UK’s CDC to consider running third-party pension fund assets

ESG takes centre stage at development finance institution in government revamp

CDC, the UK’s £2.8bn (€3.2bn) development finance institution, says it will look at managing third party pension fund assets.
The idea is part of a radical restructuring which will also see environmental, social and governance (ESG) factors take on more importance at the former Commonwealth Development Corp.
The revamp has been driven by the government after a series of damaging headlines about lavish salaries and expenditure at the institution. CDC chief executive Richard Laing announced his retirement in March.
“CDC will also examine the possibility of managing third party capital, such as that of pension funds, to boost funds deployed,” CDC says in its new business plan. There is a stated objective to attract a further £1 in third-party capital for every £1 CDC invests. The new plan comes into force on July 1 at the 60-year-old body.

Under the new plan, UN PRI-signatory CDC will shift away from its current reliance on external managers and make more direct investments, which will represent up to 20% of its portfolio by 2015. This, it is claimed, will allow CDC to target businesses with high potential development impact and be more “hands-on”.
CDC gave up being a direct investor in 2004, preferring instead to work with fund managers – it now has assets in 143 funds managed by 71 different fund firms, who are required to invest in companies with a commitment to ESG best practice.To further this, CDC publishes a detailed 192-page ESG toolkit for its asset managers.

Now it says that ESG standards at investee businesses will “be improved” – and that there will be independent evaluations of the development impact of funds.

“Particular attention will be paid to businesses rated as high-risk from the ESG perspective,” the government and CDC said in a statement. “This will ensure that CDC’s capital is invested responsibly and sustainably.”

As recently as in its 2010 annual report, CDC chairman Richard Gillingwater said: “Good management of ESG issues at investee businesses is one of the greatest benefits of private equity investing and is an example of the added value that fund managers can bring.”
CDC’s fund managers were said to be “helping companies build value by improving their environmental management, labour conditions, health and safety standards and corporate governance”.
CDC will now publish more information about itself, its investee businesses and its partners. Its investment code will be regularly updated to incorporate the latest international standards.
It will have to focus its investments in sub-Saharan Africa and South Asia, with no new commitments to be made outside these regions. Debt investments will also represent up to 20% of CDC’s total portfolio by 2015 – enabling it to target frontier markets.
Staff pay would also be “appropriate for a publicly-owned body whose purpose is poverty reduction”.