In this lesson, you'll decide how to take the SDG goals you articulated in your investment policy and integrate them into your daily operations and decision-making across all key stages of the investment process. Most investors share a similar process. They decide to buy something, they own or hold it for awhile, and eventually they sell it. Within these very simple steps, investors have enormous power to integrate impact management. How will you decide what to buy versus not to buy? How long do you hold and what influence do you exert while holding, and when do you sell, and under what circumstances? As an investor, you have power to assess and influence impact across all stages of the investment process. This chart from Tidelines report the Alpha of impact shows potential influence points for an investor like a keel, who generally wants commercial returns in addition to impact outcomes. As you can see, there are ways in each stage of the investment process to integrate activities to drive to SDG outcomes. Another example is from a gender lens investing training. We developed a case at Duke. In it, we detailed questions that investors can ask related to SDG 5 on gender equality across eight different steps of the investment process. The IFC is operating principles for impact management uses similar frame of integrating impact into the investment process from strategic intent to origination and structuring, portfolio management, impact at exit and independent verification. With these frameworks in mind, document the points of influence on SDG outcomes for your investment process. Think about how you could better assess and manage impact toward your SDG outcomes at each key stage. This includes adding positive practices that enhance impact, as well as reducing negative practices or barriers to impact. Download our integrate impact into your investment cycle template to help organize your team's discussion. Here are some of the questions you can start with for each stage. For sourcing, do you have relationships with networks where more impactful investments can be located or cultivated? Do you currently have deal size or other criteria that exclude higher impact investments? Are there opportunities to seek out blended finance investments where other types of investors may be willing to offset risk for higher impact? Due diligence. Have you established a clear narrative on the potential impact of each investment supported by evidence? Have you integrated clear impact criteria into the due diligence process through impact questions in your due diligence questionnaire or by establishing waiting for impact factors? Have you eliminated barriers that might disqualify higher impact investments? Due diligence is a particularly important stage to incorporate impact analysis. Our next video is focused entirely on impact diligence strategies you can consider adding to your process. Investment decision-making, how our impact and non-impact factors weighted by your investment committee. Is there a threshold for impact potential under which you will not invest? Do you have investment committee members who are experts in the SDG areas you're targeting? Closing, and deal structures. What deal terms do you include related to impact management or performance? Would you consider lighter term requirements or financial return targets for higher impact deals? Monitoring and management, what are the ways you'll actively contribute to impact during the ownership phase of the investment? Review the types of investor contribution from setting strategy step 4, will you signal, engage, grow new markets, be flexible on returns or contribute to field building? How will you regularly compare impact performance to targets and engage to close gaps during ownership? How will you monitor baselines and thresholds for your C-level investments? What are the specific ways that your staff incentives, decision-making processes or financial structures might be making it harder for you to prioritize impact with your investees, which could be changed or removed? How will you collaborate with co-investors around impact management? Exits. Can you define key criteria for an impact aligned exit for each investment? How will you consider the effect which the timing, structure and process of this exit will have on the sustainability of the impact? Which stakeholders should be consulted on exit options? Which stakeholders might be most vulnerable? Can you act as a proxy for their interests? Can you influence decision-making to protect the impact of this investment beyond your involvement in it? There's an extensive body of field-based impact investing literature about each of these steps, some of which we've added to the resources section of this lesson. Akeel's VC fund team analyzed their investment cycle and decided on specific actions they would take to integrate impact into decision-making at each stage. They differentiated their practices by A, B, C goal because they felt that while their B investments required some changes, their new C investments required more operational changes to maximize the chance of achieving the substantial change in SDG outcomes they seek. For example, the practices they're adding to their financial inclusion outcomes include, partnering with local accelerators for improved sourcing, a new due diligence process that integrates information across the five dimensions, a scoring system to weigh and compare estimated SDG outcomes across potential investments, quarterly reviews of investee impact data, semi-annual benchmarking of peer data, and annual updating of impact criteria for potential exits. They also decided to add incentives to their deal terms for investees who meet or exceed their SDG impact targets. Akeel and his team found that instituting operational changes across the full investment lifecycle made a lot of sense. Looking holistically revealed how changes in one area, such as diligence criteria around carbon saved, needed to be matched in other areas such as the quarterly review of carbon data. He added, "We narrowly thought of impact management as trying to figure out what data to ask our investees for. Now, we see this as a broader management issue that starts before we choose to invest. We have a lot of influence points and we're excited to leverage them for more impact, from more nuanced pipeline criteria to setting targets with each investee and extending all the way through consciously managing impact at exit." Paula, our pension fund manager, knew she needed differentiated strategies for integrating SDG goals into her investment processes for climate change and equity and inclusion. The climate change market was more developed with a lot of potential investments and more launched every day. There were also intermediaries that could help her assess the potential carbon impact of investments. Paula's team developed more detailed and stringent diligence criteria to assess the carbon savings of potential investments, they put in place more frequent review of investments for buy, hold, and sell decisions, finally, they instituted incentives among the staff for speed and efficiency in investment recommendations. Given that the equity and inclusion investment market was less-developed, Paula wanted a more flexible approach across the investment process, reducing some potential barriers to high-impact opportunities. Most of the fund managers of color she identified were running smaller funds and had a shorter track record than what was usually required by the pension fund. She advocated for and got permission from the investment committee to broaden both perimeters, so she could consider more funds run by under-represented managers. Paula found few data sources readily available to help make investment decisions within equity and inclusion lens. Her team found JUST Capital's Racial Equity Tracker quite helpful. She gave her team permission to experiment with different ways of collecting data during the diligence process and rating and weighting DEI criteria. Last, she started laying the groundwork for proxy voting in investments they currently hold to advance stronger DEI practices. Paula said this process of looking across the investment cycle helped her fit practice to purpose and align her staff's capacity with where the markets were. "I don't think we realized before this process how dependent on available market data we are when trying to move quickly into a new SDG area. We were able to get the investment committee on board with some pretty novel changes about how we invest and now feel we can proceed and learn fast over the next year." Making it real. Consider the practices you will add or change to improve impact, both by reducing barriers to impact that might exist within your current investment process and by adding practices that elevate the investments that match your investment goals. Differentiate your practices for A, B, and C-level investments. Generally, Cs will require you to ask investees for more data across the five dimensions, including ways to compare two baselines and peer benchmarks over time. Match your internal activities with any external commitments to positive and negative investor contribution or make adjustments in what contribution you claim. Align diligence, management, and reporting activities. Strong impact management systems are coordinated to bolster impact across the full investment cycle. At the end of this step, you'll have a set of practices designed to assess and contribute to impact across all stages of the investment cycle.
