Annual Report 2023 V

"At the heart of the CFC’s work is its mission to strengthen the economic resilience of developing nations. Its financing and expertise empower people to grow their agribusinesses and adopt sustainable methods of working, so they are better placed to overcome supply chain disruption, climate shocks and price volatility. The CFC’s track record of success, highlighted by the Annual Report, speaks for itself."

Datuk Dr. Ramle Hj. Kasin (CC Chair)

As an impact investor, the CFC finances investments that can generate a greater social and economic impact in developing countries. To be a credible and effective impact investor, the CFC recognises the need for a robust and efficient system for measuring and managing impact. To this end, the CFC's Executive Board approved a new impact strategy in October 2018. This chapter provides further information on the strategic focus, implementation, and impact highlights of the CFC's loan portfolio in 2023.

Championing the Sustainable Development Goals

The CFC's Impact Strategy Framework is rooted in the Sustainable Development Goals (SDGs), a universal call to action to end poverty, protect our planet, and ensure prosperity for all. Building upon the foundation laid by the Millennium Development Goals (MDGs), the SDGs integrate economic, social, and environmental dimensions of sustainable development, targeting the root causes of poverty and fostering global growth.

While each nation bears primary responsibility for its own economic and social development, collaborative partnerships are paramount. By uniting governments, civil society, and the private sector, we can take bold and transformative steps towards a sustainable and resilient future. In response to this call to action, the CFC has adopted the SDGs as the cornerstone of its impact framework.

Recognising the pivotal economic role of commodities, CFC-financed projects have the potential to advance all 17 SDGs. However, the CFC's impact management strategy emphasises its direct and measurable contributions to select core SDGs, where the impact is most significant and demonstrable across its project portfolio. This targeted approach enables the CFC to maintain a clear and comprehensive view of its contributions towards achieving the SDGs on a portfolio-wide basis.

By investing strategically in commodity value chains, the CFC aims to harness the immense value created in global commodity markets. This investment approach not only drives economic growth but also ensures that the benefits of this growth are equitably distributed. By enhancing productivity, improving market access, and fostering innovation within commodity sectors, CFC investments empower local communities, create sustainable jobs, and build resilient economies.

Through such investments, the CFC supports sustainable agricultural practices, promotes fair trade, and encourages responsible resource management. This reduces poverty, ensures food security, and promotes economic inclusivity. By focusing on value addition and local capacity building, the CFC helps communities capture a greater share of the value created, thus fostering long-term economic stability and prosperity.

Together, through strategic focus and collaborative efforts, the CFC is committed to driving meaningful progress towards a sustainable and prosperous world for all. Investing in commodity value chains is a powerful lever for economic transformation, enabling communities to benefit fully from global markets and advancing the collective achievement of the Sustainable Development Goals.

SDG 1 is more critical now than ever before. The global extreme poverty rate increased for the first time in over two decades in 2020¹ due to the pandemic. With double-digit inflation and the war in Ukraine, it is estimated that as many as 198 million extremely poor people were added in 2022.² Poverty perpetuates a cycle of limited access to basic services, education, and healthcare, impeding the ability of individuals to contribute to their community. Achieving SDG 1 requires investment in social protection systems, empowering marginalised communities, supporting small businesses, and creating sustainable job opportunities. The CFC contributes to SDG 1 by investing in businesses that improve people’s livelihoods throughout the supply chain, by among others, training and providing stable demand to smallholder farmers in developing countries. By enhancing productivity and market access, these investments help break the cycle of poverty and promote economic resilience.

The UNCTAD Commodities and Development Report 20231 emphasises the urgency of addressing SDG 1, which aims to end poverty, in the context of commodity dependence. Several critical issues and recommendations are relevant to the impact strategy of the CFC today, including addressing Economic Vulnerability and Inequality of commodity-dependent developing countries (CDDCs). The impact of global decarbonisation is another significant challenge that commodity dependent countries will have to face due to the rapid decarbonisation of the global economy. This transition could lead to economic hardships and exacerbate vulnerabilities if not managed carefully. In this context, a significant contribution to addressing SDG 1 can come from the diversification of economies in CDDCs to reduce their reliance on a narrow range of commodities. This strategy is crucial for fostering economic stability and reducing poverty, as it would make these countries less susceptible to commodity price volatility. The CFC is also aware of the need to support green industrial policies and enable CDDCs to move up global value chains, particularly in sectors relevant to the energy transition, such as critical minerals. The CFC continues to develop its understanding of impact investing that drives economic diversification, supports green policies, and promotes inclusive growth strategies that lead to a sustainable reduction of poverty and enhanced economic resilience in the face of global challenges.

