Step 1 of optimize, is to monitor and assess SDG impact performance as information becomes available through the systems and processes you set up in the integrate stage. You will want to assess what happened at both the deal and portfolio levels, and categorize your indicators as meeting, exceeding or falling below your targets. At the deal level, help investees with data validation. You should already have worked out with investees how you will regularly collect and review data. We've provided tips on integrating this effort into your operations in previous lessons. As you seek ways to optimize impact, start by working with investees to review and assure the validity of their data. As a partner, you can act as an external data reviewer to help identify irregularities or any sensitive aspects of data or conclusions. Take particular note of data gaps, and analyze why those gaps occurred. Note that the SDG impact standards say that, investee data that was targeted but is consistently missing should be treated as negative performance. Missing data always increases evidence risk, as a result data that was viewed as essential but is regularly missing, should lower your confidence that performance is happening as expected. Here is an example, a US impact fund worked with one of its health care portfolio companies to improve data collection and validation over the past three years. In year 1, they helped the company improve data collection policies and practices around their key performance indicators, mostly how much business outputs like number of clients served, and number of Medicaid reimbursements paid. In year 2, they helped add some outcome measures such as overall satisfaction levels of their customers, pre and post-treatment. In year 3, the fund paid for a third party evaluation, to compare the investees impact to a control group. The study showed the company to be more efficient and effective than alternatives, and the company was able to use this information to partner with the federal government to expand their offerings nationwide. Once you've gathered and assessed your impact data, there are three kinds of data comparisons you should be doing regularly. First, compare data to your projected impact, decide if the performance on SDG impact goals matches, exceeds or falls below projected targets. Many investors integrate this analysis into quarterly reporting. When comparing actual data to projections, pay attention to the rate of change between periods just as you would with financial data. Annual impact growth rates can be highly aligned with annual financial growth rates or entirely uncorrelated, depending on your theory of change and their performance. Consider how quarterly data informs your expectation of annual targets for SDG impact. Second, compare your actual impact data to applicable peers or benchmarks on at least an annual basis. Some impact data platforms, such as the B Impact Assessment, may include benchmark data that can make it easier for both enterprises and investors to evaluate performance relative to peers. Some third party industry data may be able to be purchased. For some SDG indicators, it may be difficult to find applicable benchmarks especially once you factor in geography, industry, and impact thesis variations. Here's an example from a Keel. A Keel's fund had invested in a microfinance lender serving microbusinesses in Southeast Asia. The fund experienced significant losses early in the 2020 COVID crisis, and thus the intended impact was not achieved. The lender explained that the losses were due to the crisis, however, a third party was engaged to do a peer comparison, and found that the losses were much higher than those experienced by peer lenders during the same period. The results were presented to the board, and actions were taken to improve the financial and impact outcomes of the fund. In this example, a financial indicator served as a proxy for impact and peer benchmarking help to reveal underperformance. Third, compare your data to your SDG target thresholds. Remember the concept of good enough thresholds. Recall that A, B, and C level investments are differentiated by their comparison to those thresholds. A level investments should show improvement compared to their own performance in prior periods. B and C level investments should exceed the good enough threshold. On an annual basis, determine if data shows that outcomes are on course in comparison to the relevant threshold. If they are not, you may need to revise how you categorize your investments. Now, let's look at the portfolio level. Here, you should start by evaluating performance in the aggregate by rolling up your data. When investments share some common key performance indicators or metrics, you can aggregate them. Roll up your data by segments that are relevant to stake holders to evaluate how the portfolio is performing in meeting its SDG impact goals. For example, closed loop partners developed an integrated process for reviewing individual company impact data and rolling it up at the portfolio, fund, and partnership levels. Quarterly reports come in from each investee and are monitored and managed in detail by portfolio managers. The interim all quarters file translates the operational data from investees to the funds specific KPIs. The overall fund file is aggregated and subdivided by type of investee for easier comparison. For example, the closed loop Infrastructure Fund analyses three main impact categories for recycling projects, collection, sortation, and end processing. Finally, the summary KPIs are rolled up into the fund family CLP master