TBLI in Emerging Markets:Insights on integrating ESG into private equity in challenging markets

TBLI Conference, AmsterdamNovember 12, 2009

Sarita Bartlett

Investment Manager- Social, Environment and Governance

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Insights on integrating ESG into private equity in challenging markets

1. Development Finance Institutions

2. An overview of Norfund

3. Environment, Social and Governance at Norfund

4. Norfund’s Active ownership

5. Technical Assistance in the area of Corporate Responsibility

6. Norfund’s Development Effects

7. Summary

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1. Development Finance Institutions (DFIs):The 3rd pillar of development cooperation

Economic growth, combined with equitable and sustainable global development

Development & humanitarian

assistance

National DFIsMultilateral development banks

• Bilateral & multilateral (EC,

UN)

• Sector-specific interventions

• Public finance

• Donor financing for projects and programs

• Provide humanitarian aid for Disaster Risk, Reduction and Recovery

Norfund, AWS OeEB, BIO SBI-BMI, CDC, COFIDES, DEG, Finnfund, IFU, FMO, MFD, Proparco, SOFID, SIFEM, SIMEST, Swedfund

• Long-term financing to the private sector

• Catalyze private sector investment and national expertise

• Support SMEs to build width in the economy

• Exclusively in developing countries with focus on Africa and other LDCs

International DFIs, (e.g., IDA, IBRD, IFC, MIGA & regional development banks)

• Fewer and larger-scale projects than national DFIs

•

• Mainly guarantees and loan-based

• Global focus

• Mostly concentrated on governments and public services

National DFIs are additional and catalytic. However, they are a diverse group of funds with different ownership structures, sizes, strategies, mandates, and expertise.

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2. Norfund and its mandate

• Invest in the poorest countries in the world, where there are – weak institutions and

– Norfund and its partners face endemic problems with corruption

• Implement high ESG standards in the projects in which it invests

• Invest on commercial terms, but be additional to private investors. It is willing to contract more risks and spend more resources on developing projects (including the projects’ CSR aspects)

• Always invest with other investors, generally between 20 and 30 percent; Norfund will never be a majority owner.

Poverty reduction through investment in profitable enterprises

”Sustainable improvements in developing countries depend, to a large degree, on the ability to create profitable enterprises and employment”

Erik Solheim, Minister of the Environment and International Development

Norfund does not look for perfect projects or ideal partners, but rather it seeks to secure projects in which its money can make a difference!

Norfund will:

The Norwegian Investment Fund for Developing Countries – Norfund – was created by the NorwegianParliament in 1997. It is a hybrid state-owned company established by law with limited liability, owned on behalf of the state by the Ministry of Foreign Affairs. As of December 31, 2008, it hadNOK 5.3 billion (€ 632.5 million) in assets under management.

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Geography: Four regions with emphasis on Africa and other LDCs

Sectors: Renewable Energy, SMEs (directly and indirectly via funds, and Finance institutions

Direct Investments: SMEs together with Norwegian/international partners

Technical Assistance: Project development, Development support and enhancement, and CSR

2. Norfund: Expertise – Capital – Value Add

SN Power Direct investments, funds and financial institutions

Norfund’s regional offices

Johannesburg, South Africa

San José, Costa Rica

Nairobi, Kenya

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2. Norfund: Geographic distribution, Investment Areas and Results

Internal Rates of Return (2002-2008) and since inception

Funds

Financial Institutions

Renewable Energy

Industrial Partnerships

- 5%

19%

0%

-9%

- 15%

4%

17%

-22%

- 4%

18%

1%

-28%

1%

9%

44%

-19%

17%

10%

-3%

2%

32%

27%

14%

16%

4%

9%

25%

10%

7%

11%

18%

-5%

2002 2003 2004 2005 2006 20072008 Since

inception

Total -4% 7% -1% 4% 24% 17% 21% 13%

Loan8%

Equity92%

Funds26%

FI17%

Industrial Partnerships 8%

Renewable Energy49%

LDCs38%

Low income countries8%

Lower income countries42%

Global & middle income countries12%

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Requiring high ESG Standards

Supporting Norwegian firms

Not creating distortions in the local business community

Conducts activities in accordancewith the fundamental principalsof Norwegian development policy, such as:

Balance between:

2. Norfund: Challenges

Operates in the world’s most challenging markets

Is independent

Is profitable

Being a professional actor who:

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Why

• Establish new, high risk projects with large development effects in areas in which funds do not exist

• Attract competence and technology to LDCs.

