The impact of UK overseas aid on environmental protection and climate change adaptation and mitigation

 Written evidence submitted by CDC Group plc

Key questions

1. CDC's policy regarding the environmental impact of its investments.

2. The extent to which and how CDC seeks to safeguard against degrading the environment.

3. CDC's policy on whether CDC investments address climate change mitigation/adaptation.

4. Any environmental or climate-change focussed restrictions on the investments that CDC can make, eg regarding fossil-fuel power stations.

Background

CDC is the UK’s development finance institution, owned by the Department for International Development (DFID). CDC’s mandate is to provide patient capital to invest in promising businesses, typically in South Asia and sub-Saharan Africa. CDC believes that developing the private sector in these regions is key to long-term poverty relief. CDC typically provides capital for private equity fund managers to invest in new and growing businesses within CDC’s investment universe.

All CDC’s fund managers are asked to sign up to CDC’s Investment Code which sets out the principles, objectives, policies and management systems for sustainable and responsible investment with respect to environmental, social and governance (ESG) matters. Fund managers are asked to implement these principles and objectives in their operations and also in the portfolio companies in which they invest.

CDC’s Investment Code

CDC’s Investment Code, effective for all capital committed to new funds and co-investments by CDC, was updated in 2008 and replaced CDC’s prior Business Principles and Exclusion List in line with developing international best practice on Environment, Social and Governance (ESG) standards. All capital committed by CDC must be invested in accordance with CDC’s Investment Code. The core principle of CDC’s Investment Code is that businesses in which CDC’s capital is invested should work on improving their practices on ESG in line with international good practices over the duration of the investment by CDC’s fund managers. The Investment Code makes reference to a leading number of international standards and legal frameworks in the area of ESG.

CDC’s Investment Code also includes CDC’s Exclusion List which sets out the activities and businesses in which CDC capital should not be invested for ethical reasons.

Where CDC’s fund managers have effective control or significant influence over portfolio companies, [1] CDC requires that fund managers procure that their portfolio companies sign an undertaking confirming that they will operate in line with the Investment Code .

The full investment code is available for download from CDC’s website:

www.cdcgroup.com/CDC-Publications.aspx

Summary of CDC’s policy and monitoring

1. CDC's policy regarding the environmental impact of its investments

CDC’s Investment Code requires fund managers and their investee companies to apply the following general principles that they will:

· comply with all applicable laws;

· as appropriate, minimise adverse impacts and enhance positive effects on the environment, workers, and all stakeholders;

· commit to continuous improvements with respect to management of the environment, social matters and governance;

· work over time to apply relevant international best practice standards, [2] with appropriate targets and timetables for achieving them; and

· employ management systems which effectively address ESG risks and realise ESG opportunities as a fundamental part of a company’s value .

Environmental impact

On environmental matters specifically, CDC’s Investment Code includes the following principles and policies:

Objectives

· t o minimise adverse impacts and enhance positive effects on the environment, as relevant and appropriate, from the businesses in w hich CDC’s capital is invested;

· t o encourage the businesses in which CDC’s capital is invested to make efficient use of natural resources and to protect th e environment wherever possible;

· t o support the reduction of greenhouse gas emissions which contribute to climate change from the businesses in which CDC’s capital is invested. [3]

Policy

Businesses in which CDC’s capital is invested will:

· operate in compliance with applicable local and national laws (as a minimum);

· assess the environmental impact of their operations as follows:

­ identify potential risks and appropriate mitigating measures through an environmental impact assessment where business operations could involve loss of biodiversity or habitat, emission of significant quantities of greenhouse gases, severe degradation of water or air quality, substantial solid waste or other significant negative environmental impacts; [4] and

­ consider the potential for positive environmental impacts from business activities; and

· take appropriate actions to mitigate environmental risks, ameliorate environmental damage, and enhance positive effects as follows:

­ where an activity is assessed to present significant environmental risks, work over time to apply the relevant IFC policies and guidelines, [5] if these are more stringent than local legislation, with appropriate targets and timetable for improvements; and

· as appropriate, work over time towards international environmental best practice standards. [6]

2. The extent to which and how CDC seeks to safeguard against degrading the
environment

In order to obtain a financial commitment from CDC , CDC requires that its fund managers sign the Investment Code containing the above objectives and policies on environmental matters. Where CDC’s fund managers have obtained significant influence over a portfolio company (as defined above), CDC also requires an undertaking that the portfolio company will also comply with CDC’s Investment Code. All CDC’s fund managers agree to apply CDC’s exclusion list when considering prospective investments .

