Impact Due Diligence: Emerging Best Practices

We at Pacific Community Ventures are thrilled to announce the publication of Impact Due Diligence: Emerging Best Practices, a report which surfaces the shared impact due diligence approaches employed by leading impact investors.

The report examines trends and offers insights in an important, yet underdeveloped, area of investment practice. 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.

With support from the Heron Foundation and the Impact Management Project, and with research support from the Global Impact Investing Network, this report synthesizes findings from interviews with leading practitioners, IMM experts, and consultants, and draws from extensive desk research and PCV’s own experience developing impact due diligence systems for clients and our own loan fund.

While systematic impact due diligence approaches are still emerging across the impact investing industry, seven areas of best practice stand out among investors who lead the field in this practice. These include the following:

Assessing Impact Using the Five Dimensions: the Impact Management Project is a useful and widely accepted set of norms for understanding and assessing impact. Investors should check their approaches against the five dimensions of impact to ensure they are comprehensively assessing expected impacts on people and the planet.

Bridging the Divide Between ESG and Impact Assessments: When assessing anticipated impact, investors should ensure they are evaluating all impacts an enterprise has that matter to people and planet including those related to business operations (i.e. ESG considerations) as well as products or services. In this way, investors can evaluate all impacts that matter – not just the intended positive ones.

Aligning with the Sustainable Development Goals: Incorporating the SDGs into impact due diligence helps ensure that investments’ anticipated impacts align with the global development agenda, and also enables effective communication about expected impact across a diverse portfolio. This best practice is most appropriate for investors whose strategies have significant overlap with the global goals.

Elevating the Perspectives of Key Stakeholders: Incorporating the perspectives of those who are impacted by investees helps investors better align on impact goals, mitigate impact risk, amplify stakeholder voices, develop feedback loops between investors and investees, and assess both investor and investee contribution.

Evaluating a Commitment to Impact and Learning: Investors should explicitly assess investees’ commitment to achieving impact as well as their ability to improve, adapt, and learn. Specifically, investors should evaluate whether investees’ impact thesis is clearly defined, their understanding of key stakeholders’ needs, the robustness of their IMM systems, whether they have financial incentives linked to impact performance, and their ability to change strategies and tactics based on results.

Adopting a Portfolio-Wide Approach: Investors should develop a consistent impact due diligence approach that enables direct comparisons of different types of investments across a portfolio. This is an essential component of effective, impact-driven portfolio management.

Prioritizing Accessibility: To ensure that their impact due diligence approaches can be easily adopted, investors should use consistent language, appropriately balance rigor and efficiency, and seek to understand the expectations of internal and external audiences.

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Impact Due Diligence: Emerging Best Practices is the first of two reports intended to elevate the practice of impact due diligence. In the coming months, we look forward to sharing The Impact Due Diligence Guide, which draws upon the findings in this first report to offer detailed recommendations regarding the design and implementation of impact due diligence approaches. The forthcoming guide contains actionable advice 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.

This research has been a collaborative effort, and we are especially grateful to the fund managers, foundations, development finance institutions, institutional investors, consultants, and industry experts in the impact investing and IMM communities who have generously shared their work and insights with us as part of this report. We look forward to continuing the conversation and collaborating further on this important topic and hope that this research can support more widespread adoption of impact due diligence and deepening of IMM practice across the industry.

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