Impact Due Diligence Initiative

Implementing Impact Due Diligence Approaches

Investors have time-tested strategies for evaluating expected financial return, but evaluating expected impact is less common among investors and not well understood. The Impact Due Diligence Guides gives investors practical advice to systematically perform due diligence on the expected impact of investments.

As the impact investing industry has matured rapidly in recent years, the field is increasingly recognizing the need for commonly accepted approaches to defining, measuring and managing impact. While the practice of IMM has become increasingly sophisticated and widespread, most investors focus primarily on what happens after, not before, investments are made. However, if impact investing is to realize its promise of generating meaningful social and environmental impact, then it is essential to prioritize a thorough and systematic examination of impact as part of due diligence, just like financial risk and return.

To be sure, significant strides have been made in the last few years to help impact investors achieve greater impact, with the Impact Management Project surfacing important conventions and norms for engaging in impact management, the GIIN’s launch of the IRIS+ system as an essential resource to foster impact comparability within the market, and the IFC’s introduction of Operating Principles for Impact Management that codify how impact should be integrated within the investment process.

Still, there is work to be done, and impact investors must take action to apply these conventions, standards, and principles to effectively manage for impact alongside financial risk and return, including by utilizing IMM pre investment to engage in a deeper and more systematic examination of impact prior to committing capital.

In response, Pacific Community Ventures has developed the Impact Due Diligence Initiative to identify emerging best practices in impact due diligence and offer practical tips and guidance to help investors more systematically examine impact in the same manner that they would financial risk and return prior to making an investment. The initiative has released two industry-leading reports. 

Impact Due Diligence: Emerging Best Practices

Impact Due Diligence: Emerging Best Practices, a report from Oakland-based impact investor Pacific Community Ventures, surfaces the shared impact due diligence approaches employed by leading impact investors.

While impact measurement and management (IMM) has become increasingly sophisticated and widespread in recent years, many investors focus primarily on what happens after, not before, investments are made. This limits the potential of IMM, because systematically examining which investments are expected to generate more or less impact can help investors more closely align their investments with their objectives and increase the likelihood that their portfolios reflect their values and goals. 

Impact due diligence, which encompasses all assessments of expected impact before making an investment, is therefore essential to effective impact investing. Not only does impact due diligence enhance investors’ capacity to make more informed investment decisions and increase the impact of their portfolios, it also helps safeguards the entire field against “impact washing” as the market grows.

This report synthesizes findings from interviews with leading practitioners, IMM experts, and consultants, and draws from PCV’s own experience developing impact due diligence systems for clients and our own loan fund. 

The Impact Due Diligence Guide

As the impact investing industry has matured in recent years, the field is increasingly recognizing the need for commonly accepted approaches to defining, measuring and managing impact. While the practice of impact measurement and management has become increasingly sophisticated and widespread, most investors still focus on what happens after, not before, investments are made. If impact investors are really serious about achieving social and environmental impact, then we have to prioritize a systematic examination of impact as part of due diligence, just like financial risk and return.

For that reason, Oakland-based impact investor Pacific Community Ventures has released The Impact Due Diligence Guide. The Guide is a how-to for engaging in impact due diligence and contains actionable advice and guidance for both novices as well as seasoned experts in IMM, covering topics such as building impact-focused due diligence questionnaires and quantitative tools, integrating impact due diligence into existing processes, and using impact due diligence to inform investment decision-making.

Given the sheer magnitude of our global challenges, it is essential that impact investors deepen their focus on impact pre-investment through impact due diligence. By doing this we can guard against “impact washing” and realize our collective vision of building a sustainable financial industry that meaningfully tackles, rather than contributes to, the most critical issues we face today.