ESG is in Africa’s DNA

Development finance institutions have played a crucial role in ensuring that private equity in Africa has some of the world’s most rigorous ESG standards, says Runa Alam, co-founder of DPI.

Runa Alam, the co-founder and chief executive of pan-African firm DPI, has more than 18 years’ experience in private equity in Africa. A former chair of the African Private Equity and Venture Capital Association, she co-founded DPI in 2007 having previously raised two African funds. Alam also chairs AVCA’s Sustainability Committee.

Taking a responsible approach to environmental, social and governance issues is integral to the investment approach of private equity in Africa, because development finance institutions were instrumental in drawing up standards, she tells PEI’s Graeme Kerr.

You credit the DFIs with pioneering ESG standards in Africa. Why?

Private equity in Africa offers some of the world’s best ESG practices because Africa is the only continent that would not have had the institutional private equity ecosystem emerge without the input of development finance institutions at inception. They realised that the private sector in Africa was very small and needed development. Private equity seemed a good model as growth capital rather than buyouts, but to get a DFI to anchor funds, GPs had to sign up to the DFI’s ESG standards. Over the last two decades, ESG standards have continued to improve because we have all learned what worked and what didn’t. Governance standards have also come under new scrutiny as PE recognises the effect that good or bad governance can have on returns.

So how does ESG influence your investment decisions?

DPI employs a hands-on approach to ESG through the entire lifecycle, both pre-investment and as part of portfolio management. We engage with potential investee companies on ESG early, setting out DPI ESG standards and our expectations, as well as identifying areas where we can add value through our partnership. A detailed and ambitious ESG action plan, designed to align the company with DPI’s ESG standards, is developed on every deal and included within the portfolio company shareholder agreement. We have declined a number of deals which do not align with our ESG standards and objectives. This decision is part of the deal process and is made through rigorous ESG due diligence conducted by a specialist practitioner.

We acknowledge that our ESG expectations are in many cases a steep learning curve for management. We work closely with each new company to meet their action plan and identify where increased capacity is required, but we also know that ESG is one of DPI’s true value adds and so we work hard at achieving our objectives. Each portfolio company is subject to at least one annual ESG monitoring visit and we maintain regular engagement with them by meeting their ‘sustainability team’, which includes human resources, health and safety, environment, compliance and finance.

So it’s a commercial decision but one underpinned by ESG?

ESG is hugely important for us but we should stress that we are a commercial fund that seeks private equity returns for its investors. DPI has always been an extremely engaged investor. We are not passive – we are a Cambridge Associates Africa top quartile fund with around $1.1 billion in assets. But even in a commercial context, ESG is fully integrated into our post-investment work and into our exit decisions because the highest returns in Africa come from industry or strategic buyers who are very focused on reputational risk. Buying a company that is not only clean in finances but clean in ESG achieves a higher return. So it sits all the way in the lifecycle of an investment decision.

How important is good governance?

Governance can make or break an investment. Since the majority of our dealflow is proprietary and relationship based, we give enough time to do a proper assessment of governance. We work at the board level and with the senior management, and organise a governance day where we train the top executives before disbursement. We also work lower down: are we doing the right thing for the employees? Is the organisational chart the right one for effective governance? How does the information flow in the organisation? How do we relate to the community? That is also governance.

We won’t invest unless there are certain pre-agreed governance standards. For example, if our portfolio plan includes Africa expansion, we need the company’s governance structures to be robust enough to achieve ambitious growth objectives. If there are any changes to governance, these are identified at an early stage and included within the ESG action plan.

How do you monitor these standards?

We place milestones in the shareholders agreement so we can ensure the standards progress through the lifetime of the investment. We nominate someone at the company to work with a counterpart at DPI on governance and then we execute. Many investments are family companies where the questions asked are do they have a board? Do they have a proper chairman/CEO sharing of powers? Is there independence on the board? Are the right committees present? Are they independent? Are they properly staffed in terms of skillsets? For family-run businesses we usually have to create a board which has a proper nominations process as well as audit, risk and remunerations committees. Our work is very granular. Creating a governance structure from scratch is not easy. We have a successful track record on this and it’s a key area of focus throughout the DPI team.

It’s often said there is a shortage of management expertise in Africa. Is this a problem?

