Impact Investing Handbook

An Implementation Guide for Practitioners


All Investments have impact—both positive and negative.

Impact investments are made with the intention to generate positive, measurable social, and environmental impact alongside a financial return. - Impact Investing Handbook



Why is a philanthropic service organization publishing a handbook on impact investing? Well, in part it’s because we hold an expansive definition of philanthropy. Like many, we see philanthropy as the voluntary use of private resources for public benefit. Nowhere does that concise formulation say this resource can only be money that’s donated.

So as the field began to emerge with energy some ten to fifteen years ago, Rockefeller Philanthropy Advisors published two pragmatic guides1 on creating positive social and environmental impact and public benefit at the intersection of philanthropy and investment. More than 10,000 print copies (and untold downloads) later, we and our advisors made the decision that it was time for a fresh handbook to reflect the broadening and deepening of impact investing during the past ten years. This is a pivotal moment with more than $35 trillion in assets standing behind the Paris Accords fighting climate change, and the world’s largest money manager committed to sustainable investing. The idea that one should integrate the search for financial returns with the search for social and environmental impact has gone from heresy to a niche approach to practically business as usual.

Since the publication of our original guides, Rockefeller Philanthropy Advisors has been
an active participant in the field, incubating the Global Impact Investing Network (GIIN), Confluence Philanthropy, and the U.S. National Advisory Board on Impact Investing. Currently, the Catalyst Fund (supporting developing world fintech entrepreneurs) and Upstart Co-Lab are among the projects we sponsor. Our guides have been translated into several languages, including Chinese. And we work directly with funders to help them shape strategy and plans for impact investing.

For Rockefeller Philanthropy Advisors, engagement in impact investing is integral to how we fulfill our mission. Impact investing is a powerful force that is reshaping how philanthropy defines its operating models, as we’ve learned in the research that created The Philanthropy Framework.2 It’s a critical tool for fulfilling philanthropy’s role in achieving the UN Sustainable Development Goals.3 Without impact investing, the kind of systems change we need to solve deeply persistent challenges and inequities will continue to elude us.4 That’s part of why we’re so optimistic about the next decade for impact investing.

We offer our heartfelt thanks to the funders of this guide—The Sidney E. Frank Charitable Foundation, MacArthur Foundation, The Atlantic Philanthropies, Alabama Power Foundation, Rockefeller Brothers Fund, Skoll Foundation, The Nathan Cummings Foundation, Ford Foundation, Woodcock Foundation, and Porticus—as well as to our expert advisory board, representing 18 leaders from the private, philanthropic, and public sectors. For this new handbook, our team at Rockefeller Philanthropy Advisors is very pleased to collaborate again with Steven Godeke, the lead author of the two previous impact investing publications. More than 40 advance readers gave us valuable reactions, and we’re grateful to them as well. Our board of directors has been a staunch source of encouragement, support, and guidance.

Melissa A. Berman
President and CEO
Rockefeller Philanthropy Advisors

What to Know About This Guide

We designed this guide to present you, the impact investor, with the tools to develop and execute a tailored impact investing strategy. We aim to provide an objective, agenda-
free resource that will inspire readers while also being realistic about the limitations and possibilities of this increasingly popular investment strategy. We will propose new approaches while keeping the principles of traditional investing in mind.
This guide will be most relevant to mission-driven asset owners, such as private and community foundations, endowments, high-net-worth (HNW) individuals and families, seeking to drive social and environmental changes through their investments. These investors want to be accountable for all of the impacts of their assets—both positive and negative. While retail investors, wealth advisors, and large institutional investors are not the primary audience of this guide, we hope that the process and tools are valuable to them as well.

As industry observers and practitioners, we created this roadmap to offer some common methods to achieve the varied impact objectives of asset owners while also building upon traditional investing frameworks. We will define impact investing broadly and apply it across a wide array of approaches and asset classes—from the global public equity and debt markets to less liquid markets and more catalytic strategies.

How to Use this Guide

We have structured the guide to answer a series of fundamental questions about impact investing. Placed in a sequence, these questions—and each corresponding Practitioner Exercise—become the building blocks of your own impact investing implementation plan.

In the “What” chapter, we place impact investing at the intersection of philanthropy, investment, and policy while identifying its boundaries. The “Who” chapter describes the landscape of key market participants and stakeholders and provides the first steps for you to understand who you are as an impact investor. We then move into “Why” investors pursue impact investing to help you develop relevant goals and map them onto a theory of change—the central anchor for your impact investing process. These goals inform “How” you can use the right structures and tools—for both impact and investment—in order to build an impact investing portfolio. Finally, we look at how investors can measure success in “So What,” and then share concrete organizing approaches and best practices in “Now What.”



What: Defining and Locating Impact Investing




All Investments have impact—both positive and negative.

Impact investments are made with the intention to generate positive, measurable social, and environmental impact alongside a financial return.

These two statements help us locate and define impact investing and reflect the two distinct faces of impact investors:
Investors as Engaged Asset Owners and Investors as Intentional System Changers.

Impact is broadly defined as any meaningful change in the economic, social, cultural, environmental, and/or political condition due to specific actions and behavioral changes by individuals, communities, and/or society as a whole. For investors, impact means a deeper accountability for all of the positive and negative impacts of our assets and our intentional use of those assets to make a positive difference for society and the planet.

Investors as Engaged Asset Owners

The most important element in the definition of impact investing is that all investments have impact.

As investors, we are increasingly aware that our assets create impacts in the world—both positive and negative. Your current investment portfolio is made up of enterprises,8 funds, real estate, and other financial instruments that exist in and influence a dynamic world. They have supply chains, employee practices, products and services, leadership teams, and environmental footprints. Impact investing is a tool you can use to develop your impact goals and shift the net impact of your portfolio toward the outcomes you are seeking.

In recent years, “knowing what you own” has become the motto of impact investors. Our decisions as consumers, investors, philanthropists, and citizens can have both positive and negative impacts. We have the ability to make these decisions in ways that align with our personal values or organizational mission. Due to better data, transparency, and tools, we have an expanded ability to articulate our values through our assets. As engaged owners who consider this impact, we are able to shift portfolios away from the investments we view as negative and move them toward the positive. This reframing of what it means to be an asset owner continues to expand. The Heron Foundation’s pioneering journey, outlined in Exhibit 1-1, describes this change in the foundation’s understanding of its role as an investor.9

The Philanthropic Paradox

Impact investing is trying to address what is known as the philanthropic paradox: Philanthropy can aim to solve problems that may have been caused by the source of a donor’s wealth.
A growing movement questions whether wealth generated by businesses that cause harm should be lauded for their charitable activity. Two examples of this paradox include Purdue Pharma and the Sackler family’s philanthropy resulting from the profits of opioids, and the negative effects on the climate coming from the Rockefellers’ oil wealth. This paradox also exists on a personal level, as we seek to manage the carbon footprint of our investments, make sustainable purchases, or avoid investing in companies that may increase inequality. By internalizing the social and environmental effects of capital, impact investing attempts to reduce these misalignments. Large institutional investors, who have historically focused solely on the financial results of their portfolio companies, are redefining who they are as investors by calling for corporations to consider their effects on the planet and society rather than exclusively focus on maximizing shareholder value. In Exhibit 1-2, the leader of BlackRock, the world’s largest asset owner, clarifies this call for corporate purpose.


