We’re pleased to announce the release of 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.
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 first report, Impact Due Diligence: Emerging Best Practices, was published in July of 2019 and we’re excited to publish the second part of research, The Impact Due Diligence Guide.
Impact due diligence creates value for a broad range of stakeholders across the impact investing ecosystem, including impact investors, investees and the field at large. It fosters alignment around intended impacts and priorities, supporting more open communication on how impact is generated, how key stakeholders experience impact, and potential impact risks that should be monitored and mitigated. The impact due diligence process can help investors and investees develop stronger working relationships that can serve them well throughout the course of their investment together.
What’s Included in the Guide?
The Guide is comprised of two sections, each containing detailed guidance for engaging in impact due diligence as well as case studies that highlight how leading investors assess anticipated impacts during due diligence and embed this work within their investment processes. Given the level of detail contained within the Guide, we suggest that readers focus on the particular sections most relevant to them and seek to make incremental improvements to their own impact due diligence approaches, rather than implement the entirety of what is described in the Guide.
Developing Impact Due Diligence Approaches
This section contains practical guidance on how to develop impact due diligence approaches, including narratives of expected impact, impact focused due diligence questionnaires, and quantitative impact due diligence tools. Investors should review this section to determine which approach is most appropriate for their organization and draw upon recommendations to develop resources and processes to evaluate expected impacts. The section also describes how investors have won organizational support for engaging in this work and the importance of developing clear impact goals to inform impact due diligence efforts.
Implementing Impact Due Diligence Approaches
This section offers recommendations intended to help investors operationalize a systematic approach to impact due diligence within their organization. This includes guidance on integrating impact due diligence into existing processes, staffing, engaging with investees, informing investment decision-making, and enabling more rigorous post-investment evaluations.
Background On Our Research
PCV’s work on impact due diligence continues our tradition of field-building research focusing on emerging trends within the impact investing industry and draws from our work with clients in developing impact due diligence and IMM approaches more broadly. In recognition that we can only support a limited number of clients on impact due diligence projects we set out to create a comprehensive public resource with practical tips, advice, and guidance that practitioners could use to engage in impact due diligence.
With the support of the Heron Foundation and the Impact Management Project, and with research support from the Global Impact Investing Network, PCV has conducted research over the past two years to understand impact due diligence’s prevalence within the market, emerging best practices, and the common approaches and steps used by investors to operationalize a systematic examination of impact within due diligence. The Guide and our previous report on emerging best practices are a direct result of the willingness of the impact investing community to openly share their knowledge and expertise with us to help the field deepen its approach to impact. We are extremely thankful to the many fund managers, institutional investors, foundations, development finance institutions, consultants, and industry experts for their helpful insights, advice, and are excited to be able to offer the Guide as a resource to the field.
Looking Ahead
Given the sheer magnitude of our global challenges, it is essential that impact investors meaningfully integrate impact considerations into each stage of the investment process. By deepening focus on impact pre investment through impact due diligence we can increase the field’s fidelity to impact 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.
We hope that this Guide can serve as a helpful resource that empowers the field to more efficiently, accurately and systematically assess expected impact prior to committing capital. We look forward to continuing the conversation and collaborating further on this important topic.
See how your investment returns and impact returns can be improved by working with us.