Impact investment in commodity value chains plays a crucial role in addressing SDG 2, which aims to end hunger, achieve food security and improved nutrition, and promote sustainable agriculture. The combined challenges of the pandemic, soaring food prices, and the war in Ukraine, make achieving SDG 2 even more urgent. Rural households, heavily reliant on small-scale farming for their sustenance and income, are particularly vulnerable. As of 2023, between 702 and 828 million people worldwide are suffering from hunger, a number exacerbated by the continued legacy of the COVID-19 pandemic and other global crises. More than 2.3 billion people experienced moderate to severe food insecurity, and the estimated number who faced acute hunger in 2023 is 349 million across 79 countries. Hunger and malnutrition lead to severe impacts, including stunting, health problems, reduced cognitive development, lower productivity, and decreased economic growth. The CFC supports a world in which everyone has access to safe, nutritious and sufficient food, by investing in SMEs that increase smallholder productivity and build farmers' resilience to external risks. By focusing on improving access to credit, technical assistance, and other resources, the CFC aims to enhance the capacity of smallholder farmers and SMEs within these value chains, thereby contributing to global food security and supporting livelihoods.

The essential instrument of the CFC's investments, enhancing access to credit, is vital for smallholder farmers and SMEs as it enables them to invest in better agricultural practices, purchase necessary inputs such as seeds and fertilizers, and adopt innovative technologies. This financial support helps increase agricultural productivity and sustainability, which are essential for ensuring food security. By providing loans and financial instruments, impact investors can help bridge the gap in funding that many farmers face, especially in developing countries. This is supported by technical assistance activities which involve sharing knowledge and skills training to farmers and enterprises within the commodity value chains. This can include educating them on modern farming techniques, sustainable practices, pest management, and efficient water use. Such training helps improve crop yields and quality, which not only contributes to local and national food supplies but also increases the marketability of the produce. Technical assistance also helps farmers meet international standards, which can open up new markets and increase their income.

By investing in commodity value chains, the CFC helps build a more robust and resilient agricultural sector with improved agricultural practices, higher productivity and greater sustainability, ensuring a stable food supply throughout the year. This stability is crucial for combating vulnerabilities that lead to food insecurity, especially in regions prone to climate variability and economic shocks. Moreover, enhancing the economic well-being of farmers through increased productivity and market access directly contributes to poverty reduction and improved nutritional outcomes. As farmers' incomes improve, they have more resources to invest back into their farms and communities, creating a positive cycle of growth and development.

Despite efforts to achieve gender equality by 2030, progress has been hindered by the socioeconomic impacts of the pandemic. Women and girls have been disproportionately affected by job loss, interrupted education, increased unpaid care work, and domestic violence. In agriculture, where women comprise 43% of the labour force in developing countries, gender disparities persist in access to productive resources such as land rights, technology, finance, and income distribution. By prioritising investments that promote gender equality – such as women-led enterprises, employment creation for women, and higher representation of women in senior positions – the CFC contributes to achieving SDG 5.

Ensuring that women have equal access to resources, opportunities and decision-making positions in commodity value chains is a critical strategy for promoting gender equality. This approach not only addresses fundamental rights and equity issues but also catalyses broader economic and social development.

For example, when women gain equal access to resources such as land, credit and inputs, they can increase their productivity and incomes. This economic empowerment is crucial because women are more likely to reinvest their earnings in their families and communities, leading to improvements in child nutrition, health and education. Our experience demonstrates that providing women with the necessary skills and resources leads to increased involvement in commodity value chains, which in turn enhances their economic status and decision-making power within their households and communities

Women play a significant role in agriculture, yet they frequently face barriers that limit their efficiency, such as restricted access to high-quality seeds, fertilizers and technology. By investing in women and enabling equal access to these agricultural inputs and services, they can match or surpass the productivity of men, leading to overall increases in agricultural output. This boost in productivity contributes to other SDGs such as SDG 1 and SDG 2, particularly in regions where hunger and malnutrition are prevalent. Incorporating a gender perspective into commodity value chains fosters more sustainable and resilient agricultural practices. Women, when empowered, often prioritise sustainable approaches to farming that enhance biodiversity, reduce waste and conserve resources. These practices not only mitigate the impact of agriculture on the environment but also build resilience against climate change, benefiting entire communities.