Who: The Players Involved

Questions and Considerations for Collaborators

Collaboration is complex, and it usually requires more time and energy from those involved than going it alone. However, when done thoughtfully, the positive effects can exponentially outweigh the costs. Before you begin, it’s important to find alignment with your potential partners on a series of questions.

Before you begin discussions with possible collaborators, we recommend spending some time working through a series of individual questions related to your motivations and expectations for your personal philanthropic vision. These questions are contained in our Philanthropy Roadmap guide.


Why are we giving? What impact do we want to create?

In collaborative philanthropy, the first—and most important—point of alignment is the why: why are you coming together to give? What are you trying to achieve as partners?

In traditional, project-based philanthropy, donors are happy to provide funding in order to move a specific effort ahead in a defined way. And that kind of giving is still important. However, if you want to help a grantee scale their operations, catalyze ripple effects, potentially generate exponential impact, or create a more effective allocation of funds across an entire sector, you’ll want to collaborate with others who share your goals.

Example: Oceans 5 narrowly defined two priorities, based on science and opportunity, in order to create tangible change in the world’s oceans. The group focuses on stopping overfishing and establishing marine reserves. This helps guide their grant-making and supports their commitment to measurable results. To learn more, read our Oceans 5 case study below. 


How will we achieve the impact we’ve identified?

Once you’re aligned on your shared why, it’s time to tackle the how. Because collaboration can entail such a wide range of action and effect, it’s crucial to think about how you’ll reach your stated goals. Will you pool your funds in order to give larger grants that require less reporting and ongoing efforts from your grantees? Will you intentionally learn from your partners in order to make the best possible grantmaking decisions? Do you want to leave a collective mark on a particular sector in order to change the game for the organizations inside it? Do you want to create a new example of how collaboration can function?

Example: In service of their two main impact goals, Oceans 5 makes direct grants, provides in-kind services, and offers strategic support to their grantees. Members of the collective are also involved in similar efforts for ocean conservation, including the Plastics Solutions Fund and the Global Partnership for Sharks.

Remember that the details of your collaboration can be as unique as the people and organizations within it. Even if you’re tackling different areas within a large issue, or not working directly together, you can still create collective change. Sharing knowledge, due diligence, and impact reports – both positive and negative – can help each of you become more effective and informed.

What is each partner willing and expected to invest—not just in funds, but in time and effort?

Because every collaboration is as unique as the people and organizations within it, it’s worth taking the time to consider the tactical questions about how you’ll support your chosen causes. How will you meet and communicate? Will each of you have the same role within your group, or will you each be responsible for different parts of the work? Do you want to be a group of hands-on donors, or will you step back and let your grantees take charge after your funds are disbursed? Beyond the money you’re committing, what kinds of connections might you bring to the table? How can you leverage other resources in your networks? All of these assets – time, effort, social capital – can strengthen a collaboration, so it’s important to work through expectations about how you’ll bring them to bear.

Example: Oceans 5 has two forms of membership: Partners and Members. Partners donate $1 million a year to the collaborative’s overall efforts, taking a seat on the Board of Directors. Members provide significant project-based support of at least $100,000 a year and do not have a governance role, though they participate in Board meetings and decision processes.


How soon do we need to see our desired results?

Depending on the “why” and the “how” you define for yourselves, the scale of your goals may be audacious—and rightfully so. Realistically, how long will it take to reach the milestones that define success? Are you all prepared to actively participate until then? And if a partner does need to step down from your partnership, how will you handle it?

Some collaborations are specifically time-bound. A group may decide to collaborate for five or ten years and then disband. This strategy may require the collaborative to focus on grants that can have a more immediate, noticeable impact or achieve a specific goal like building a school or launching a sustainable program.

Example: Oceans 5 projects are generally defined with 3-year objectives, inclusive of shorter-term milestones. Most Oceans 5 outcomes involve changes to public policy. All projects are defined by specific objectives that are easily evaluated.  

Focus Area

Why are we the right team for our shared area of focus?

In the best collaborations, each partner contributes something unique and valuable to a shared vision. What’s bringing you together, and what makes you the right partners to create the change you seek?

Some philanthropic efforts find success because they’re sector-specific. They pull in collaborators who truly understand the space, and are prepared to meet its particular challenges. Recall the story of the END Fund, which brings together global stakeholders across industries in order to tackle the thorny problem of neglected tropical diseases: the key to this initiative’s success comes from a deep knowledge of the interplay between different actors and conditions in the field.

By the same token, some of the strongest collaborations happen through shared geography. Funders share a deep knowledge of the issues that affect the places where they live and work, and their efforts benefit from that experience.


Do we need to collaborate in order to reach our goals?

Once you’ve talked through the questions above, it’s a good idea to check in and make sure that collaboration is the best way forward. As we’ve discussed, working together has its pluses and minuses.


Investors as Intentional System Changers

We now live in a world of increasingly open systems, and impact investing promises to create innovative and effective new investment products at the boundaries of existing systems. Many people believe that the complex challenges and wicked problems12 facing the world today can only be solved through integrated approaches to policy, philanthropy, and investment. A wicked problem is a social or cultural problem that is difficult or impossible to solve for as many as four reasons: incomplete or contradictory knowledge, the number of people and opinions involved, the large economic burden, and the interconnected nature of these problems with other problems. Systems change is about addressing the root causes of social and environmental problems, which are often complex and embedded in networks of cause and effect. It is an intentional process designed to fundamentally alter the components and structures that cause the system to behave in a certain way (we will further explore systems and systems change as part of “Why” in Chapter 3). Investment has become a fundamental component and influencer of systems. Our world has become more integrated, but frameworks and practices remain largely separate—with the private sector actors, policy makers, and philanthropists staying in their own lanes.

Although systems change is traditionally viewed as the realm of policy makers and philanthropists, impact investors introduce investment capital as an additional tool to change systems.

Intentionally or not, investors change systems. As impact investors become more accountable for their assets, they have the opportunity to engage with other stakeholders who have not historically been involved in the investment process. An investor is just one of many stakeholders in the impact investing ecosystem. Investors rely on their investments    to eventually create impact on the ground level. Impact investing can trigger legitimate

debates about the appropriate roles and boundaries among the private, public, and nonprofit sectors. For example, the charter school movement in the United States, in which private organizations receive public funding to construct and operate schools, has attracted both accolades and criticism. The model has been touted as a critical innovation to address underperforming schools, but it is also criticized for questionable effectiveness and negative effects on public school systems.

