Impact first investing has become an increasingly popular strategy for investors who want to use their capital to drive positive social and environmental change, in addition to earning financial returns. With impact first investing, the priority is placed on generating measurable positive impact, rather than prioritizing financial returns above all else. This introductory article will provide an overview of impact first investing, including its key characteristics and how it differs from other investment approaches that seek to balance financial and impact objectives. We will also explore real-world examples of impact-first investment funds and highlight key considerations for investors interested in applying an impact-first strategy. By focusing on the tenets and nuances of impact-first investing, investors can gain greater clarity on how to implement this approach and align investments with personal values or an organizational mission.
Impact first investors actively screen for and select investments based on impact
A defining feature of impact first investing is the proactive screening for and selection of investments based on their potential to drive positive social or environmental change. This is in contrast to some other responsible investment approaches that integrate ESG factors but do not actively seek out impact. Impact first investors go beyond negative screens to intentionally source and diligence opportunities with a clear theory of change for how they will create impact. This often involves conducting in-depth assessments of the impact model, theory of change, and measurement practices of prospective investments. Many impact first investors also leverage third-party standards and certifications like B Corp certification to identify businesses with robust impact practices embedded in their operations. By taking an active and rigorous approach to assessing impact, impact first investors ensure capital flows to opportunities aligned with their impact goals.
Impact objectives are prioritized over financial returns within set risk parameters
At the core of impact first investing is the prioritization of impact over financial returns. Fund managers targeting competitive market rate returns may pass on an investment offering below average financial projections but highly positive impact potential. However, most impact first investors do establish minimum risk-adjusted return thresholds to ensure capital preservation and portfolio sustainability. The key is that within predefined risk parameters, impact goals will take primacy in investment selection. This contrasts with balanced-objective investing where financial and impact projections are weighed equally during the investment process. With impact first investing, deeply intentional choices are made to direct capital based on impact, while maintaining a risk profile aligned with investor expectations.
Impact metrics and reporting are emphasized by impact first investors
Consistent with the priority placed on impact outcomes, impact first investors place great emphasis onimpact measurement and reporting. Robust methods for quantifying and assessing impact progress are integrated throughout the investment process, from due diligence to ongoing portfolio management. Impact-focused metrics based on IRIS+ or proprietary measurement frameworks track both output indicators and longer-term outcome metrics. Regular impact reports demonstrate progress towards impact targets for stakeholders. A higher bar is set for validating impact, enforcing accountability for delivering on impact promises. Impact first investors may also advocate for and provide hands-on support to help portfolio companies enhance their own impact measurement practices. By maintaining focus on impact metrics, impact first investors ensure transparency on whether impact goals are being fulfilled.
Impact first portfolios often encompass higher-risk, earlier stage investments
The impact-first mandate often translates into investment portfolios with higher allocations to higher-risk, earlier stage companies and funds compared to traditional portfolios. The priority placed on impact may lead investors to accept higher volatility or illiquidity to fund innovative models delivering outsized impact. Many impact first investors intentionally provide catalytic and patient capital to prove and scale new solutions to pressing social or environmental issues. Their portfolios may be heavy on seed and series A stage tech-for-good ventures or first-time impact fund managers pursuing novel strategies. The emphasis is on using investment capital to unlock transformative impact potential in untested business models. However, impact first investors still conduct diligence on factors like management quality and market landscape to mitigate non-impact risks.
Impact first investing prioritizes impact objectives over financial returns within defined risk parameters. Investors take an active approach to sourcing and diligencing high-impact opportunities and emphasize impact measurement. Impact first portfolios also often carry higher impact risk. By maintaining full focus on impact, impact first investing enables investors to most intentionally direct capital towards positive change.