Are you serious about impact?

Make IMPACT part of your investment decision-making process.

Each day new promising impact investing projects and opportunities emerge. All seem to be innovative, impactful and able to change the world. But are all these projects truly the same? Are these assessing impact in the same way and achieving their claimed social and environmental goals? When deciding where to allocate capital, which project should you choose if you genuinely want to create impact??

One of the first major steps if you are really serious about impact is to incorporate impact into your investment decision-making process. While this may seem straightforward, it can be challenging. Impact is not always a universally agreed-upon concept, it is intangible, often more emotional than rational, and people might have different opinions on what constitutes genuine impact. To achieve this, it is essential to have clear definitions, standard frameworks, well-defined processes, and to follow best practices in the field. By doing so, you can make impact more rational and measurable, ensuring that your investments truly drive the social and environmental change you aim for.?

Thus, considering social and environmental dimensions in all steps and decisions is essential, from deal screening to exit (Figure 1). A few frameworks exist that may help, like the Impact Europe Investing for Impact Toolkit , the Operating Principles for Impact Management , the SDG Impact Standards for Private Equity Funds , the Impact Europe Five-Step Process to Manage Impact and the Impact Frontiers Norms .

1) Screening & Initial Appraisal

Identifying potential investment opportunities involves determining sectors, industries, and thematic areas that align with the fund’s impact goals and criteria. Establishing these priorities helps concentrate efforts and enhance expertise. It is essential to check how social and/or environmental goals fit into a project’s vision and mission, aligning these with macroeconomic frameworks like the Sustainable Development Goals (SDGs ). Use the IMP Five Dimensions of Impact to evaluate the project's clear, transparent intention to solve social/environmental issues and assess if the proposed solution will create a meaningful, additional positive impact.

2) Due Diligence

During due diligence, understanding how the proposed solution will address the problem is crucial. Develop a theory of change to analyse the relationship between inputs, activities, outputs, outcomes, and impact. Assess both intentional and unintentional effects on stakeholders, positive and negative impacts and potential conflicts between these impacts and business operations. Evaluate the team’s commitment, experience, and ethical practices, ensuring alignment with the intended social/environmental outcomes. Conduct an ESG assessment, using guidelines like the IFC’s Performance Standards on Environmental and Social Sustainability .

Define measurable indicators for expected outputs, outcomes, and impact. Utilise frameworks like IRIS+ for comprehensive understanding and set specific targets and baselines. Identify evidence and benchmarks to validate your goals and expectations. Assess potential risks using the IMP Risk Assessment framework and explore additional support opportunities such as technical assistance or training in impact measurement.

A couple of organisations developed and shared practical guides on how to incorporate impact in the due diligence process: Pacific Community Ventures and Root Capital .??

3) Signing & Closing

Clearly outline excluded or prohibited activities to maintain alignment with impact goals and specify compliance obligations. Determine data and information required for monitoring and reporting, establish reporting frequency and formats, and assign responsibilities for data collection and reporting.

4) Portfolio Management

Sustain and enhance positive impact through continuous strategies and initiatives. Regularly review impact data against predefined indicators and goals, using the data to inform decisions. Report following the recently published Impact Performance Reporting Norms . Validate reported impact results through third-party verification or audits. Adapt indicators as needed to reflect substantial changes in the business model or strategy.?

5) Exit

Analyse final reported impact results against initial objectives and targets, ensuring accuracy through third-party verification or audits. Learn from achievements and improve processes. Choose buyers or partners committed to maintaining social and environmental standards, implementing contractual mechanisms to uphold the impact mission. Refer to GIIN’s report Lasting Impact: The Need for Responsible Exits and Impact Europe’s Practical Guide to Planning and Executing an Impactful Exit for insights on ensuring sustained impact beyond the investment duration.

To be continued… Next article: Develop your Impact Framework.?