How

• Mobilize the Norwegian business community

• Be an active, long-term owner

Why

• Access to electricity is a precondition for economic growth

How

• Invest in renewable energy projects

• Mobilize Norwegian capital and expertise in renewable energy

Why

• To create financial services to the smallest entrepreneurs

How

• Invest in SME Banks, Funds, and Microfinance investments

• Increase competition and range of local supply

• Partnerships (e.g., MNI)

2. Norfund: Four Investment Areas

Financial Institutions

FundsRenewable

EnergyIndustrial

Partnerships

Why

• Storage of risk capital

• Important for building the formal economy

• Strengthen the local capital market

How• Invest through

existing PE fund managers

• Establish new fund managers in countries and/or segments where funds do not exist

Build financial infrastructure

Strengthen SMEs Private equity where there are large

development effects

Build energy infrastructure

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3. ESG is an integrated part of Norfund’s operations: ESG Goals

• Ensure Norfund’s, and its owner’s values

• Identify, manage, and minimize ESG-related risks

• Value creation

• Strengthen development effects

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Investments: Phases and focus

Identify good projectsAchieve good

investment terms Achieve good

results and create value

Realize profits

• Strategic goals Competence in - Investments - Countries - Sectors - ESG •Project development•Strengthening of development impacts

•Project/Country analysis

•Evaluating of partner(s) and clarification of mutual expectations.

• Satisfactory price

• Secure strategic interests

• Protect downside

• Development impacts

• Due diligence

• Contract/ Terms

• Exit strategy

• Active ownership

• Correct strategic choices

• Risk management

• Internal control (including monitoring and reporting)

• Good management

• Growth

• Profitability

• Sustainability

• Identification of potential buyers

• Illuminate value

• Identification of potential buyers

• Develop ownership structure and liquidity

• Exchange listing or trade sale

• Exit management

• Timing

3. ESG is an integrated part of Norfund’s operations: The integration of ESG into Norfund’s investment processes

Map and Evaluate Invest Own Exit

ESG is an integrated part of Norfund’s investment processes- from mapping and evaluation through to the exit phase

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3. Norfund’s ESG policy and controls

Map & Evaluate

Invest Ownership ExitN

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Norfund’s Exclusion list

Initial conversations w/ project leader, partner & project on ESG issues and expectations

Exploration of development possibilities

Due diligence(including. SEG)

Review of development possibilities

Contract and Terms• Exclusion list• E&S Policy• HES Guidelines• Corp. governance guidelines

Active ownership

Use of TA Funds, if necessary

Norf

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ESG input on the Investment Committee Paper

Measurement and reporting of development indicators/impact

Input on ESG-related risk levels (every quarter)

Input on annual reviews for different investment areas

Norfund Jointly together w/partners and potential investment object

Exclusion list (fund & fi)

Corporate governance policy and guidelines

HES Guidelines

E&S/HES Responsible resourceE&S/HES Management systemOn-going reporting on fatalities (and other serious, unexpected incidents (not in loans, fi and funds) Annual reporting on ESG/HES and development impact

Environmental & social policy

Project/Sub-Project

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Active Ownership

•Focus on compliance with contracts and terms, as well as value creation •Participation in boards and on other steering committees

•Engagement with management

• Use of TA Funds

•Compliance reports

•Audits

•Control

•Risk management

•Value creation

•More comprehensive control

•Better risk management

•Potential to create value

•Good relationship with company • Higher costs

• Can be limited by contracts and terms

• Can be perceived as meddling investor

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Why does Norfund use active ownership as a tool to promote betterESG-related practices?

4. Norfund’s active ownership:

Direct Investments

Funds & FI

Sub-projects (Fund’s Investee Companies)

DI’s large suppliers

FI’s large clients

DI’s small suppliers

FI’s small clients

Norfund

Other factors include: Asset Class, Legal framework, Ownership (%), Other Investors, Governance Role, and Attitudes, Relationships, etc.

Opportunities and constraints to active ownerships

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5. Technical Assistance in the area of Corporate Responsibility

• Secure higher ESG standards and increase development impacts

• Examples:– Social and environmental training of Cambodian microfinance institutions

– A paid ESG consultant placed in an invested Central American fund who works with the fund’s holdings

– HIV/ AIDs program for an invested East Africa Fund’s portfolio holdings

– Waste water treatment technology to an industrial company

– An energy conversation study and infrastructure for accessing the electricity network for a hotel that (previously) produced its own electricity using a diesel generator

• The program provides Norfund with an additional tool that it can use to enhance business practices

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• Norfund has produced development reports for 2007 and 2008

• Norfund measures and reports complete information on the following development effects: - Employment (248,000 people )- Share of female employees (49 percent)- Taxes (3.2 billion NOK)

• Relevant development data are collected, measured and reported within each investment areas

- Renewable energy: CO2 reduction, total number of employees, percent of female employees, demonstration effect, effects on competition, diversification effects, infrastructure, suppliers, technology, expertise, training, and HIV/AIDs programs

- Funds: Direct and indirect employment, percent of female employees, equal opportunities, demonstration effects, effects on competition, diversification, training, HIV/AIDs, governance, and anti-corruption programs

- Financial Institutions: Direct employment, percent of female employees, equal opportunities, effects on competition, diversification, training, HIV/AIDs, governance, and anti-corruption programs

- Industrial partnerships: Employment, percent of female employees, equal opportunities, demonstration effect, effects on competition, diversification, training, exports, infrastructure, suppliers, technology, HIV/AIDs, governance, and anti-corruption programs

• Norfund is the only DFI that has measured and reported both quantitative and qualitative development indicators

6. Norfund’s Development Effects