Singapore, July 16, 2004
—The global private equity industry should develop a common approach to environmental and social due diligence to enhance opportunities and the performance of investments funds in emerging markets. Speaking at the annual conference of the Association for Sustainable and Responsible Investment in Asia, or ASrIA, Rachel Kyte, International Finance Corporation’s director for environmental and social development, challenged private equity industry leaders to make the cause their own. She urged standards that are unique to and appropriate for their industry.
"The time is ripe for the private equity industry to take a leadership role in shaping its future," Ms. Kyte said. "You should do it because you will reduce risks by directing investments towards companies and funds that meet sound corporate governance, environmental and social practices. You should do it because you will be able to raise more capital for private equity investments in emerging markets because investors will be more confident in investing in these companies. And you should do it because you will achieve higher returns on your investments as these well managed companies prosper."
In her remarks, Ms. Kyte noted that corporations, banks, and multilateral institutions have all begun recognizing that new approaches are required to encourage more investment in emerging markets. Increased pressure from investors to demonstrate good practices is likely to intensify. "If you don’t seize the initiative, you will likely face a far more complex problem of standards being forced on you," by institutional investors, for example, she said. Meanwhile companies in emerging markets would benefit from clearer guidance on requirements to attract capital from fund managers. "Private equity has to find a way to voluntarily adapt the changes occurring in the global financial sector," she said.
Ms. Kyte said private equity needs to find its own unique approach to standards, but may be able to learn from the experience of commercial banks with the Equator Principles. The Equator Banks’ experience demonstrates that common standards are increasingly viewed as a means to improve business performance and investment returns. While an identical approach might not be appropriate in the private equity industry, an initiative to create common standards for screening such investments might be facilitated by leaders in the private equity industry or associations that are well placed to take the lead.
Ms. Kyte noted the specific challenges facing Asia’s economies are creating a new environment for investors and businesses. The region, especially China, is becoming the manufacturing base for the world. More than half of the world’s population lives in China, India and Indonesia. Asia’s cities are being filled at the rate of 40 million additional inhabitants every year, making heavy social and environmental demands on economies. "This is creating challenges and opportunities that will only be met if private companies are up to the tasks that await Asia in the coming decades."
IFC is world’s largest fund investor in emerging markets. IFC provides training and innovation in this industry through the leadership of its Private Equity and Investment Funds Department. IFC’s Sustainable Financial Markets Facility has been supporting innovators in the field such as ASrIA, mentoring private equity fund managers and conducting research to demonstrate the business case for sustainability in emerging markets. IFC has been working with the Emerging Markets Private Equity Association, known as EMPEA, to build the capacity of the association to offer training to fund managers.
The mission of IFC, the private sector arm of the World Bank Group, is to promote sustainable private sector investment in developing countries helping to reduce poverty and improve people’s lives. IFC finances private sector investments in the developing world, mobilizes capital in the international financial markets, helps clients improve social and environmental sustainability, and provides technical assistance and advice to governments and businesses. From its founding in 1956 through FY03, IFC has committed more than $37 billion of its own funds and arranged $22 billion in syndications for 2,990 companies in 140 developing countries. IFC’s worldwide committed portfolio as of FY03 was $16.8 billion for its own account and $6.6 billion held for participants in loan syndications.
Note to editors
IFC Environmental and Social Development Director Rachel Kyte will be available by appointment for interviews from Singapore to discuss her speech on Friday, July 16, 2004 after 10am. Please contact Desmond Dodd on his mobile telephone (+852 6478 7749) to arrange an interview.
