Impact first investing refers to the practice of prioritizing social and environmental impact at every stage of the investment process. This approach is grounded in the emerging field of impact investing, where investors seek both financial returns and positive impact.
In traditional investing, financial returns are the primary goal. Impact first investing flips this logic, putting impact at the forefront. Investors screen potential investments for impact, conduct thorough impact due diligence, structure deals to optimize impact, and rigorously measure impact throughout the holding period. The approach also entails partnering closely with investees to unlock impact and providing flexible capital that meets their needs.
At over $700 billion in assets under management globally, impact investing is gaining significant momentum. However, it remains a novel concept in the mainstream investment community. Adopting an impact first orientation often requires investors to pioneer new practices, tools, and ways of thinking. Though challenging, this approach holds unique potential to drive capital towards solving pressing social and environmental problems.
Impact first investors employ customized due diligence focused on understanding target impact
A core practice of impact first investing is conducting specialized due diligence focused on analyzing a potential investment’s ability to generate impact. This involves gaining an in-depth understanding of the social or environmental problem an enterprise aims to solve, how its products or services create impact, and how that impact can be expanded. Investors also assess impact risk factors and identify areas requiring support post-investment. This intensive focus lays the groundwork for structuring deals and partnerships to optimize impact. It also enables the setting of concrete impact goals and rigorous measurement frameworks to track performance. While time and resource intensive, the approach is essential for investors who put impact first.
Deal structuring is a key tool for impact first investors seeking to address common impact obstacles
Turning due diligence findings into action is critical for impact first investors. A key way they do this is by utilizing specialized deal structures to enable and incentivize impact. For example, tiered return models provide below market rate capital to enterprises addressing neglected issues or underserved groups. Guarantees and first-loss terms can reduce risk for impactful yet unproven business models. Payment by results contracts tie payments to impact milestones, ensuring capital remains focused on impact goals. Innovative legal formations like the L3C codify an enterprise’s social mission. And board provisions can safeguard mission in future decisions. Though unfamiliar to mainstream investors, these instruments allow impact first investors to get creative in addressing common impact obstacles.
Hands-on support and close partnerships are essential for impact first investors to achieve impact ambitions
Capital alone is often insufficient for early-stage impact ventures to optimize their potential. Thus, impact first investors provide significant hands-on support to fill critical capacity gaps. This can include recruiting leadership talent, refining business models, developing impact measurement systems, facilitating partnerships, and advising on growth strategies. This high-touch partnership approach reflects the investor’s vested interest in enabling impact. It allows them to course correct when needed and leverage their expertise and networks to unlock an enterprise’s possibilities for impact. Maintaining open communication and aligning priorities and incentives further solidifies these supportive partnerships.
Customized impact metrics and rigorous measurement practices provide impact first investors accountability and intelligence
Measuring impact is essential for understanding if an investment is effectively driving impact. Impact first investors co-develop customized metrics aligned to an enterprise’s theory of change. Rigorously tracking these metrics provides intelligence on what’s working and accountability for delivering on ambitions. Common practices like third-party verification, participant surveys, control groups, and process tracings increase confidence in reported impact. Transparently sharing impact performance serves to strengthen trust and focus partnerships. Insights can also inform wider ecosystem learning or policy improvement. While measurement does have limitations, adopting best practices is key for investors pursuing an impact first orientation.
Impact first investing requires adopting an unconventional approach to due diligence, deal structuring, partnering, and measurement. However, this rigorous focus on enabling impact at each investment stage holds unique potential to direct more private capital towards pressing societal issues. As the impact investing field matures, impact first practices are likely to become more widespread.