Promoting gender equality in commodity value chains fosters social inclion and enhances community well-being while strengthening livelihoods. When women are given equal opportunities to participate in and benefit from these chains, it challenges entrenched gender norms and stereotypes, triggering positive change. This cultural shift can lead to greater social cohesion and reduced gender-based violence, contributing to the overall health and stability of communities.

The pandemic's impact on informal employment was devastating, preventing labour reallocation and forcing many workers to leave the labour force altogether. The global unemployment rate remains high. In addition, almost 1.4 billion workers are in vulnerable forms of employment without job security, regular incomes, social protection, or opportunities for social dialogue. The CFC recognises the critical importance of creating decent jobs and supports investments that generate employment with decent working conditions, particularly in SMEs.

The CFC's investments in sustainable commodity value chains directly contribute to the creation of higher quality jobs. By focusing on sectors such as agriculture, mining and textiles, which are labour-intensive and prevalent in developing countries, the CFC generates employment opportunities that strengthen communities. We aim to create jobs that are decent as well as numerous, offering fair wages and safe working conditions, which are the building blocks of quality employment. The CFC's approach to investment is inherently inclusive, targeting the upgradation of value chains in which smallholder farmers and SMEs play significant roles. This inclusivity overlaps with other SDGs as it helps reduce inequalities within and among countries by empowering underrepresented groups, including women and young people, thus fostering inclusive economic growth.

By focussing our impact investments on diversifying products and enhancing value chains in commodity-dependent developing countries, the CFC creates jobs that address economic vulnerabilities related to the reliance on a limited range of exports. This strategic focus not only delivers sustainable jobs, it helps to stabilises local economies and reduces the vulnerability of communities to external shocks.

Progress in reducing income inequality and lowering remittance transaction costs was made before the pandemic, but COVID-19 has amplified existing inequalities within and between nations. The negative impact of global crises does not impact everyone in the same way, with the most vulnerable people and the poorest countries experiencing the greatest loss of development. To combat this inequality, the CFC supports investments in the world’s most vulnerable regions. By enabling individuals to earn a fair share of the global value generated from commodities, the CFC's investments work to decrease inequality and foster greater equitable opportunities for all. In turn, this supports the sustainable economic development of the commodity sector.

The CFC specifically targets interventions that benefit clearly identified vulnerable groups, such as smallholder farmers and indigenous, tribal and ethnic communities. By focusing on these groups, we help to elevate the economic status of marginalised populations, thereby reducing inequalities within countries. This approach ensures that the benefits of economic growth and development are more evenly distributed among different societal groups.

Placing investments at the grassroots of commodity value chains advances inclusive economic growth through the SMEs which operate in developing countries. The CFC’s investments fill an essential niche, supporting the missing middle. This refers to SMEs that often struggle to access financing, which is crucial for their expansion and integration into larger markets. By providing the necessary financial support, we enable these enterprises to grow and create jobs, which contributes to reducing economic disparities. Enhancing the capabilities of SMEs and smallholder farmers to access broader markets helps these stakeholders to achieve better prices for their products and integrate more effectively into the global economy, leading to increased incomes and reduced economic inequalities

Climate change profoundly impacts commodity production and trade, and the livelihoods of smallholder farmers in developing countries. SMEs face challenges from extreme weather events, which disrupt agricultural production and value chains. To thrive in international markets, SMEs must also demonstrate environmentally responsible production.

The CFC supports SMEs that combine climate action with business sense, promoting sustainable value chains. This approach is aimed at enhancing climate resilience and promoting sustainable agricultural practices, thereby contributing to the broader objectives of SDG13. In particular, the CFC's impact investment strategy involves channelling funds into projects that improve the sustainability and resilience of commodity value chains. This includes investments in agricultural practices that are both environmentally sustainable and economically viable for smallholder farmers. By doing so, the CFC helps mitigate the impact of climate change on these communities and enhances their ability to adapt to changing environmental conditions. A particular focus of the CFC is to invest in projects that foster climate resilience among smallholder farmers. This includes the introduction of drought-resistant crops, improved irrigation techniques, and sustainable land management practices. These initiatives help farmers maintain productivity and stabilise incomes when they face adverse climate conditions.