It can be but we have excellent management teams. Capacity development is something we prioritise. Our deal partners and our portfolio management team spend time coaching CEOs and CFOs. We do everything from sending our managers to top business schools to creating programmes where they are trained on the ground, to bringing back the diaspora from overseas to work at our companies.

How can a focus on ESG create opportunities for investors?

The answer is simple: it generates higher returns. Our performance and recent exits demonstrate this and ESG is fundamental to good returns. We work closely with our companies to look for opportunities to improve and continuously enhance their sustainability performance. Since private equity investments almost always act as growth enablers for portfolio companies, this investment helps trigger a virtuous cycle of higher employment, higher incomes and greater profits. On a basic level ESG is to ensure you do no harm, but it then starts to deliver impact, so you can actually do a lot of good. Within our companies, impact has never been a reason for reduced returns. It ensures the long-term viability of the company within its community. We firmly believe that it is possible to deliver impact in ESG while being a top-returning fund.

Are investors putting you under more pressure on ESG?

If there’s any pressure it comes from us. We have set the culture within our firm and team to operate at the highest standard of ESG. We’ve stayed ahead of investor pressure because we believe that to operate in Africa you have to be a good corporate citizen. Development institutions have always prioritised ESG and impact, but today you also see global pension funds, endowments and foundations who’ve been tasked by their boards to measure and encourage ESG in their fund managers. We welcome the additional attention on ESG as it is something we always believed in, and as a result we have set high standards internally.

But don’t LPs ask some tough questions?

We seek to have open and honest relationships with our LPs. The E&S teams of our DFI partners and other interested investors are regularly in contact with our dedicated sustainability manager and wider team, sharing knowledge and experience. Since we have a decade of experience and institutional standards at DPI, we are often asked by institutional investors to educate them on our process and how we implement the standards. We are happy for investors to ask the tough questions because we know we have done the work and we have an answer, and the answer is typically beyond what they are expecting. That said, we seek to also learn from the tough questions and those who ask them. This way we can keep improving.

You mentioned the UN SDGs. How important are these to your investment philosophy?

There is an unprecedented and largely untapped impact investment opportunity in Africa to deliver the UN Sustainable Development Goals, and private sector investment holds a pivotal place. For instance, SDG 8 which targets good jobs and economic growth is the key to what we do. Jobs and growth are bound together. Our Botswana-based consumer lender Letshego has won countless inclusivity awards. Even with a company providing something more basic such as Egyptian home electronics retailer B.Tech, we’ve helped them build a best-in-class online platform.

DPI has always seen positive impact from the result of our investments, be that through the growth of businesses leading to job creation, the promotion of women and a focus on improving the quality of work generated by our portfolio companies.

Raising the bar

Sustainability manager Michael Hall explains how DPI helped an Algerian pharmaceutical firm to meet international standards

Can you give an example of a company where your approach to ESG has created demonstrable value?

We invested in Biopharm in March 2013, taking the opportunity to partner with the leading local player in Africa’s second largest pharmaceutical market, Algeria. Biopharm was established in 1991 as the Algerian pharmaceuticals sector was being privatised. Today, it is the leading indigenous pharmaceuticals company in Algeria with an estimated
12 percent share of the pharmaceuticals market.

During due diligence, DPI developed an ESG Action Plan, based on international best practices including the IFC Performance Standards, and following which key ESG-related milestones were set. Throughout the life of the investment, DPI continued to work with the company on the improvement of ESG Standards as we carried out monitoring visits of Biopharm’s head office and facilities in Algiers and reviewed performance against the ESG Action Plan.

In 2015, Biopharm became the first company in the market to receive accreditation by the French National Agency for Medicines (ANSM) for one of its production lines, allowing the company to export to France and the rest of the European Union.

Several other achievements were completed by Biopharm with the support of DPI, notably the installation of a waste water treatment plant for the main production facility, the first of its kind in Algeria. The plant allowed Biopharm to go above the mandatory environmental requirements and standards in terms of waste treatment.

Biopharm also started the implementation of a rigorous ESG management system, ISO 14001. The standard provides assurance to company management and employees as well as external stakeholders that environmental impact is being measured and improved.

As ESG considerations are gaining increasing attention in Algeria and in the rest of Africa, Biopharm was able to create lasting value, with the support of DPI, thanks to its commitment to environmental protection and sustainable development.

 

This article was sponsored by DPI. It was appeared in the Responsible Investment supplement published with the February 2018 issue of Private Equity International.