Investors are not elected democratically, so questions also arise about the legitimacy of them using financial power to establish priorities for social and environmental spending. Some investors may try to use impact investing for bridging gaps in public services or incentivizing nonprofits to create more financially sustainable business models. However, a lack of public funding does not automatically mean impact investing will be a better solution. Some stakeholders view impact investing as an inadequate and inefficient tool for driving environmental and social rights and, therefore, will favor clearer regulation and enforcement. Successful impact investing will not solve these debates, but investors need to understand how their deployment of capital can be viewed and judged by other stakeholders.13

Aggregating Utility Curves

In traditional investing theory, financial returns are simply a means to achieve the end goal of consumption. In other words, the benefit—called “utility” by economists—comes from consumption, not from investment. This makes financial returns fungible. Under this

assumption, the utility we receive from an investment in an oil refinery would be the same as an investment in a solar farm, assuming the risk-adjusted financial returns are equal. Exhibit 1-3 summarizes the distinctions between impact investing and traditional investing.

Incorporating impact into an investment makes transferability and comparability of impact difficult. In other words, any generated impact creates utility for the investor, as well as

for the planet and society—independent from financial return. This blurring of utility and financial return is driven by an impact investor’s dual objectives of doing well financially while also creating social good.

Core Components of Impact Investing

As defined by the Global Impact Investing Network (GIIN), impact investments are made with the intention to generate positive, measurable social and environmental impact alongside a financial return. From this definition, the two key components are the intention and measurement of the investor toward both a social and financial return. With not as much industry consensus, some also argue that a critical third component is contribution. It is important to point out that each component is an attribute of the investor rather than of an investee or an investment product.


The first component of impact investing is intention. The investor must have the intention to achieve both financial returns and positive impact. In this way, impact investing is a prism through which the investor makes decisions. It is possible for two investors to make similar investments, though only one is making an impact investment. For example, two investors in electric car manufacturing (U.S.-based Tesla and China-based BYD) may have different intentions for making the investment. Investor A makes this investment for purely financial reasons, while Investor B includes a reduction in carbon emissions as one of the priorities. In this simple example, Investor B has the critical intention of making an impact investment.


The second critical component to impact investing is measurement. Financial measurement is standard practice for most investments, but the impact investor must also seek to measure the impact of the investment. As with philanthropy, the measurement of impact

is nuanced and the approaches vary widely—from annual impact reports, quarterly key performance indicators (KPI) reporting, or structured qualitative evaluations. Given that impact measurement is a new field without widely accepted standards, we are not prescriptive in the approach. However, we do want to emphasize the importance of

measurement in some form at initial selection and throughout the life of the investment, at both the portfolio and transaction level.14 Like intention, impact investors can seek and measure different impacts from the same investment. “So What” in Chapter 5 will address impact measurement and management in more detail.


Some impact investors also include a third variable: contribution, also known as additionality. This variable requires an investment to meet a “but for” test: But for your investment, would the impact goals have occurred anyway? Paul Brest and Kelly Born define15 this variable

as “an increase in the quantity or quality of the enterprise’s social outcomes beyond what would otherwise have occurred.” The inclusion of contribution as a hard boundary of impact investing is still being debated.

In its report on the state of the impact investing field, the International Finance Corporation (IFC) segmented the impact investing market by asset classes (see “How” in Chapter 4 for an explanation of asset classes), then assessed whether specific asset classes have the impact investing attributes of intent, contribution, and measurement (see Exhibit 1-4). You will notice that the IFC concluded that contribution readily occurs in private markets, while it is more difficult to demonstrate in the public markets.

Impact Investing Misconceptions

A number of prevalent misconceptions exist about impact investing.

Fallacy 1: Considering impact or values in investment decisions violates fiduciary duty. A summary16  of interviews with policy makers, lawyers, and senior-investment

professionals shows that “failing to consider long-term investment value drivers, which include environmental, social, and governance issues, in investment practice is a failure  of fiduciary duty.” The Business Roundtable has also released a new Statement on the Purpose of a Corporation signed by 181 CEOs who commit to lead their companies

for the benefit of all stakeholders—customers, employees, suppliers, communities, and shareholders.17 We will explore fiduciary duty further in “Who” and “Now What” in Chapters 2 and 6.

Fallacy 2: An inherent trade-off exists between impact and financial returns. Empirical evidence suggests otherwise. A meta-study18 of 2,000 other studies finds a positive correlation between environmental, social, and governance (ESG) considerations and corporate financial performance. To be clear, the data is still in its early days; the key is that no conclusive evidence indicates impact considerations inherently lower returns.  A study19 by Nuveen TIAA finds “no statistical difference in returns compared to broad- market benchmarks, suggesting the absence of any systematic performance penalty. Moreover, incorporating environmental, social, and governance criteria in security selection did not entail additional risk.”

Fallacy 3: Impact investing is an asset class. Impact investing is not dependent on a particular asset class, investor structure, corporate form, or investment tool. As you will see in the “How” chapter, impact can be achieved across a full range of tools and approaches.

We will further address these misconceptions throughout the guide.

Spectrum of Impact Investing Approaches

Given the field’s growth and increased number of actors, the last ten years have also seen a proliferation of definitions and terminology related to impact investing. In fact, strong opinions prevail regarding whether or not the term “impact investing” is the best to capture this field. While some prefer mission-related investing or sustainable/responsible investing,

we have chosen to use impact investing. We ask you not to focus on the term, but rather on the core approaches. We will explore the Who question in the practitioner exercise at the end of this chapter and throughout Chapter 2. As you will see in the “Why” chapter, we argue that knowing your Why is more important than the definition so that you can measure success against your stated goals.

Rather than arguing about the terms, we propose three approaches and one overarching strategy to describe impact investor practices. Depending on who you are—and your goals and capacity—you may have the resources and willingness for some but not all of these

approaches. We will build out and expand on these approaches as we move through the guide.

We see the image of the home as a good metaphor (Exhibit 1-5) for describing these approaches to managing and being accountable for your assets.

Clean Up: This approach reflects the belief that your assets should align with your values, and by holding or divesting specific assets you can increase that alignment and express your values. For example: Clean and remove toxins.

Renovate: In this approach, you select assets based on specific investment criteria that define eligible and ineligible investments with the goal of incorporating the positive and negative externalities into your investment decision. For example: Paint your house.

Add a Room: By picking a specific theme, you are using your capital to drive the generation of a specific environmental or social impact. For example: Add a new addition to your house.

Manage and Measure: This overarching strategy is to continuously measure and manage the positive and negative impact of your assets and respond to new data and events. You will track the emergence of new environmental and social movements, as they become impact investment products.20 For example: Maintain and repair your roof.

We use the umbrella term impact investing to encompass all of these approaches.

These approaches can all be executed to meet the impact investing criteria of investor intention, measurement, and contribution. These methods do not assume specific risk/ returns or asset classes or impact intensities. They are not mutually exclusive and can be pursued together across portfolios and/or within the same investment. In the past, these approaches have sometimes been connected to specific return/impact trade-off assumptions that have not addressed the underlying impact goals but rather followed existing industry, sector, and product norms. The house will be expanded later in the guide, at which point we will attach specific tools and structures to each of these approaches.