file. According to Luba Shabal, Director of Impact Strategies, the master files help close loop partners report to its stakeholders and make impact projections based on actual past data. Another example of a rollup process by theme comes from Beth Bafford, Vice President of Syndications and Strategy at Calvert Impact Capital. Calvert Impact Capital is a global investment firm that raises capital from individual investors that they invest mostly through loans to financial intermediaries and funds in the US and around the world. For each sector, we have a sector theory of change and impact objective for that sector. Sector being affordable housing, small business development, sustainable agriculture, environmental sustainability. For each one of those sectors, we have impact objectives and then we have metrics that we collect. We have what we call primary metrics which are metrics that we collect for every investment in that sector. If you're a borrower who borrows in that sector, you have to report this typically 2-4 to the primary metrics, and then we have secondary metrics that are more nuanced to that specific investment. Those are metrics that we want to collect that we think that is core to the mission of that investment and that, that investee really cares about and measures. We want to collect everything that they are already measuring and collecting themselves so that we have the more nuanced view of the impact of that investment. Those secondary metrics don't roll up nicely. The primary metrics do. When we create our annual impact report, we take all the primary metrics of every sector. We roll those up so that we do have a sector wide view. Next, consider data normalization methodologies. It's rare to have common KPIs across an entire portfolio. More often, investors create a scoring system or some other way of translating performance to aggregate across industry, SDG, asset class or other characteristics. Here's Christina Leijonhufvud, CEO of Bluemark and managing partner of Tideline on how she sees managers developing proprietary scoring systems to help compare impact across diverse investees. The challenge is at a portfolio level or across different portfolios in trying to find a universal metric of impact is significant. I still think it is really valuable to go through the effort, even if it's a proprietary mechanism, both for asset owners and asset managers to conduct some scoring or have an assessment rubric, a way of translating the evaluation of a manager or an investees impact into something that can be compared. A lot of judgment goes into that, but I think it's good discipline. I think the key is not to put too much weight or all weight on a single measure or a single metric. There are efforts evolving to allow better standard comparison of impact performance across portfolios, industries, asset classes, and SDGs. Normalization is the mathematical process of adjusting values measured on different scales to arrive at a comparable scale. Monetization assigns a dollar value to each unit of impact created so that any investments impact can be compared with another. Some monetization methods include social return on investment or SROI, impact multiples of money, and impact weighted accounts. Efficient frontier analysis uses impact and financial data to analyze an efficient frontier for impact per dollar spent. This analysis is particularly useful to investors wanting to know where they need concessionary capital to operate below their efficient frontier to adequately reach underserved populations, and so it's highly relevant for many SDGs. Impact Frontiers is a group that shares a toolkit and has a global member group, applying and refining this framework. For more guidance on comparing the impact of investments. Again, we recommend the GIIN publication, the COMPASS guide, especially on pages 16-18, because they have a methodology for investors to assess and compare impact results using some new standard ratios. Last, you want to verify the ABC levels of your portfolio. Assess if you're meeting your ABC goals at the portfolio level by categorizing what percentage falls into each goal. Here's an example from M&G Investments, a global investment manager headquartered in London. M&G conducted a detailed holding review by revenue split to determine their B and C holdings. Then Constable Maxwell, Head of Sustainable and Impact Investing, said this analysis was a catalyst for further engagement with investees to understand their B versus C level activities. Once you've used your data to identify where you met, exceeded, or fell below your performance targets, both of the deal and portfolio level, you need to understand why. Work with your investees to understand the context of your positive outcomes. Ask them to help you understand what went right if factors are temporary or trending, explore what could help fine tune or optimize the impact occurring. You could also identify areas where overperformance indicates that the original targets were not ambitious enough. Particularly in areas in which you're trying to reduce a negative outcome. You'll also want to work with your investees to identify potential reasons for underperformance. Our guide to types of impact risk and mitigation options can be particularly useful to understand which risks may have driven underperformance. Ask investees how they've engaged with their most important stakeholders to understand the reasons and consequences of any areas of underperformance. Given what the data shows and what you can ascertain about impact risks, do you think there are ways to mitigate underperformance