CDC Exclusion List

CDC’s Investment Code contains an exclusion list of businesses and activit i es in which CDC’s capital will not be invested. This includes:

· production of or trade in any product or activity deemed illegal under applicable local or national laws or regulations, or banned by global conventions and agreements, such as certain:

§ hazardous chemicals, pesticides and wastes; [7]

§ ozone depleting substances; [8] and

§ endangered or protected wildlife or wildlife products; [9]

· production of or trade in arms, i.e., weapons, munitions or nuclear products, primarily designed or primarily designated for military purposes; or

· production of, use of or trade in , unbonded asbestos fibres. [10]

CDC’s capital will not be invested in businesses for which the following activities or products are, or are intended to be, a significant source of revenue:

· gambling;

· pornography; or

· tobacco or tobacco related products. [11]

CDC’s monitoring of compliance with the Investment Code

In addition to CDC’s exclusion list and obtaining investment undertakings where fund managers have obtained significant influence, CDC has various checks on its investments to ensure against breaches of its Investment Code. These include:

· the right to perform site visits of portfolio companies;

· the requirement to produce an annual ESG report, part of which requires fund managers to list environmental issues and opportunities faced by their portfolio companies, what improvements have been achieved and what further actions remain to be taken;

· the requirement to report serious breaches of CDC’s Investment Code, including incidents of material environmental effect to CDC as soon as they arise. A full report with a description of actions to prevent re-occurrence is then required within a reasonable timeframe; and

· the completion of two development impact evaluations over the life of a fund. The impact that the fund has had on environmental matters and the consideration it has paid to climate change issues is considered within these.

CDC’s support for fund managers on environmental and climate change topics

CDC has produced various documents to support its fund managers in implementing sound ESG practices and reducing negative environmental and climate change impact. This support has included:

· in situ workshops and capacity building;

· guidance material in the form of a (free of charge) 190-page Toolkit on ESG for fund managers, available in English and Chinese. The Toolkit was updated in 2010 and has to date been used in training sessions for 45 of CDC’s 71 fund managers in Shanghai, Mumbai, Lagos, Johannesburg, Sao Paulo, Bogota and London;

· specific climate change guidance material on assessing, managing and mitigating the risks posed by climate change in emerging markets; and

· one-to-one support as required.

CDC’s Toolkit on ESG and CDC’s climate change guidance can be downloaded from CDC’s website: www.cdcgroup.com/CDC-Publications.aspx

3. CDC's policy on whether CDC investments address climate change mitigation/adaptation

CDC’s Investment Code is explicit in its objective to support the reduction of greenhouse gas emissions at businesses where CDC’s capital is invested. CDC expects fund managers to perform an environmental impact assessment at businesses at which operations might result in significant greenhouse gas emissions and to consider appropriate action to mitigate against such emissions.

To help fund managers perform this, CDC offers various support on environmental and climate change matters as outlined above.

4, Any environmental or climate-change focussed restrictions on the investments that CDC can make, eg regarding fossil-fuel power stations

CDC’s Investment Code contains an exclusion list (outlined in full above) which contains all businesses and activities in which CDC capital must not be invested. This exclusion list contains various businesses excluded on the grounds of the nature of their environmental impacts and specifically, all businesses prohibited by major international conventions.

CDC’s Investment Code does not make specific exclusions on grounds of potential contributions to climate change and greenhouse gas emissions. CDC would expect however any such investments would carry out an environmental impact assessment and seek to mitigate and reduce climate change impacts over time.

In addition, CDC recognises the shortage of companies, in sub-Saharan Africa in particular, who have been able to access the carbon markets. CDC plans to work with fund managers and portfolio companies over the course of 2011 and 2012 to develop strategies for more portfolio companies to access the carbon market and engage in carbon trading. CDC’s Toolkit on Climate Change for Fund Managers is the first step in this project.

24 January 2011