We also recognise the importance of promoting low-carbon technologies and practices in commodity production, to reduce the greenhouse gas emissions of activities we invest in. This includes recent investments in renewable energy sources for agricultural operations, which not only reduce carbon footprints but also enhance energy security for rural communities. The CFC also focuses on capacity building and knowledge sharing to empower farmers and SMEs to implement sustainable agricultural practices, particularly through training programmes, workshops, and the dissemination of best practices in climate-smart agriculture. To this end, the CFC provides financial and technical assistance to SMEs that source from smallholders, helping them to implement sustainable practices that align with climate action goals. This support is crucial to enable these enterprises to invest in climate resilience measures and to adopt environmentally friendly technologies.SDG 13 is the most recent addition to the CFC’s list of core SDGs. By including SDG 13, the CFC seeks to bolster the economic prospects of smallholder farmers through climate finance to SMEs.

Measuring CFC impact across its portfolio

Measuring the total impact of the CFC's investment portfolio using the SDG framework presents several challenges, primarily due to the global and national scales at which SDG targets are monitored. This scale issue makes it difficult to link the contributions of individual organisations or projects to the advancement of specific SDGs.

The inherent complexity of attributing specific outcomes to particular interventions complicates the process of impact measurement and reporting. To navigate these challenges, the CFC has adopted the Impact Reporting and Investment Standards (IRIS+) as its principal reporting tool. IRIS+ serves as a comprehensive catalogue that consolidates the most useful metrics from the impact investing industry, thereby facilitating the measurement of performance against impact goals. This approach allows for a more structured and standardised method of reporting, which is crucial for comparing and aggregating impact across different projects and sectors.

The CFC continues to work on a process to map the most relevant IRIS+ metrics to the SDGs that align with its mission and investment focus. By identifying and selecting key indicators for monitoring, the CFC aims to ensure that its projects contribute meaningfully to the SDGs. This process involves a detailed assessment to determine which IRIS+ metrics best capture the essence of the SDGs that the CFC targets through its investments. As a result, the CFC is better equipped to address the reporting difficulties associated with the SDG framework and to demonstrate the positive impact of its projects on sustainable development.

However, the challenge of measuring impact is not solely a matter of selecting the right metrics. The complexity also lies in the nature of impact investing itself, which seeks to generate social and environmental benefits alongside financial returns. This dual-purpose approach necessitates a nuanced understanding of how investments influence outcomes in the real world, which can be influenced by a myriad of factors beyond the control of any single investor or project. Moreover, the dynamic and interconnected nature of global challenges addressed by the SDGs adds another layer of complexity to impact measurement.

The difficulties of measuring impact, stemming from the broad scope of the SDG framework, the challenge of attributing specific contributions to global and national targets, and the complexity of capturing the multifaceted nature of impact, therefore means assessing the total impact of the CFC's investment portfolio remains very much a work in progress.

Recent developments in SDG reporting

Recent changes in SDG reporting practices² have been influenced by a global call for more effective and transformative approaches. The United Nations conducted a second open call for SDG good practices, success stories, and lessons learned, which concluded on March 14, 2021. This initiative aimed to collect more than 700 submissions that could be replicated or scaled up globally to enhance the implementation of the 2030 Agenda. A dedicated interagency team of experts from the UN system reviewed these submissions, resulting in a publication that showcases 21 selected SDG Good Practices. These practices are intended to share valuable insights and encourage broader adoption of successful strategies³.

Corporate reporting on SDGs has also seen significant developments. According to the World Business Council for Sustainable Development's 2022 annual review, 94 percent of member companies referenced the SDGs in their reports. This included an increase from 6 percent in 2019 to 16 percent in 2022 of members linking their key performance indicators (KPIs) to the SDGs. Despite this progress, the issue of SDG washing, where companies superficially map their activities to the SDGs without meaningful impact, remains prevalent. To combat this, research has highlighted best practices such as aligning SDGs with company revenues and integrating SDGs into corporate strategy, which can serve as models for other companies⁴.

