Now that you've decided how to integrate impact throughout the investment cycle, including how to approach impact due diligence for new investments, the final step to integrating impact into operations is preparing to monitor impact within your portfolio. Your fiduciary duty as an investor is to manage the assets under the risk and return conditions set by your governance stakeholders. Your impact duty is to manage the assets under the impact, risk and return conditions, set and agreed on by your governance stakeholders. But how do you do this? On the financial side, you can ask for audited financial statements at regular intervals from your investees. These audited statements assure that common processes have been followed to give you confidence in the financial reports. You can use financial statements to make decisions and you can share them with your stakeholders so they can judge how well you've managed to their goals. On the impact side, your duty extends to working to protect the well-being of the stakeholders, your investments touch, but the mechanisms for producing, sharing, and assuring that data is evolving. Standardized impact statements, guidance like the SDG impacts standards and the IFC operating principles and third-party impact validators, well they're only just emerging. In the meantime, you will need to work with your stakeholders, including investees, to decide how to monitor and manage for improved impact performance. To prepare to monitor, we recommend first looking outward to engage your stakeholders, to establish common goals, and then turning inward to establish systems to monitor impact within your portfolio. First, engage with investees around their data practices. What kind of data do your investees already collect? How closely does it align with your SDG and overall impact goals for this investment pool? What are the strengths and weaknesses in your investees data practices? How could you help them build more robust practice? If you did your impact diligence well, you should already have good answers to these questions. As you assess investee data practices, keep a fundamental question in mind; how does the data you see investees collecting or want to ask them to start to collect, align with the decisions that will be based on it? Be aware of the power imbalance between your need for data and the investees need to build capacity to collect data. Work collaboratively to develop a common understanding of priorities and trade-offs. Here's an example, Ceniarth, a single-family office, recently assessed and engaged with its portfolio in a report in our resource list called; how should we measure impact, we asked our investees. Ceniarth started by surveying investing is to understand the kind of impact data they already collected. They learned that most investees had only who and what data without much on the other three-dimensions, and they often didn't have the capacity to collect true outcome data. With a better sense of where individual investors were in their impact management practices, Ceniarth was able to make targeted recommendations on how they could strengthen their data practices to improve decision-making. Next, engage with co-investors if you have them, to align over SDG impact goals and learning. If you share SDG outcome priorities with co-investors and can align on certain measurement and monitoring approaches, you can simplify the ask and reduce the burden on investees. Engaging with co-investors is also an opportunity to share best impact management practices for specific SDG outcomes. Finally, consider taking the time to solicit input from investee stakeholders. Are there significant gaps or questions about the positive or negative value created on behalf of stake holders by this investment? As an investor, you may have power to encourage investees to deepen their own stakeholder engagement processes, perhaps by providing or cultivating additional funding to make this possible, or you may be able to solicit this input yourself. After looking outward to engage stakeholders, it's time to turn inward to establish your own impact monitoring systems. First, create a process to regularly review individual investments. Most investors tend to find ways to integrate impact reporting into regular financial reports where they can compare target and actual performance on their key performance indicators and discuss with management any gaps and actions to reduce them. Others may use third party platforms to collect and analyze data. For example, many investors who make direct investments into enterprises ask those enterprises to use the B Impact Assessment. The investee companies can easily input data into the online platform and then share the reports back to their investors. Some investors use this as an annual exercise to benchmark performance against peers and identify strengths and weaknesses. This might be one unifying management input across portfolio companies, perhaps used in combination with custom dashboards for each individual investment. For example, RSF Social Finance has used the B Impact Assessment to benchmark it's borrower scores against a larger pool of for profit social enterprises. You can read more about RSF's practices in the case study found in our additional resources. Another example is Closed Loop Partners. Closed Loop Partners manages a set of funds as well as an innovation center, all with the goal of building the circular economy. As part of their diligence process, the Closed Loop Partners funds integrate impact reporting requirements into their deal structures. They start with a benchmark level so that KPIs from then on can be reported as incremental impact, and then the team establishes projections for each investee. In some cases, the additional verifiable impact disclosures may lower the investees' overall cost of capital. Under Post Investment on this chart, Closed Loop Partners list sample activities that the firm undertakes across its various funds related to impact which happened post-investment. These vary by fund, but in most cases include reporting, data validation, data aggregation, comparison of projections to actuals, and a reflection on the company's business situation with company's management. Next, develop an approach to compare and aggregate impact performance across investments. Once you have a portfolio of investments for which you are managing impact, most investors start to create custom dashboards and other monitoring and management tools, so they can get a picture of how their portfolio is performing for each SDG target outcome. This helps them see trends across the portfolio and notice where concerted effort may be needed across several investees to achieve their goals. Closed Loop Partners developed an integrated process for reviewing individual company impact data and rolling it up at the portfolio, fund, and partnership level. On this reporting process chart, you can see that quarterly reports come in from each investee, and are monitored and managed in detail by those portfolio managers. The interim all quarters file translates operational data from investees to the funds specific KPIs. The data is then aggregated into an overall fund file. This file is subdivided by types of investee for easier comparison. For example, the Closed Loop Infrastructure Fund analyzes its impact by three main categories for recycling projects, collection, sortation, and end processing. Last, summary KPIs are rolled up into the fund family CLP master file. According to Luba Shabal of Closed Loop Partners, the two primary uses of the master files are one, to help Closed Loop Partners report to its stakeholders, and two, to help them make overall impact projections based on actual past data. Finally, align staff incentive systems with impact performance. There are many ways you can do this. One example comes from the Brussels-based VC fund, Astanor, which responding to a challenge from one of its investors, the European Investment Fund pledged to reach a non-financial performance hurdle before being entitled to the long-term financial incentive typically associated with venture and private equity funds. To ensure a complete alignment between its incentive structure and its long-term impact goals, they have defined a set of six impact KPIs around environmental and social metrics, which they say wholly capture the fund's positive impacts on the planet and people. According to Eric Archambeau, co-founder of Astanor, "If the fund does not deliver on its impact objectives, Astanor then allocates a portion of the carry of the fund that's usually there to reward managers for good financial performance to NGOs or charities that are operating in the same sector as Astanor." We recommend that if you're starting from scratch, you develop a first year operational plan that you can improve and revise in future years. If you already have an investee engagement and tracking process that integrates impact, your team can articulate what you're adding and testing over the next year. Making it real. Don't shortchange the process of engaging with external stakeholders. Taking the time to understand investees' current data and decision-making practices to align on goals and processes with co-investors, and to ensure that the most important stakeholders are heard can save time in the long run. You want to use your and investees' limited resources carefully, getting the most important decision-relevant data in the most efficient way possible. Consider how you can integrate impact data collection into existing processes to reduce the reporting burden on investees and free their capacity to create the impact you seek on the ground. For example, if you're already collecting and reviewing quarterly financial statements, can you add impact KPIs to this process? Decide which KPIs you may need to collect across investees to roll up or compare performance within an SDG theme. Acknowledge the tension between burdening investees with additional KPIs and your need to compare performance, choose KPIs that will truly help you and investees manage for improved impact. Align your data monitoring with decision-making timeframes. What data cadence will give you confidence you can make timely decisions to manage toward your performance goals? What cadence will allow you to report performance to your key stakeholders? At the end of this step, you'll have processes in place to receive decision-worthy data from investees in order to review individual investment-level and portfolio-level performance.
