Supplementary Memorandum
from the Commonwealth Development Corporation
CDC'S BUSINESS AND SOCIAL PRINCIPLES—AN
UPDATE, 23 JUNE 1998
1. INTRODUCTION
1.1 This paper has been prepared to provide
an update on the work CDC is doing to develop its business principles,
policies and procedures. In CDC's Annual Report, these matters
were discussed in the section "The Way CDC Does Business"
and this paper focuses in particular on the progress made since
publication of that document.
2. BACKGROUND
2.1 CDC contributes to development through investing
in profitable businesses that employ people, generate taxes and
foreign exchange, and stimulate wider economic growth. CDC's impact
can only be positive if these businesses are sustainable in economic,
social and environmental terms. Our development impact is enhanced
by our ability to demonstrate the possibility of profitable investment
in pre-emerging markets and to act as a champion for good ethical,social
and environmental practice. Our approach to these issues is therefore
critical to our success.
2.2 As CDC moves towards a new partnership,
it becomes increasingly important for us to enunciate our principles
and policies and to formalise our procedures. This will ensure
that:
— CDC's way of doing business will
be clear to its shareholders and to outside parties;
— CDC staff have greater guidance,
thus enabling good practice to be adopted in all cases;
— CDC will be able to assess its own
performance against stated benchmarks.
3. CORE VALUES
AND BUSINESS
PRINCIPLES
3.1 CDC is currently seeking to identify and
articulate its core values by means of a process of consultation
with staff throughout CDC's world-wide operations. Workshops are
being held in all of the regions to gather together ideas: the
results to date have confirmed a very strong CDC culture with
an emphasis on sustainable development, honesty and integrity,
commitment, consistency and client service. This process of consultation
will ensure that all staff members are given an opportunity to
influence the statement of CDC's core values and that they are
comfortable with the final version.
3.2 The consultation process with staff started
in the first half of June 1998 and it is forecast to continue
through to the end of the year. In the first phrase, small workgroups
are being held with staff throughout CDC's regional offices to
collect views on core values and to put together a initial draft.
This draft will then be circulated to all CDC staff for comment,
before being finalised and adopted as the CDC's own.
3.3 From the core values will evolve a Statement
of Business Principles. This will provide a framework under which
specific polices on social and ethical issues, and on health,
safety and the environment (HSE) will apply. It is envisaged that
CDC's Statement of Business Principles will cover the following
inter-linking areas:
— Guidelines for country selection.
— Business ethics—issues relating
to staff conduct, e.g, bribery and corruption; human rights issues,
e.g., child labour, forced labour, discrimination; and a list
of sector/activities CDC will not invest in.
— Social issues—consultation,
participation, gender-related.
3.4 As part of the process, staff are being
encouraged to provide practical examples of where there may be
apparent conflicts when applying the core values or business principles
in practice. From this information, a database of potential "dilemmas"
will be compiled and staff will be able to consult the database
for options to help them decide how the dilemma might be resolved.
The Business Principles will be carefully drafted so that they
capture the difficult areas without compromising the underlying
fundamental requirements of socially responsible investment. Annex
A gives some examples of typical "dilemmas".
4. POLICY FRAMEWORK
4.1 Within the Statement of Business Principles,
CDC is refining its existing policies on environment, health and
safety, and social issues. Environmental and health and safety
policies have been in place for some time in managed business
and for non-managed investments, and are regularly reviewed against
international and local best practice. Formalised social policies
are currently being developed, with the pilot programme due to
be completed by the end of 1998, after which they will be rolled
out to the entire CDC business.
4.2 These policies must reflect the reality
of the three different types of business with which CDC is involved.
The first category includes the businesses that CDC manages, including
both industrial companies and funds/financial intermediaries:
in these investments we have a majority stake and operational
controls so we can define the policies and take responsibility
for ensuring that they are applied. Into the second category fall
minority equity stakes and loans: in these cases, CDC can influence
policy to varying degrees, depending on CDC's equity share in
the company, whether it has a seat on the board, the attitude
of sponsors and co-investors, the extent to which CDC has put
legal covenants in place and a number of other factors. The third
category consists of CDC's investments in funds or financial intermediaries
not managed by CDC, making sub-investments into third party companies:
here CDC can use its best endeavours to encourage the fund to
adopted appropriate policies and procedures, but CDC's influence
may be limited.
4.3 The different policies are being translated
into detailed implementation procedures. Procedures can be split
into those which relate to CDC's activities before an investment
is committed (appraisal procedures) and those which apply after
CDC has made the investment (procedures for monitoring, measuring
and reporting). The early appraisal of social and HSE issues (and
the sponsor's attitude towards them) is critical because at that
stage CDC can choose not to invest. After commitment, CDC's options
may be very limited. It may be neither commercially advisable
nor socially responsible to withdraw from an investment. CDC has
therefore to rely principally on its stability to influence the
sponsors and co-investors. As awareness of the issues grow among
consumers and shareholders, and as the cost of failing to address
them becomes more evident (for example, with the boycott of products
billed as "environmentally unfriendly" or "socially
irresponsible"), it is likely that sponsors will become increasingly
receptive.
4.4 The monitoring aspect is undertaken for
all policies through two main tools. The "Annual Investment
Review", completed for each of CDC's investments, allows
on-going identification of problems and potential solutions, and
monitoring of progress. The "Evaluation of Development Impact
Programme" reviews investments five years after approval
and conducts an in-depth audit of their compliance with social
and HSE standards and of CDC's overall developmental impact. Both
AIRs and EDIs are strongly focused on lesson-learning, and feed
into CDC's overall lessons learned database. The following paragraphs
review in greater detail progress to date in the various policy
areas.