Furthermore, the UN Global Compact emphasises the need for improved and promoted practices in corporate SDG reporting. While specific details on the latest practices were not provided in the search results, the UN Global Compact is known for guiding and supporting companies in aligning their strategies and operations with universal principles on human rights, labour, environment, and anticorruption, and taking strategic actions to advance broader societal goals, such as the SDGs⁵. This suggests that an ongoing effort is required, including from the CFC, to refine and enhance how contributions to the SDGs can be recorded, ensuring that reporting is transparent, comparable across projects and to the baseline data, and impactful⁶.

The European Union (EU) also seeks to roll out new legislation and directives for large companies, listed companies, and funds. Notable examples of legislation and directives include the EU Deforestation Regulation (EUDR), Sustainable Finance Disclosure Regulation (SFDR), and the Corporate Sustainability Reporting Directive (CSRD), among others. The EU is actively pursuing regulatory measures related to social sustainability in general, as well as due diligence and environmental protection. These developments could have implications for organisations involved in the agricultural commodity markets, including the CFC and the smallholder farmers we serve.

The EUDR covers seven commodities: cattle, cocoa, coffee, oil palm, rubber, soya and wood, as well as products derived from these commodities. It requires companies trading in these commodities to conduct extensive diligence on the value chain to ensure that the goods do not result from recent deforestation or breaches of local environmental and social laws. The regulation applies to goods produced on or after June 29 2023, with some exceptions, and companies are advised to carefully check which products are covered. The EUDR is part of the EU's efforts to curb the EU market's impact on global deforestation.

The EUDR may have both positive and negative effects on smallholder farmers. The regulation's stringent requirements and complex traceability standards could pose challenges for smallholders, potentially excluding them from the EU market and increasing their compliance costs. Many smallholder farmers lack the resources, secure land access, and information to comply with the EUDR, which may hinder their market access and livelihood. However, the regulation also presents opportunities for smallholders to access environmentally conscious markets, double their income, and drive innovation and technological adoption in farming practices. Empowering smallholder farmers to meet the EUDR requirements through rigorous awareness campaigns and other enabling measures such as improved land titles and sustainable practices, are seen as a longterm positive impact of the regulation. Nevertheless, the challenges in demonstrating compliance with the EUDR requirements, especially for independent smallholders, remain a concern. Overall, while the EUDR may create barriers for smallholder farmers, it also holds the potential to incentivise sustainable practices and improve market access in the long run.

The SFDR has been in application since March 2021 and sets out how financial intermediaries, such as asset managers, must communicate sustainability information to investors. The SFDR has implications for asset managers and investment firms, who are required to overhaul their investment processes, product strategies and reporting operating models, to comply with the regulation. While the specific impact of the SFDR on the livelihoods of smallholder farmers remains unclear, the regulation's focus on sustainable finance and disclosures is part of the broader EU efforts to promote environmental and social sustainability in the financial sector. As such, the SFDR and similar regulations could indirectly influence the investment landscape for sustainable agricultural practices, which may have implications for smallholder farmers in the long run. The CFC does not have an obligation to report on the SFDR as an international organization. However, the direct impact of the SFDR on smallholder farmers will depend on how the regulation shapes investment decisions and capital flows in the agricultural sector. The CFC therefore will have to pay due attention to the requirements of SFDR in its work.

The EU's Corporate Sustainability Reporting Directive (CSRD) aims to hold companies more accountable for their environmental and social impacts and to accelerate the EU's transition to a sustainable and climate-neutral economy. The CSRD is a new mandatory sustainability reporting framework that requires companies to disclose their material environmental, social and governance (ESG) impacts and risks throughout their value chain, in a standardised digital format as part of their annual reports. The directive is designed to provide investors with a reliable and comprehensive dataset on which to evaluate companies' sustainability performance and climate impact. The directive's focus on corporate sustainability and environmental impact is part of broader EU efforts to promote sustainability and climate neutrality. The CSRD's implications for smallholder farmers would depend on how it shapes the reporting and sustainability practices of companies involved in agricultural production and value chains. The directive's potential indirect influence on the agricultural sector could have implications for smallholder farmers, particularly in terms of promoting sustainable and climate-resilient agricultural practices. However, understanding the direct impact of the CSRD on smallholder farmers would require a more detailed analysis of its implementation and its effects on the agricultural value chain.

