Impact Due Diligence

1. Why Impact Due Diligence Matters

Impact due diligence is the process of evaluating whether an investment will actually deliver the social or environmental outcomes it claims. It's essential for two reasons:

1. Avoiding "Impact Washing": Some investments are marketed as impactful without rigorous evidence. Due diligence helps separate genuine impact from marketing claims.
2. Maximizing Impact: Understanding how impact is created allows you to identify investments with the greatest potential for positive change.

"The difference between impact investing and traditional ESG is intentionality and measurement. Due diligence must verify both."

Unlike traditional financial due diligence, which focuses on revenue projections and market opportunity, impact due diligence examines the causal relationship between an investment and its intended social or environmental outcomes.

2. The Impact Due Diligence Framework

A comprehensive impact due diligence process examines five key dimensions, aligned with the Impact Management Project (IMP) framework:

Dimension 1: WHAT Outcomes?

What social or environmental outcomes is the investment targeting? Are these outcomes important, evidence-based, and aligned with recognized frameworks like the SDGs?

Dimension 2: WHO Benefits?

Who are the stakeholders experiencing the outcomes? Are they underserved populations or geographies? How vulnerable or marginalized are they?

Dimension 3: HOW MUCH Impact?

What is the scale (how many people), depth (degree of change), and duration (how long) of the impact? Is the change meaningful?

Dimension 4: What is the CONTRIBUTION?

Would this impact happen anyway without this investment (additionality)? Is the investor enabling impact that wouldn't otherwise occur?

Dimension 5: What is the RISK?

What is the likelihood that the expected impact will be achieved? What could prevent impact from materializing?

3. Evaluating Theory of Change

A Theory of Change (ToC) is the logical framework that explains how an investment's activities lead to intended outcomes. A credible ToC should include:

Questions to Ask About Theory of Change:

• Is the causal logic clear and plausible? Does A really lead to B?
• What are the underlying assumptions? Are they reasonable?
• Is there evidence (academic research, pilot data) supporting the causal claims?
• What external factors could disrupt the causal chain?
• Has the company tested and refined their ToC based on real data?

4. Impact Metrics & Data Quality

Credible impact claims require robust data. Here's how to evaluate impact metrics:

Metric Quality Criteria

• Relevant: Does the metric actually measure the intended outcome, not just outputs?
• Comparable: Is the metric aligned with standards like IRIS+ that allow benchmarking?
• Verifiable: Can the data be independently verified or audited?
• Timely: Is data collected frequently enough to enable management decisions?

5. Red Flags to Watch For

Years of impact investing experience have revealed common warning signs of weak or misleading impact claims:

Impact Washing Indicators

• Retrofitted Impact: Company wasn't designed for impact but added impact language after the fact
• Indirect Claims: "Our customers create impact" without evidence of the company's specific contribution
• SDG-Washing: Claiming alignment with many SDGs without clear evidence for any
• Missing Stakeholder Voice: No evidence of input from intended beneficiaries

Measurement Red Flags

• Vanity Metrics: Focus on impressive-sounding numbers that don't indicate real impact
• Attribution Issues: Claiming credit for outcomes influenced by many factors
• Selection Bias: Only measuring impact for successful cases
• No Negative Outcomes: Failure to acknowledge or track potential negative impacts

6. Impact Due Diligence Checklist

Use this checklist to systematically evaluate impact investments:

Intent & Alignment

Theory of Change

Measurement & Data

Stakeholder Consideration

Additionality & Risk