5. SOCIAL POLICY
AND PROCEDURES
5.1 CDC's social policy is to:
— make investments in projects where
the positive social impact outweighs any negative effects;
— identify any negative social aspects
of an investment and address the ways in which these might be
mitigated;
— identify potential social benefits
and determine how the might be enhanced to the mutual advantage
of company and community.
5.2 In recent months, CDC has been formalising
its social policies and procedures with the help of external consultants.
The work to date falls into two main areas. Firstly, we have formulated
procedures for the appraisal of the social issues of all investments,
whether managed business, minority investment or fund. Secondly,
we have developed a set of guidelines for living and working conditions
at CDC's managed businesses (those companies in which CDC has
a majority stake and a management role in which CDC therefore
has both full control and full responsibility).
5.3 The social appraisal procedures consist
of three checklists to be completed for every project put forward
for detailed appraisal. These three checklists cover social risks.
social benefits and the broader socio-economic impact of the proposed
investment. Wherever relevant, a note must be made of how risks
are being mitigated and/or benefits are being enhanced. Detailed
social appraisal guidance notes have been developed and supplied
to staff in key areas such as resettlement, importation of labour,
retrenchment, reassignment of provision of social services, and
cultural property. Further guidance notes will be developed if
other areas are identified.
5.4 The guidance notes are designed to help
staff to focus clearly on the risks. If the matters in the guidance
notes are satisfactorily addressed, then the process can be considered
to be in line with international good practice and, if relevant,
with World Bank Operational Directives. Any areas of concern will
be reported to management so that these may be taken into account
in the decision on whether to approve CDC investment in the business.
5.5 These appraisal procedures have been launched
in a pilot phase lasting until the end of 1998: during this phase,
all staff are being encouraged to provide feedback on the practical
application of the procedures. Comments have so far been largely
positive, with staff welcoming the more systematic assessment
of social issues.
5.6 The Guidelines for Living and Working Conditions
for CDC's managed businesses consist of minimum standards for
employment and training, education, health, nutrition and housing.
In line with international best practice, the emphasis is on "access",
not "provision" although it is recognised that CDC may
have to provide basic services in some green-field sites where
public provision is inadequate. The guidelines reflect ILO conventions
and good practice. They have now been sent out to all of CDC's
managed businesses and each has been requested to indicate any
areas of deficiency and to provide a timetable and a budget for
achievement of full compliance. It is envisaged that in due course
the guidelines for managed businesses will also be used as a reference
point for the businesses in which CDC is a minority investor.
5.7 For monitoring purposes, the social status
of each investment will be assessed as part of the Annual Investment
Review (AIR). In the majority of cases, specific areas of under-performance
in social terms will already have been identified through site
visits and CDC will be taking steps to resolve them. However,
there may be investments on which areas of social concern are
identified for the first time in the light of the specific questions
on the checklists. At the extreme, we may consider divestment
to be the only socially responsible option. The Air will note
areas of concern and report on how they are being addressed. it
is envisaged that a report summarising the social issues raised
in the AIRs will be present to a sub-committee of CDC's Board
on an annual basis.
5.8 Where CDC has management control, an annual
report will be prepared by each company on compliance with the
basic standards in the Guidelines for presentation to the company's
own Board. It is envisaged that a summary of these reports will
also be provided to a sub-committee of CDC's Board on an annual
basis.
5.9 CDC believes that the most effective way
of implementing social standards is by embedding them in the culture
of the organisation. CDC currently plans to use its own staff
to assess the social impact of investments. Executives will be
provided with increased training on social issues and a Social
Development Specialist is being recruited. His/her primary role
will be to act as a "help-line" for staff who need guidance
on how to resolve a particular social issue. He/she will also
play a pro-active part in identifying possible areas of concern
in new proposals. It is envisaged that this role will be separate
from mainstream operations and will report direct to senior management
to ensure that social issues are given the appropriate weight.
The potential costs and benefits of an independent social audit
will also be kept under review.
6. HSE POLICY AND
PROCEDURES
6.1 In all our investments, our HSE policy is
to:
— encourage the efficient and sustainable
use of natural resources;
— seek investment opportunities where
sound economic development is coupled with the protection and
improvement of the environment;
— require all businesses in which we
invest to be designed and operated using internationally accepted
environmental good practice;
— require all businesses in which we
invest to be designed and operated with due and explicit regard
to both public and occupational health and safety.
6.2 CDC Industries has developed an individual
statement of policy on HSE for each of CDC's managed businesses.
CDC Investments is now encouraging the adoption of similar policy
statements in the businesses in which we have minority stakes
or loans and in the funds.
6.3 The policies are supported by detailed appraisal
and monitoring procedures. For the appraisal of new investments,
each proposal is categorised according to its environmental risk,
from "A" where the investment has a high potential for
negative environmental impact, to "C" where the investment
has a negligible effect. For some time now, all "A"
investments have required a detailed Environmental Impact Assessment
before approval. Covenants and events of default relating to HSE
issues are built into investment agreements.
6.4 The level of environmental monitoring required
on existing investments depends on the categorisation. For every
investment, staff are required to comment on the company's HSE
performance in the Annual Investment Review. Where CDC takes an
equity position and a seat on the company's Board, the CDC Director
presses for a internal report on HSE matters to be made to the
Board on an annual basis. CDC will seek accreditation under ISO
9000 in its managed businesses as appropriate, and progress has
been made in this area in recent months.
6.5 CDC has an in-house environmental expert
who can be consulted on areas of concern. A training programme
on environmental issues ensures that all executives are aware
of many of the matters which arise. CDC has also built up a database
of consultants who can be used either to draw up or to review
the Environmental Impact Assessment or the Environmental Action
Plan.
| 