In the Land Beyond Trade-offs

Impact is not simply a third dimension of the financial risk/return relationship that can somehow be optimized. Impact may occur independently from or not be directly correlated to risk and return. A simple trade-off of financial return does not exist for impact. The concepts of impact-first and financial-first investors have been helpful constructs, but this binary is no longer adequate and also embeds an unfortunate trade-off mentality. As outlined in a recent ImpactAlpha podcast series, “In the Land Beyond Trade-offs, investors know their own objectives for social and environmental impact and craft investment strategies and portfolios that fit their unique appetites for risks and returns.” The Omidyar Network has also created a helpful spectrum of investment options that create social value.

We have now reached a juncture in impact investing where we can have a clearer understanding of when combining impact and investing is additive. With expanding data, transparency, and measurement tools, we can now test our impact investments and adjust our approaches in a way that was unimaginable a few years ago. Nevertheless, impact investing cannot simply replace public support or philanthropy and multi-sector innovation is not always the best approach. Combining these tools may raise legal and regulatory considerations as our legal system operates in silos—with corporate law distinct from the rules affecting tax-exempt organizations. We need to understand the boundaries between impact investing and these other tools while seeking out the contexts in which impact investing will be the best tool to achieve our goals.

Recent Trends and Drivers

Interest and activity for impact investing have surged during the last ten years. Using one of the broadest definitions of impact investing as defined by the US SIF, sustainable and responsible investing from U.S.-based asset owners has grown more than 300% since 2012 to a current market size of $12 trillion or 26% of total assets under professional management. In Exhibit 1-6A, these assets under management are categorized using specific investment-selection criteria, Shareholder Advocacy, or a combination of these strategies.

The market size is under debate, with current estimates ranging from $500 billion to

$12 trillion. This variance is the result of the roles and goals of specific investors and the definitions they use for reporting. For example, the $12 trillion estimate could include the assets of an entire pension fund, even if it is using single-issue screening such as tobacco that reflects only 1% of the fund, while the GIIN uses a more conservative bottoms-up survey methodology, which leads to a total market size of roughly $715 billion.23 Regardless of the market-sizing approach, impact investing is a rapidly growing field.

Another indicator is the number of investors becoming signatories to the Principles for Responsible Investment (PRI).24  PRI works to understand the investment implications of  ESG factors and to support its international network of investor signatories in incorporating these factors into their investment and ownership decisions. Since the Principles for Responsible Investment’s founding in 2006, the number of its signatories has grown dramatically (see Exhibit 1-6B).

Institutional investor interest in impact investing has also seen a significant increase in the last five years. Most, if not all, of the largest asset managers have developed or acquired impact-product offerings. These firms include BlackRock, Goldman Sachs, Bain Capital, J.P.Morgan, Morgan Stanley, KKR, and TPG. This growth is also correlated with more coverage from the world’s leading financial-media sources, as demonstrated by the substantial growth in the number of news articles mentioning impact investing during the last five years (see Exhibit 1-6C).

Significant drivers of impact investing will be the impending generational wealth transfer and the increased role and power of women in investment decisions. The next generation’s role will grow even more with $30 trillion changing hands to them. In addition, women now control nearly 60%26 of the wealth in the United States and continue to control more assets globally: from $34 trillion in 2010 to $72 trillion in 2020.27 Combining these two trends, “women will inherit 70% of the money that gets passed down over the next two generations.

Movements, Systems Change, and Markets

Impact investing has emerged out of social and environmental movements as well as the intention of investors to use investment tools to shift systems and drive positive change. Specific examples include:

  • Divestment from South Africa in the 1980s in order to change the apartheid system;
  • Passage of the anti-redlining Community Reinvestment Act (CRA) in the U.S. in the 1970s due to the civil rights movement struggle for economic equality; and
  • Recent expansion of gender-lens

The contrasting motivations and goals of investors and movement activists create opportunities and challenges for impact investing. Although new impact themes will continue to emerge out of social and environmental movements and then appear as impact investing products, the culture and practice of social change, and movement building is alien to most investors.

Impact Investing Weaves Together Investment, Philanthropy, and Policy

While philanthropy can build the field and policy can support and enable the proliferation of impact investing, the capital markets can be used as a new lever to create impact. Sitting at the nexus of investment, philanthropy, and policy (Exhibit 1-7), impact investing combines the distinct institutional elements of these sectors. For example, an affordable-housing impact investment may draw upon public-sector tax incentives, nonprofit-housing developers, and commercial investors to achieve its social, environmental, and investment goals

The interaction of policy, philanthropy, and investment is not new, but understanding the distinct attributes of these sectors is essential for the structuring of effective impact investments. Private, public, and nonprofit sectors have distinct and sometimes conflicting ownerships, organizational structures, accountability, goals, and resource strategies. This has led to activities remaining within their distinct silos. Nonprofits in the social sector need to raise their support from donors who may not have the same incentives as the

beneficiaries and other stakeholders that the nonprofit seeks to help. Public-sector agencies must serve the general public and are accountable through elected officials and election cycles. This can make working with the private sector challenging. The private sector’s clear alignment of ownership, beneficiaries, and legal structure has led to growth and scale, but can also lead to companies not being held responsible for all of the negative externalities that they may create. Cross-sector activities such as impact investing require clear expectations and incentives for collaboration.

To achieve its full potential, impact investing brings together the tools and disciplines of investment, public policy, and the nonprofit sector (Exhibit 1-8). The case for impact investing is built on the assumption that combining investment capital with impact goals creates more environmental and social benefits than would be created if these individual tools were not combined. Both the nonprofit sector and impact investing consider externalities and seek to create public goods that do something positive for stakeholders as well as the investors.

Silos Matter, Overlapping Approaches

As we move to the Who and then explain the distinct reasons Why investors seek to create impact, it is important to note that diverse approaches and stakeholders will continue to coexist. Although the connections between the silos are growing, philanthropy, policy, and investment will likely continue as distinct disciplines. As new issues emerge from social and environmental movements, we expect to increasingly see impact investing as a tool that can successfully weave them together.

Our hope is that if impact investments are constructed appropriately, they can accomplish goals that cannot be achieved through the separate strands of policy, philanthropy, or investment.


Why: Impact Goals and Investment Goals

Anchoring Impact Investing in Why



You now have a working definition of impact investing and an understanding of the landscape of players you will need to engage. You are ready to identify your specific impact investment goals—the Why—that will drive your strategy toward implementation. We will help you identify your impact goals, which, when integrated with your investment goals, will inform your impact investing goals, including priority impact themes and lenses. This chapter concludes with an introduction to the theory of change that will serve as a strategic framework from which you will choose impact tools and structures in the “How” chapter, creating the basis for evaluating success in the “So What” chapter.

Articulating the Why is the essential—and often underappreciated—step toward making an impact investment. It is important to be anchored in the Why before moving to the How. The Why establishes the values, goals, and parameters that you will test as you move through the implementation process. Skipping this step may be tempting, but investing the time upfront often leads to a more thoughtful and consistent strategy.