These factors combined have contributed substantially to the breadth and depth of sustainability reporting among various stakeholders. International impact reporting standards are still very much in the formative stage, and the CFC is looking to adopt best practices which accurately reflect our impact while not creating an excessive burden for the target beneficiaries. The CFC is acutely conscious of the impact of commodities and their value chains on the lives and livelihoods of those who work so hard to produce them. We constantly seek to support smallholders to increase their incomes in a people and planet friendly way.

Impact measurement: an ongoing work

The CFC acknowledges that the impact investing sector lacks a well-established and robust system that enables all investors to manage and track their impact effectively. While the sector has risen to the task of assessing social and environmental impact, substantial advancements in new tools, frameworks and standards have emerged in recent years. Despite this progress, the development of comprehensive and dependable parameters that match those utilised for risk and return in the traditional financial markets is still a long way off.

The selection of proposals that receive support from the CFC is largely based on their potential development impact. For this reason, each investment proposal submitted through the Open Call for Proposals is expected to provide indicators of the intended impact. Since the 13th Call for Proposals in 2018, the CFC has required prospective investees to present the estimated impact of their projects using the SDG framework. Specifically, proponents must explain how their project will contribute to the advancement of the core SDGs and provide target impact indicators for each year of the project, as well as baseline values using the IRIS+ metrics. Projects that fail to provide this information are typically not recommended for further consideration during the screening stage.

At the due diligence stage, the CFC reviews the impact indicators and incorporates them into the project agreement between the CFC and the project proponent. The agreement ensures that the project strives to accomplish its intended outcomes and reports specific impact indicators, as agreed upon with the CFC. This data is submitted to the CFC annually along with financial reporting. The CFC’s Impact Strategy is characterised by regular and consistent impact reporting in addition to financial indicators.

In the past five years, the CFC primarily disclosed selfreported data in its annual reporting. Where data was missing, a proxy from previous years is used to estimate the CFC’s impact figures. However, reporting standards have since evolved significantly due to (a) the greater awareness of global challenges (such as climate change and the pandemic), (b) new mandatory reporting requirements enforced by governments, and (c) the increased willingness of corporations and investors to leverage sustainability reporting to their benefit.⁷

Our experience as an impact investor clearly shows that SMEs have significant difficulties in measuring their impactconsistently and in line with sustainability reporting standards, which are becoming increasingly more complex and costly to implement. Neither the SMEs, nor the CFC, can allocate resources for impact measurement in accordance with complicated standards due to the small size of projects. The environment in which SMEs operate is challenging enough without the added costs and administrative burden of impact reporting obligations. As a result, the quality and timeliness of self-reported data increasingly falls short of CFC requirements, but adding to the reporting burden of CFC investees could undermine our core mission to serve the poor. The CFC therefore faces the challenge of constructing a framework that uses specific project contexts and case-specific assumptions to derive project impact evaluation from the routine project performance indicators.

To address the situation requires us to refine our assumptions and estimation analysis. This is a common approach to achieving concrete results with incomplete information, to increase the practical value of impact reporting. It involves making estimations about certain variables, quantities or outcomes based on available information, experience and reasoning. Below is a breakdown of the typical steps involved in the process:

• Understanding the problem: First, thoroughly understand the project and indicator for which an estimate is needed. This involves clarifying the relevant factors, constraints and objectives.

• Identifying key variables: Next, identify the key variables or factors that influence the outcome or quantity being estimated. This may involve breaking down the problem into its constituent parts and understanding how each variable contributes to the overall result.

• Gathering information: Gather relevant data, information and context to inform the estimation process. This may involve researching historical trends, industry benchmarks or other sources of data that provide insights into the problem at hand.

• Making assumptions: In many cases, certain aspects of the problem may be uncertain or unknown. Strategy consultants often need to make assumptions to fill in these gaps. These assumptions should be reasonable and based on the available information.

• Using analogies and models: Drawing on past experiences, analogies or mathematical models can help in making educated guesses. Strategy consultants may leverage similar scenarios or patterns observed in the past to inform their estimates.

• Iterating and refining: The estimation process is often iterative, involving multiple rounds of analysis and refinement. As more information becomes available or as the problem is better understood, the estimate may be adjusted accordingly.