going forward? Here's an example, Paulus Pension Fund invested in an affordable housing company building energy efficient apartment buildings in cities across Canada. The impact data indicators included the number of units built in low-income versus high-income neighborhood's. The energy savings per unit compared to traditional units, and importantly, the change in need for federal housing subsidies in the region served over time. On the first two indicators, the company met five-year targets, but on the third target, housing subsidy requests in the region didn't change. Digging into the company's practices, Paulus team found that the company was overwhelmingly serving higher income renters, contributing to the gentrification of low-income neighborhoods by attracting higher income families and pushing out the lower-income families. In this example, several risks likely drove underperformance. Execution risk in not taking the appropriate actions, such as requiring income information and lease applications and setting requirements for serving certain income brackets to achieve the intended impact. Evidence risk in not collecting and reporting against the right data on renters income and stakeholder engagement risk in not ensuring that the intervention was serving the intended stakeholders' needs. After this analysis, Paula's team needs to determine what actions to take on this investment. This leads us to the next step. Step 3 is to decide what new actions will you take, including to exit investments or hold and deepen impact and document forward-looking plans and learnings. Let's look at the deal level first. You should conduct a hold or sell review. Do you need to exit an investment that is not meeting your goals? Or should you hold it so that you can help improve its impact? If an investment has already met your impact goals, is it time to manage for an impact-aligned exit so that you can turn your attention to other opportunities? Consider what constraints exist, as well as the pros and cons of changing holdings due to impact performance. If you're selling, you want to manage your exit considerations. Develop criteria to manage for an impact-aligned exit. This means you want to pay close attention to the impacts on the least powerful or the most underserved stakeholders of the various exit scenarios you can imagine. If you're holding, define the ways that you can continue or deepen your impact management with your investees. Based on what you've learned through this process, integrate new actions into the operational management of the investment. For example, you may propose ways to reduce any impact risks you've identified through your analysis. You want to adjust your plans and targets, help the investee make new plans and set new SDG targets and KPIs based on your analysis of past performance and risks, integrate these new targets into your internal processes for managing this investment. Last, you want to document and share your learnings. Capture key themes in your analysis and decision-making so that you can continue to refine your overall impact management system over time. Consider ways you can share your learnings with peers trying to achieve similar outcomes, then, turn your attention to the portfolio level. If your overall portfolio doesn't meet your goals, you're going to need to take action. One option is to adjust how you talk about the goals of your portfolio to reflect the reality of your outcomes. For example, acknowledging that you're managing a majority A-level portfolio instead of a majority B-level portfolio. A second option is to reallocate your holdings to match your goals around A, B, and C levels. Going back to our previous example, M & G decided to exit their holdings with significant A-weightings to replace them with pure C holdings targeting underserved populations. This is how their portfolio looked after that process. Deciding on the new actions you'll take, of course, brings you back to the beginning of this three-step cycle. You'll need to gather data to analyze the results of those new actions and gauge performance. Ask yourself what happened to generate your new results and then make the next set of decisions to optimize impact. Making it real. Go beyond what happened to why and what now. Remember that you're collecting decision where the impact data so your job is to use that data to take actions and adjust plans for improved impact over time. Identify potential under-performance issues as they emerge. Use interim data and informal check-ins to assess where progress seems to be on target and where it may not be. What are the decision points to address, and how can you influence them? When should affected stakeholders be engaged? Make impact risk a part of regular engagement with your investees. Our guide to types of impact risk and mitigation options can provide a framework for considering the issues that may have resulted in falling below impact performance targets. Work with investees to mitigate for risks along the way and develop criteria for your hold or sell decisions. There are arguments to make for selling an under-performing investment and for holding and improving it. The same goes for re-balancing your overall portfolio. Work with your team to develop criteria as you confront these decisions and document what you learn over time to improve your impact management practice. At the end of this lesson, you'll have an understanding of whether you're on track to meet your SDG outcomes at the individual investment and portfolio level, and a new set of actions you'll undertake to optimize SDG performance going forward.