“If I had an hour to solve a problem, I’d spend fifty-five minutes thinking about the problem and five minutes thinking about solutions.” – Albert Einstein

As you develop this strategic framework, do not confuse the Why with creating impact. Just as in philanthropy or policy, deploying capital may not create the intended impacts. By establishing the Why, you are putting down the markers of intention, measurement, and contribution that will hold you accountable throughout your investment.

Building on the metaphor that we introduced in Chapter 1 of your impact investing assets being similar to a house, Why forms the foundation of the house and will serve to define its structure and ground its stability as shown in Exhibit 3-1.

Investors come to impact investing with a wide range of motivations. Some learn about this new approach through financial publications or their wealth advisor. Others are introduced to impact investing from next generation family members. You may simply be dissatisfied with your level of impact as compared with the pressing needs of our planet and its communities. We will help you identify your specific impact goals and then merge them with your investment goals to arrive at your theory of change. Exhibit 3-2 outlines the flow of this process.

Investment Goals

Most asset owners (and their advisors) have a solid grasp of their “investment why,” which shapes their specific investment goals. Individuals and families may have a desire to retire at a certain age or maintain a certain standard of living. For many foundations, the goal may be to match or exceed the payout requirements (for example, 5% plus inflation) in order to support their grantees in perpetuity. Educational and religious endowments need to balance the need for immediate operating support and the long-term viability of their institutions.

For a family office, the goal is often to sustain and grow the family’s wealth and legacy by maximizing risk-adjusted returns. Other investment goals may include liquidity needs, diversification, and tax minimization. With a traditional investment approach, investors use these goals to construct a portfolio—selecting investments from a broad universe of opportunities and assembling their portfolios based on characteristics such as risk and return as well as liquidity and time horizon. These investment goals are most often built on established principles, including modern portfolio theory and the capital asset pricing model (CAPM). These elements also remain in place for impact investors.

However, one of the distinct characteristics of impact investing is to outline impact goals alongside the traditional investment practice. This is an extra perspective for examining your current assets and potential future investments. Having a solid grasp of your impact goals is critical to impact investing, yet establishing your impact goals can seem overwhelming given the range of challenges and opportunities that the world faces. Some impact goals are similar to philanthropic and policy goals, while others are specific to investing. For individuals with established values, as well as organizations with a clear mission, impact goals will likely emerge more quickly. For others, this process will involve more reflection and facilitation.

Impact Goals

Impact goals may be driven by an asset owner’s heritage, family, faith, legacy, or experience. These goals can aim to leverage specific approaches, including innovation, awareness raising, and direct service. Many family impact investors also pursue impact goals as a means to engage the next generation. For an exploration of how donors develop impact goals, please refer to “Your Philanthropy Roadmap.”35 In order to arrive at these goals, some impact investing advisors have developed impact diagnostics tools—ranging from a simple series of questions to more complex surveys—that can help you determine the impact goals most important to you. Once your broad impact goals are established, you can translate these into a clear theory of change that will inform how you frame, evaluate, and review the impact performance of your investments.

Some of the most common reasons investors pursue impact investing follow. As you review them, consider which resonate most with you or your institution. Please keep in mind that your impact goals are distinct from the impact tools and structures that you will use to select specific investments.

Engaged Ownership

The goal of engaged ownership is to align all of your assets for social and environmental impact. This goal aims to overcome the separation of the traditional silos of investment and impact in order to bridge gaps and reduce dissonance. As described in the “What” chapter, thoughtful impact investing can provide us with the ability to be accountable for all the positive and negative impacts of our assets by intentionally using them to make a positive difference. Our decisions as consumers, investors, philanthropists, and citizens have positive and negative effects. We have the ability to make these decisions align with our personal values or organizational mission. Our ability to have our values articulated through our assets has expanded as we have access to better data and higher transparency.

Shifting a Discrete System

As explored in the “What” chapter, this goal aims to influence the interconnected set of elements that govern a topic or sector. An asset owner with this goal is not satisfied with incremental change and seeks to address the root causes of social and environmental problems—often complex and embedded in networks of cause and effect. It is an intentional process designed to fundamentally alter the components and structures that cause the system to behave in a certain way. Although changing systems is typically viewed as the realm of policy makers and philanthropists, impact investing introduces investment capital as an additional tool to change systems. See Exhibit 3-3 for an overview of systems theory and its application to impact investing.

The Whole System Approach

While some impact investors will focus on specific interventions, such as reducing carbon in a supply chain or increasing educational achievement in a specific city, other impact investors have the broader goal of using impact investing to reconfigure and reinvent our current economic system. Impact investing offers an opportunity to realign investment broadly, so it delivers a healthy future for people and the planet—a vision that is expressed in shared global frameworks like the UN Sustainable Development Goals (SDGs).

As impact investment has broadened and diversified, many investors are now looking at how to leverage the power of commercial markets. In the United States, the size of

philanthropy is $428 billion,36 while government spending is $4.1 trillion,37 and the capital markets (all public debt and equity investments) are $69 trillion.38 Shifting from philanthropy to the public sector to the private sector, the funding pool grows by a factor of ten each time. In fact, this disparity was a major driver in the launch of the impact investing industry ten years ago.39 Impact investors with this goal seek to drive social and environmental change by shifting the economic system, including shifting corporate behavior, changing Wall Street incentives, or adding regulation to drive corporate responsibility.

Some investors seek to address market inefficiencies or failures by reducing negative externalities and increase positive externalities in order to maximize net-positive impact. With a catalytic mindset, this goal leads to closing the capital gap in order to deploy capital where traditional capital is scarce, provide a pipeline of investable opportunities, or engage underserved populations. Those who pursue this goal often consider the influence of behavioral finance tools. When seeking to disrupt and transform the economic system, impact investors may look to whole-system frameworks, such as The Just Transition Framework (see Exhibit 3-4), to inform their strategy and approach.

Advancing a Particular Cause

Many impact investors will want to focus on a specific place, people, or institution. Asset owners who focus here often start with and build from their philanthropic goals. They may see impact investing as a better means to scale solutions toward the outcomes they are seeking.

Place: Many impact investors support a specific geography or community, including place-based investing. Institutions with region-specific missions, such as community foundations, tend to adopt this goal and focus on specific geographic areas. See Exhibit 3-5 for Incourage and the Wisconsin Impact Investing Collaborative’s place-based impact investing work.

People: Impact investors may focus on improving the conditions of a specific population, including considerations of ethnicity, race, age, and income.

Institution: Some impact investors target a specific institution or specific types of institutions, including startups, community colleges, public companies, or nonprofits.

Impact Intensity and Risk

Two additional variables that describe your impact goals are impact intensity and impact risk.

Impact Intensity: One consideration for establishing your impact goals includes your impact intensity—how influential you want your impact goals to be in shaping your investment decisions. Intensity may drive your willingness to target deeper, more system- level goals, take on more investment risk, and use nontraditional investment tools.