• Communicating the estimate: Help stakeholders understand the basis of the estimate and its reliability by communicating the estimated value along with the assumptions, uncertainties and limitations involved in the estimation process.

Box 1 provides an illustration of how we derived the impact number from the reporting numbers of an investee company. The investee, Coffee Planet, purchases and markets coffee beans from farmers in Ethiopia. The model shown in the box illustrates how impact can be derived from the reported financial indicators using a set of assumptions from public sources. The CFC continues the compilation of impact evaluation assumptions and relevant methodologies, based on the project documents and specific commodity and regional focus. Portfolio impact indicators are reviewed and updated with appropriate methodology accordingly.

Social and Environmental Management System

In addition to measuring the positive impact of its projects, the CFC recognises the significance of evaluating the potential social and environmental risks associated with its activities. As a result, the CFC has collaborated with the International Labour Organization’s Social Finance Programme to establish its Social and Environmental Management System (SEMS).

Systems of this nature are intended to empower financial service providers to identify social and environmental hazards linked to a specific transaction. These systems also allow them to take these risks into account when determining whether to provide funding. Furthermore, these systems assist in identifying prospects to enhance social and environmental performance.

When evaluating a project, the CFC has always considered the ESG risks associated with it. This assessment is part of the entire process of evaluating a new proposal, starting with the initial screening of applications, and continuing with the ongoing monitoring of active projects. Despite this, given the significance and intricacy of the matter, the CFC has decided to go beyond its existing practices by aligning its procedures with the industry's current best practices in impact investment. To accomplish this, the CFC developed its own SEMS.

The CFC has partnered with the ILO to create various tools and procedures that methodically evaluate the social and environmental risks associated with potential projects. These bespoke tools consider the CFC’s specific configuration and the sectors in which it operates, encompassing all phases of the CFC’s investment process. The main result of this initiative was the endorsement of the CFC’s Sustainability Policy by the Executive Board. This policy sets the criteria for evaluating the social and environmental risks of the CFC’s operations. SEMS is already integrated in the CFC's due diligence and monitoring processes.

The CFC's primary focus is to increase the income of smallholder farmers so that they can lift themselves up from the pit of poverty. Accordingly, we always strive to bring maximum impact in a sustainable way in accordance with the mission of the CFC. We, therefore, remain focussed on assisting the world's most impoverished populations in commodity-dependent member states, including Least Developed Countries (LDCs), Landlocked Developing Countries (LLDCs), and Small Island Developing States (SIDS). The Fund's investment portfolio is designed to advance Sustainable Development Goals (SDGs) deemed most relevant to CFC's mission, notably SDG 1 (No Poverty), SDG 2 (Zero Hunger), SDG 5 (Gender Equality), SDG 8 (Decent Work and Economic Growth), SDG 10 (Reduced Inequalities), and SDG 13 (Climate Action).

The evaluation of impact across CFC portfolio serves to better focus the activities of the Fund and to guide future project selection. The specific numbers produced by the CFC so far are based on self-reporting by the investee companies, to minimize the administrative burden on the SMEs in which have limited resources to follow more elaborate impact evaluations schemes. Reported data are latest available and not all projects have provided updated impact reports for 2023. The reports are updated continuously and reported to the governing bodies of the CFC. In the interest of maintaining consistency in the reporting of portfoliowide impact, only the projects which remain operational in 2023 are included.

The CFC follows a minimalist and robust approach covering impact indicators and impact measurements essential for reporting under the core SDGs of the CFC (See Section V.1). This means that all investee companies are expected to provide for the following in their investment proposals:

• Target indicators: Indicators should clearly demonstrate the intended level of achievements for each year of the investment. The CFC expects that these will be systemically assessed and reported by the investee company, demonstrating that the implementation plans are feasible and not based on unrealistic assumptions;

• Baselines: Baseline levels for impact indicators should be included in the investment proposals. The CFC reviews and compares baseline data with other sources, e.g., similar investments;

• Data on achievements: The CFC systematically follows up on the achievements of its investments to ensure timely and accurate reporting of the progress and impact. The follow-up procedures are introduced, and investee companies are informed of the consequences of incomplete or late reporting on the implementation and eventual success of the investment;

• Monitoring and Evaluation: Selective monitoring and evaluation of individual investments may be included but is constrained by the financial and human resources made available by the investee companies.

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Annual Report 2023 V

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