs receive the environmental and social information they need without the fund manager having to complete numerous templates.
  • CDC provides training for fund managers on how to integrate ESG management into the private equity investment cycle as well as more specific technical training on topics of interest to fund managers (such as labour rights and establishing an effective ESGMS).
  • CDC requires that any serious incidents involving portfolio companies that result in loss of life, severe permanent injury or severe permanent damage to health, a material adverse environmental or social impact or a material breach of law relating to an environmental, social, or business integrity matters, including financial irregularities, are reported promptly. Through subsequent communications with the fund manager, CDC will discuss what root cause analysis has been done and the nature of the follow up actions to ensure they are appropriate and adequate to address the identified risks, and to prevent similar actions from occurring in future.

CDC’s ESG Toolkit provides advice for GPs on effective ESG integration into internal approaches as well as the type of monitoring that will bring about improvements to portfolio companies and communicate the benefits of these improvements to LPs.

Download the full report

  • Download report

    ESG monitoring, reporting and dialogue in private equity

    June 2018