Impact Risk: In addition to investment risk, impact risk describes how comfortable you are with the possibility that your investment will fail to create the targeted impact. The Impact Management Project has identified nine types of impact risk, including evidence risk (lack of high-quality data), drop-off risk (that positive impacts do not endure), and unexpected impact risk (significant unexpected positive or negative impacts occur).

Impact Themes and Lenses

Impact themes and lenses are the means through which you can sort and organize the deployment of your investment capital in alignment with your impact goals. These two categories tend to cluster around specific issue areas and impact goals. For example, the impact theme of financial inclusion may align with the impact goals of empowering women, economic equality, and community development.

Theme: An impact theme can be a specific industry sector, such as energy or health, or can focus on a specific issue, such as community development or social justice. Sometimes these themes may be divided into subthemes.

Lens: An impact lens is a specific view or perspective applied across all of an impact investor’s assets. For example, a foundation may apply a racial-equity lens to all its investments. This means that the foundation will consider how the investments affect the underlying conditions of racial equity.

These themes and lenses are not mutually exclusive and can evolve over time. Examples of impact themes and lenses are presented in Exhibit 3-6.

The creation and articulation of impact goals, themes, and lenses can emerge from a wide range of sources. For families and individuals, reflection and facilitation may lead to specific areas of interest. For institutions with a clear mission, this will inform your selection. An upfront grounding and education in the range of possibilities can also trigger your specific interest in a theme. A deep interest in a specific area should be tested against social science and how change happens in the sector. Some lenses, including climate, touch such a wide range of sectors that they can be applied in multiple ways. As shown in Exhibit 3-7, gender lens investing uses gender as a tool to assess investment risks and opportunities. While some may have detailed interests, others may have a broader, less focused, goal that you will need to further develop. Many advisors have structured tools and processes to use with clients to help them develop these personal and institutional goals both individually and as a group. We will explore how these impact goals and themes will be used to construct your portfolio in the “How” chapter. For now, articulating your goals is key without jumping to the specific investment tools that you will use to achieve these goals.

Field Level Impact Themes and Lenses

At the field level a range of frameworks, such as the United Nations Sustainable Development Goals (SDGs) shown in Exhibit 3-8, have emerged to promote and target investment in themes to better align economic, environmental, and social systems that support both people and the planet. While the SDGs are not an all-encompassing list of impact investing themes, impact investors are coalescing around them. This is in large part due to the normative framework organized into a typology of seventeen goals and associated targets that helps potential investment partners find each other. The SDGs demonstrate that collective action matters, while different investors can choose to focus on distinct goals. Some SDG goals lend themselves better to investing than others. For example, Goal 7, Affordable and Clean Energy, aligns well to a climate-focused investment goal, while Goal 17, Partnerships for the Goals, is more challenging to translate into an investment portfolio.

The concept of Doughnut Economics in Exhibit 3-9 is another useful framework based on the need to set our economic and social activities within the ecological capacity of the planet. This framework summarizes the social foundations needed by humanity and the ecological planetary boundaries between which a safe and just space for humanity can exist. Many of the fundamental societal issues, such as health, gender equality, and energy, can serve as impact themes: while investments in areas that threaten to push past our planetary boundaries, such as fossil fuel–based energy projects, would be avoided. The ecological ceiling can inform how investors can consider environmental themes. For an example of how this can be applied practically, see the work of the Science Based Targets Networks.

Emergence of New Themes and Lenses

In addition to broad impact themes and lenses, impact investors have begun to focus on more specific subthemes such as early-childhood development or carbon-mitigation technologies. As new social and environmental movements emerge, entirely new impact themes and lenses will also be created. For example, Exhibit 3-10 highlights Upstart Co-Lab, launched in 2016 to create a new impact lens on the creative economy.

Coordination Versus Customization

The impact investing field must balance the goals of establishing exhaustive lists of themes and lenses, so that investors can focus and coordinate their investments with the desire of other asset owners to customize their impact themes in order to reflect their individual preferences. To drive real change on themes such as climate and education, investors will need to work together. Clearly defined themes also allow asset managers to build impact investing products at scale. However, asset owners will continue to create new themes as social and environmental movements emerge. Some impact lenses will cut across themes since social and environmental topics can be so closely interrelated.

Developing a Theory of Change

Now that we have helped you zero in on your goals and establish your priority themes and lenses, we will introduce the theory of change. This tool will serve as the articulation of your intended objectives, how you think they will be achieved, and why you believe it to be so:

If we provide X support, we believe Y and Z will happen. A theory of change articulates the intended changes for people, issues, and systems. It helps make explicit the connections   and logic between activities (what you will do in terms of deploying financial and non- financial contributions), outputs (the short-term, direct results), and outcomes and impacts (the longer-term shifts that occur for issues and contexts, either directly or indirectly).

Your theory of change is typically constructed by first identifying the desired long-term goals and then working backward from these to identify all the intermediary effects, or outcomes, that are intended to occur to demonstrate progress. The theory of change includes the influence of the context you are working in, as well as the assumptions and evidence you are relying on. It is usually depicted as a visual map displaying the space between what impact investments do and how these directly or indirectly advance or realize the desired impact goals being achieved. This can be demonstrated at the enterprise, fund, or portfolio levels.

A theory of change can be useful for your impact investing strategy in several ways. First, it can help describe and interpret—for you, your advisors and partners, and other stakeholders— what you are seeking to achieve and why. In this way, a theory of change can serve as a communications tool to align and manage expectations. Working through a portfolio-level theory of change can inform portfolio construction in terms of themes, instruments, and partnerships. It can also identify gaps and issues that require further validation, as you prioritize how you seek additional research and evidence. A theory of change should also inform the selection of methods, indicators, and standards that you can use to measure and evaluate success, while aligning short- and long-term measurement efforts.

Components of a Theory of Change

As a first step in developing and constructing a theory of change, the logic model framework shown in Exhibit 3-11 may be useful. This linear logical model explores the basic components that will eventually become a nonlinear theory of change. While a standard format for a theory of change does not exist, we present this as a template or possible way forward. You can review a few specific examples later in this chapter, then utilize what is relevant and develop your own. Here we highlight common components:

Inputs: The financial and nonfinancial resources you bring. Examples include the amount and type of capital, instruments used, networks, time, and passion.

Outputs: The immediate, direct results from these investments–including what is delivered, to whom, when, and how. Examples include the number of units or products sold, the number of users reached, or the demographic characteristics of your direct beneficiaries.

Outcomes: The short-term and medium-term results attained or effects for individuals, groups, or issues. They can be both directly and indirectly related to the investments. Examples include improvements in targeted health behaviors for individuals or groups, or reduction in localized household-level economic poverty.

Impact: The long-term changes achieved for populations, issues, or systems. Impacts usually also specify the nature of contribution from investments relative to other inputs and influential factors. Examples include the shifts in behaviours or patterns for multiple population groups, or reductions in regional or national poverty levels.

