ESG Integral to Approach of Emerging Market Fund Managers
CDC Group plc, the UK’s development finance institution and a leading emerging markets private equity fund investor, has announced the results of its first environmental, social and governance (ESG) survey of fund managers. The survey looks at fund managers’ evolving ESG support needs and the ways CDC can meet this current demand. Fifty-three individuals took part in the survey, representing 44 institutions across Africa, South Asia, Asia Pacific and Latin America*.
The survey shows that almost all emerging market fund managers now consider ESG to be integral to their investment approach, and as a result have developed sophisticated ESG systems and processes. The survey also identified demand for specialist ESG support tailored to investment model and specific sectors, rather than generic, entry-level ESG materials that had previously been required.
According to the research, fund managers believe the biggest hurdle to implementing ESG improvement programmes is resistance from investee company management. The second biggest obstacle is poor enforcement of regulation at the country level.
Three years ago, CDC launched a comprehensive, free-to-use ‘Toolkit for Fund Managers’ to help private equity investors manage ESG to international standards. Since then it has provided ESG training to over 180 investment professionals in 17 cities. CDC commissioned this latest research, which was carried out by independent consultancy Steward Redqueen, to assess how investors’ needs are evolving and explore where CDC could improve the ESG support it provides to its partners.
Thanks to its long-established systems, CDC has an industry-leading reputation for the emphasis it puts on ESG management among its investment partners, and the support it provides them throughout the investment process. Over three-quarters of the fund managers questioned rated CDC as ‘above par’ or ‘best-in-class’ for the impact, relevance and time spent on providing ESG support to fund managers and their management of underlying fund investments.
While CDC’s record as a leading institution throughout the investment process is applauded, fund managers are not without criticism of some of their investors (limited partners, or ‘LPs’) and their inconsistent approach to improving ESG standards. The third biggest hurdle to implementing ESG improvement programmes is the conflicting ESG agendas of the LPs who invest in funds. Moreover, fund managers stated that LPs would have a greater impact if they agreed on a common ESG agenda for each fund, rather than requiring managers to fit different LPs’ priorities into the scope of a single ESG improvement plan.
An accompanying theme arising from the survey is that many LPs put a lot of resources into due diligence prior to making a commitment to a fund, but then lose interest once the fund starts investing.
Commenting on the findings, CDC’s Director of Environmental and Social Responsibility, Mark Eckstein, said:
“We carried out the survey to find out what our partners need from us in terms of support. We are encouraged that many of our partners have evolved their own systems to a sophisticated level and can be considered ESG specialists. To respond to this need for more tailored support, CDC has recently provided advanced training to fund managers and is developing new training materials.
“Fund managers have emphasised the resistance they can face from investee company management when implementing environmental and social improvements. So we are giving them the skills they need to make the strongest business case to management and we are also providing support in specific sectors. For example, we recently published guidance to support fund managers to manage issues associated with investments in land for agricultural development.”
ESG and Impact Assessment Consultancy, Steward Redqueen, carried out the research on behalf of CDC. Willem Vosmer at Steward Redqueen said:
“The survey demonstrates that CDC is seen by fund managers as an expert that knows its business in the area of ESG and is committed to a trusted partnership. Fund managers increasingly require a more advanced level of ESG support, and the survey shows that CDC is well placed to respond to this demand, providing useful and practical advice and challenge.”
* CDC no longer makes new investments outside Africa and South Asia, but it continues to support fund managers outside these geographies to whom it has previously committed capital and who continue to manage investments on CDC’s behalf until it is timely and prudent to exit.