The United Kingdom’s development finance institution has formally released a new five-year strategy further detailing its path forward amid a much publicized name change and concerns that a higher profile might lead it to drift from its development mission.
Starting in January, CDC Group — and British International Investment, after the name change in April — will invest in a broader geographical area and increase its focus on climate finance and on partnering with U.K. companies on investments.
“The only way to really know how much fidelity it will have to the core mission is when we see what investments it makes over the next five years.”
— Ranil Dissanayake, policy fellow, Center for Global Development.The name change is the “most visible but … not the most important part of our strategy,” Nick O’Donohoe, CDC Group’s chief executive, said at a launch event last week.
The strategy, released Tuesday, “builds on the development mandate that’s really been at the heart of our work … and also on the successful track record of growth,” he said. “We also know that there’s a lot more to do, and our strategy sets, I think, a new ambition for scale and innovation.”
But not everyone is confident in the institution’s fidelity to that mandate. In an open letter released this week, a group of NGOs voiced concern that the new strategy, with its expanded mandate and geography, would “further dilute the poverty reduction mandate of UK aid.”
BII has three strategic objectives that will govern how it invests: It will seek to achieve development that is productive, sustainable, and inclusive.
The first of those objectives, productive development, aims to “support a decent standard of living for all,” while the second target, sustainable development, reflects a major new focus on climate-related investments to “reduce emissions, protect the environment and adapt to the changing climate,” according to the strategy. Inclusive development refers to “sharing the benefits of higher productivity and greater sustainability with poor and marginalised sections of society.”
By comparison, the institution’s previous strategy had four priorities: That investments be developmental, responsible, innovative, and enduring. It directed the institution to invest only in Africa and South Asia, “where the world’s poorest people live.”
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To achieve the new objectives, CDC Group and BII will focus on digital transformation and “gender lens” investing, as well as climate finance. Part of that is a target for “25 per cent of all new investments to qualify under the 2X Challenge, the initiative to boost financing for women.”
In terms of what types of projects it will invest in, the strategy outlines that CDC Group and BII will be “major infrastructure investors”; focus on “SMART sectors,” referring to services, manufacturing, agriculture, real estate, and technology; and invest through financial services to provide targeted capital to marginalized groups and small and medium-sized enterprises.
As Devex has reported, the new strategy includes a “pivot” to Asia, but at the launch event O’Donohoe said BII will “retain our historic focus on Africa.”
As part of the scale-up in Asia, BII will have “a hub office in Singapore with a coverage presence in three countries,” said Srini Nagarajan, head of Asia at CDC Group, during the event. The focus of the investments will be climate funding through equity, project finance, and backing fund managers. BII expects to invest between £300 million and £500 million in the region between 2022 and 2026, Nagarajan said.
While there are concerns that this expansion of BII’s mandate could result in less funding to the lowest-income countries — many of which are in Africa — Tenbite Ermias, head of Africa at CDC, said during the event that the continent will remain an area of focus. CDC Group has deployed about £5 billion in Africa in the past five years, and the institution expects to deploy about £7.5 billion in the coming five years.
“Africa becomes as important or more important than it’s been in the past — certainly not a step backwards,” he said. Part of that focus will mean more staffers on the African continent — growing from the 25 employees today to between 80 and 100 in five years, including many investment officers so BII can more actively evaluate opportunities and engage in local markets, Ermias said.
BII will also spend more time on venture capital and early stage investing.
“This is a key area for Africa, and it’s a place where perhaps we haven’t been able to do as much as we would have liked to do in the past, as it was not a focus,” Ermias said.
The new strategy also includes plans for growing the institution’s Catalyst Strategies portfolio, in which CDC Group has more flexibility and takes more risk. The goal is to triple the size of the portfolio over the next five years and launch additional programs that will complement it, said Yasemin Lamy, deputy chief investment officer and head of asset allocation and capital strategy, during the event.
One new program, Kinetic, will invest in even earlier-stage innovative seed capital in nascent markets. Another, named Quantum, will aim to mobilize capital into markets that can attract private money.
The new strategy document includes a lot of language about partnering with U.K. companies, particularly those in London’s financial sector.
“It means we’ll continue our work to cement the U.K. as a global development finance hub by mobilizing more capital alongside our own, taking advantage of our proximity to the City of London, the world’s largest international financial center,” O’Donohoe said.
The strategy also outlines plans for a new “impact score” to ensure project alignment with the new objectives. The institution will also have a new portfolio-level impact score based on its strategic objectives, which is one of the two ways the agency will measure success.
The other is a rolling, seven-year financial performance measure requiring portfolio returns of 2% or higher. That CDC Group is stating a required return is unusual among DFIs — to the point that comparing the required 2% return to others is difficult, since few share a specific target.
“CDC’s always had a … deserved reputation for being a development finance organization that takes lots of risk, and that isn’t going to change,” O’Donohoe said. “I don’t think we should confuse the tilt towards a much stronger climate agenda with a tilt away from the key mission of CDC, which has always been, and will continue to be, development impact, poverty alleviation in the hardest countries in the world.”
Some development advocates have said that they are concerned about the new strategy and that budget increases at the institution will mean funding is taken from elsewhere in the U.K. aid budget. Speaking to Devex, several experts said the proof of whether the institution stays true to its mission will be in the investments it makes in the years ahead and how it follows through on some of its rhetoric.
“The only way to really know how much fidelity it will have to the core mission is when we see what investments it makes over the next five years,” said Ranil Dissanayake, a policy fellow at the Center for Global Development.
But Dissanayake said that he is a “fan” of the new strategy and appreciates that it lays out three “fairly simple” strategic objectives.
While those are important areas to focus on, the “real challenge is what happens in the next four years, in the actual portfolio,” he said. “The proof is in the pudding.”
One concern is that CDC Group misleadingly touts itself as advancing a gold standard in transparency, said Gary Forster, the CEO at Publish What You Fund, a global campaign for aid and development transparency. For example, CDC Group has not updated its online database of projects since 2020, he said.
The strategy says that the “new name clearly defines us as a British institution working to bring not just capital, but the highest levels of ethics, standards and transparency to our markets.”
But language in the investment policy, published alongside the strategy, doesn’t match the stated ambition, Forster said.
In that policy, CDC says it is committed to transparency and will publish information “to the extent useful and relevant to interested third parties and as permitted by applicable law and the requirements of commercial confidentiality.”
“They have to find a balance” between the investment policy and “saying they want to be a world leader,” Forster said.
A key concern for Dissanayake, and the group of NGOs, is not in the details of the strategy but in the trade-offs of more funding going to CDC Group and BII with a broader geographic mandate that is less focused on the lowest-income countries.
“The expansion into the Indo-Pacific is a sort of dilution of CDC's focus on poorer places, poorer people,” Dissanayake said.
While climate finance is needed, “it is still very clearly driven by political priorities, not a technical calculation of where money is most needed and where it can do the most good,” he said.