Assumptions: Description of what you believe to be true in the context of the intended changes. They describe the basis of evidence or experience you are using, and should identify possible influential factors across the various levels from inputs to impacts.

Tips for Developing Your Theory of Change

Developing theories of change can be daunting. As part of our research, we spoke with a group of impact investment advisors about how they work with clients to develop and

articulate impact themes, create theories of change, and ultimately construct portfolios that reflect these impact goals. The differences among individuals, families, and institutions are significant—reflecting the distinct approaches that are used to develop theories of change. These advisors emphasized the importance of shepherding clients through this process before heading into portfolio construction.

Here are some highlights:

  • A shift from themes to theories of change means a shift from sectors to actions, resulting—for example—in looking at poverty alleviation rather than the financial- inclusion sector;
  • By going deep on specific outcomes, understanding your priorities becomes critical and real-life examples are key in testing and setting these priorities;
  • Take an expansive rather than a narrow perspective when developing your theory of change, as many impact goals and themes are interconnected. Multiple pathways exist for creating impact, rather than just one “magic bullet”;
  • Developing a theory of change is a repetitive process that requires data in order to be effective—be both courageous and iterative;
  • The ability of an advisor to work with you to develop a theory of change has become an essential part of impact investing services;
  • Organizations may distinguish between their organizational mission and their impact theory of change; and
  • Impact theories of change will not deliver clear black-and-white answers and need to be informed by social science and research that may not align with your interests and passions.

The Limits of Theory of Change

To be clear, some funding decisions and portfolios lend themselves to using a theory of change better than others, and the pathways of change can be short and straightforward or long and complex. When supporting areas that require shifts in people’s beliefs, mindsets, and culture (for example, social justice), investors need to understand that progress may take far longer and be more difficult to measure. Other interventions, such as incremental steps toward adopting new solar-energy technologies, may be much quicker and easier to track. Ultimately, a theory of change is just that—a theory you will progressively test, validate, and iterate through your investment decisions and feedback loops. A sound theory of change is important, but it is only one tool in your impact investing journey. We will provide more guidance in the “Now What” chapter.

Theories of Change Across Organizations and Approaches

As you begin to construct your impact investing theory of change, it is helpful to understand that a theory of change can operate at different units of analysis. For example, there

could be a theory of change for an asset owner (an individual, a family, or an institution), a portfolio, a fund, an asset class, or a specific investment or enterprise. In Exhibit 3-13, we have outlined the various units of analysis that a theory of change can use. We have also included a specific theory of change from HealthMine (Exhibit 3-14), a for-profit enterprise in which the W.K. Kellogg Foundation has made an impact investment.

Aligning Impact Intention and Impact Measurement and Management

While we will address impact measurement and management in more detail in the “So What” chapter, the theory of change can inform how impact considerations are integrated at various stages of the investment process. At the highest level, your theory of change informs the design of your overall impact portfolio. One level down, it can be applied at the thematic level, and subsequently at the transaction level. At these stages, you are beginning to convert specific aspects of your theory of change into “impact criteria and considerations” that will be integrated within due diligence processes—also known as impact due diligence. This integration helps to align and screen for impact considerations

before making an investment, guides the terms of that investment, and informs post- investment monitoring and review of impact performance. This process helps you make more informed investment decisions, increases the chances of impact occurring, and protects against the risks of negative impacts on suboptimal results.

One framework that can be helpful for both your theory of change and its translation into impact due diligence criteria is the “Impact Management Project’s (IMP) Five Dimensions of Impact” (Exhibit 3-15). These dimensions provide defined categories as a shorthand—What, Who, How Much, Contribution, and Risk. On one hand, it can be helpful to review your theory of change against these dimensions to ensure that you have the appropriate level of clarity for each dimension—and that you have a holistic understanding across these dimensions. On the other hand, you can integrate these dimensions (and their subcategories and data fields) into your impact due diligence processes, including post-investment monitoring and reporting. To put it simply: The IMP five dimensions can act as a checklist to ensure that you have a targeted understanding of your intended impacts in relation to your impact investment strategy.

In the next chapter, we will build from the theory of change and move to the How, considering the impact tools and structures available for impact investors. These will guide your selection of products for your portfolio, bringing more detail to your theory of change and shaping your governance documents.



“He who has a why to live can bear almost any how.”
–Friedrich Nietzsche
- Impact Investing Handbook


How: Impact Tools and Impact Structures

Bridging Theory of Change and Portfolio Construction

Once you have established your impact goals and developed a theory of change, you are ready to apply your theory of change to the construction of your portfolio. In this chapter, we will focus on the impact tools and impact structures available to express your theory of change. Impact tools are actions, such as screening, shareholder engagement, ESG integration, thematic investment, catalytic concessionary capital, and setting a time horizon.

Impact structures are the investor, intermediary, and enterprise vehicles you can select to optimize impact. Transaction structures, such as pay for success, responsible exits, and covenants, can also drive specific outcomes. While these impact tools and impact structures can affect investment risk and return, we will focus on how they can be used to drive impact. We will then discuss specific product types and concrete suggestions about constructing your impact investing portfolio. To begin, we will introduce asset classes and review the key governing documents, such as the investment policy statement, that establish the ground rules for deploying your impact investing portfolio.

Investment Governance Documents

The two categories of governing documents for an impact investing portfolio are the impact investment statement (IIS) and investment policy statement (IPS). The IPS has traditionally focused on investment goals and parameters that drive portfolio construction. Along with the IPS, the IIS codifies your theory of change as driven by your impact goals. The IIS is a guiding tool for both internal and external stakeholders, which provides clarity of mission, principles, and impact strategy. Some asset owners choose to create one document that integrates elements of both statements, while others choose to create two separate documents. The IIS can serve as the guiding principles for the family or board and can then be used to drive the execution of the strategy through the IPS. In the practitioner’s exercise at the end of this chapter, we will help you develop your version of these two documents.

Your impact investment statement may contain the following elements:

  • Mission, vision, and values;
  • Views on fiduciary duty;
  • Definition and boundaries of impact investing;
  • Role of impact investing;
  • Impact investing approaches;
  • Theory of change;
  • Impact goals;
  • Impact tools and structures;
  • Product examples, if desired; and
  • Approach to Impact Evaluation (read more about this in the “So What” chapter).

Your investment policy statement likely includes:

  • Roles and responsibilities of the board, family, and investment committee;
  • Role of advisors, including level of discretion;
  • Overall investment goals and objectives;
  • Risk appetite;
  • Liquidity requirements;
  • Diversification goals;
  • Investment limitations, including specific assets and transactions;
  • Tax considerations, as applicable;
  • Asset-allocation strategy;
  • Time horizon;
  • New cash investment guidelines; and
  • Financial reporting.

