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Assessing the expected impact of investments… before you make them

ImpactAlpha, July 11 – If impact investments can indeed deliver alpha returns, or mitigate risks, or simply deliver better outcomes for beneficiaries, understanding the expected impact of an investment before it’s made seems like a good idea. Yet the practice of impact due diligence, which includes all assessments of expected impact before making an investment, is still largely underdeveloped, says Pacific Community Ventures.

In a new report, “Impact Due Diligence: Emerging Best Practices,” the Oakland-based community development financial institution and impact investing research firm rounds up what’s known about the emerging investment practice.

“Systematically examining which investments are expected to generate more or less impact can help investors more closely align their investments with their objectives,” says PCV’s Daniel Brett, “and increase the likelihood that their portfolios reflect their values and goals.”

  • Impact diligence systems. The International Finance Corp., which manages an impact investment portfolio of $58 billion, evaluates anticipated impact of project-level outcomes as well as systemic effects on the overall market with its Anticipated Impact Measurement and Monitoring tool. Bridges Fund Management’s Impact Radar system scores investees positive and negative impact in four criteria: industry leadership, target outcomes, Bridges’ value-add and alignment. HIP Investor, an investment advisor, classifies each potential public-equity investment as a direct, indirect or zero hit based performance against 117 Sustainable Development Goals-aligned metrics. Project Snowball, a UK impact investor, assesses general partners’ impact philosophy and culture, impact process, and engagement.
  • Best practice. PCV identifies seven areas of emerging impact due diligence best practices. Among them: Assess impact using Impact Management Project’s five dimensions (what, who, how much, contribution, and risk), bridge the divide between ESG and impact assessments by evaluating both business operations and products or services, and evaluate the perspectives of stakeholders.
  • Data-driven. The PRIME Coalition, the Cambridge climate nonprofit, is open-sourcing its Emissions Reduction Potential method for assessing early-stage ventures’ potential to reduce future carbon emissions.

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