As one example of these governing documents in practice (Exhibit 4-2), the Rockefeller Brothers Fund (RBF) has developed an investment policy statement45 as well as a mission- aligned investment statement.46 The RBF’s investment policy statement intentionally addresses the roles and responsibilities of the board of trustees, the Investment Committee, staff, and the foundation’s Outsourced Chief Investment Office (OCIO). As we elaborate in the “Now What” chapter, the clear delegation of these responsibilities is a critical element of an investment policy statement. The document also establishes return, risk, and liquidity targets for specific asset classes and the overall portfolio.

Asset Classes

The key building block of any portfolio is the asset class, each categorized with unique risk/ return characteristics. Debt and equity are broad asset classes, and each is distinguished by the asset owner’s relationship to the investment: Debt investors are creditors (lenders) and equity holders have an ownership stake. Debt is also known as fixed income, as the lender is typically paid a fixed rate of interest. The equity owner is not assured a fixed return and is compensated by the company’s growth, expressed in an increase (or decrease) in the value of the ownership interest. An equity investor can receive dividends from the company or sell the equity stake in order to realize a return. Asset classes generally range from very liquid and low risk/return, such as cash, to illiquid and high risk/return, such as private investments and real assets. Debt and equity are available in both public and private markets. While there are different ways of segmenting asset classes, we will use the categories specified in Exhibit 4-3 going forward as we discuss impact investing portfolios.

Though asset classes are not directly linked to specific impact tools or structures, impact characteristics and considerations do vary across asset classes. For example, a municipal bond might have more information about intended community impacts, while private equity could raise impact questions about how to responsibly exit the investment. The impact characteristics of specific asset classes will be explored further when we look at portfolio construction later in this chapter.

Impact Tools and Impact Structures

Extending our house metaphor, the How will begin to build the structure of your portfolio on top of the foundation of your Why or theory of change. Expanding on the approaches we introduced in Chapter 1, the impact tools and impact structures in Exhibit 4-4 can also be clustered within the following broad approaches. You will use impact tools and impact structures to lay out the rooms and walls before selecting the specific investment products you will use to construct your impact portfolio.

Impact Tools

Impact tools can be combined or used separately within your portfolio. Screening can be applied to reflect your specific preferences about what investments you want to hold, while shareholder engagement is about influencing the corporate practices of the companies in your portfolio. Environmental, social, and governance (ESG) integration uses data and methodologies to include ESG factors into your financial analysis and investment selection. Thematic investment is an impact tool that drives the creation or expansion of specific outcomes, while catalytic concessionary investments generate (catalyze) positive impact and enable investments that would not otherwise be deployed.

We will now explore each of the impact tools and impact structures individually.


The earliest examples of impact investing use the tool of screening: the inclusion or exclusion of companies or sectors due to alignment with specific values. As many impact themes emerge from social and environmental movements, investors see screening as a way to align assets with their values and drive change. For some investors, entire industries, such as private prisons, tobacco, or contraception, are excluded from their investment holdings. While the link between screening and contribution is not as clear as with other impact investing approaches, many impact investors see screening as a central part of their active ownership.

Shareholder Engagement

Shareholder engagement involves the identification of material factors where shareholders can influence corporate practice—either by engaging with corporate management or voting as a shareholder. While most shareholder engagement occurs in public equities, private- equity investors and debt holders can also engage with management (for example, by taking a board seat). Through direct results and broader influence, this approach feeds back into future investment analysis and decision-making. While this approach has historically involved a significant investment of time and resources, recent advances have improved its popularity. Exhibit 4-5 highlights the U.S. Dominican Sisters’ evolving approach throughout several decades, showing the importance of long-term commitments and collaboration to influence corporate change.

ESG Integration

The widely used impact tool of environmental, social, and governance (ESG) integration is the systematic and explicit inclusion of ESG factors into financial analysis and investment selection. Investment institutions complement traditional quantitative risk/return analysis with consideration of ESG policies, performance, practices, and impact. When applying this approach to investment selection or weighting, it may also be known as an ESG tilt or best-in-class screening. Asset managers and asset owners can incorporate ESG issues into the investment process in a variety of ways. Some investors include companies that have stronger ESG policies and practices, while others exclude or avoid companies with poor ESG track records. Still, others incorporate ESG factors through peer benchmarking or as part of a wider evaluation of risk and return. The Principles for Responsible Investment has developed a four-stage process (Exhibit 4-6) describing how investors can integrate ESG.

The availability of ESG data and data providers has proliferated, although consistency does not yet exist across approaches. ESG data services range from fundamental providers of public data such as Bloomberg and Refinitiv to comprehensive ESG ratings providers like ISS, MSCI, RepRisk, Sustainalytics, and Vigeo Eiris to specialists focused on specific themes such as the nonprofit Carbon Disclosure Project (CDP) and Equileap, which provides gender- equality data. Asset owners use ESG data as one input for their investment decisions as part of their due diligence and portfolio monitoring. Given the growth in ESG data sources, ESG is no longer limited to corporate disclosures as data providers track information from non-governmental organizations (NGOs), governments, and other stakeholders to find insights. As data proliferates, the field is moving from data gathering to better understanding the patterns and signals in the data, through machine learning, natural language processing, and artificial intelligence. Truvalue Labs (Exhibit 4-7) has developed a helpful framework to understand how ESG research has moved from data scarcity to abundance and now superabundance with artificial intelligence.

Thematic Investment

Thematic investment is an impact tool that drives the creation or expansion of specific outcomes. Different from the tools mentioned thus far, this tool focuses on investments that address one particular impact theme. For example, an investment in an early-stage educational-technology company would be a thematic investment focused on the theme of education. This approach can be applied across asset classes and themes, although individual projects and early-stage enterprises may more easily demonstrate outcomes. Given that an investor can exercise more direct control over a project or private-market investment, many thematic investments are in these asset classes.

In the article, “Why and How Investors use ESG Information: Evidence from a Global Survey,” Amir Amel-Zadeh and George Serafeim lay out the broad range of impact investing approaches and reasoning of global money managers responding to the survey. For their research, they distinguished between the following impact tools commonly used in practice:

  • Engagement/active ownership is the use of shareholder power to influence corporate behavior through direct corporate engagement, such as communicating with senior management and/or boards of companies, filing or co-filing shareholder proposals, and proxy voting that is directed by ESG
  • Full integration into individual stock valuation is the explicit inclusion of ESG factors into traditional financial analysis of individual stocks, for example as inputs into cash- flow forecasts and/or cost-of-capital
  • Negative screening is the exclusion of certain sectors, companies, or practices from a fund or portfolio on the basis of specific ESG
  • Positive screening is the inclusion of certain sectors, companies, or practices in a fund or portfolio on the basis of specific minimum ESG
  • Relative/best-in-class screening is the investment in sectors, companies, or projects selected for ESG performance relative to industry
  • Overlay/portfolio tilt is the use of certain investment strategies or products to change specific aggregate ESG characteristics of a fund or investment portfolio to a desired level, such as aligning an investment portfolio toward a desired carbon
  • Thematic investment is investment in themes or assets specifically related to ESG factors, such as clean energy, green technology, or sustainable
  • Risk factor/risk premium investing is the inclusion of ESG information in the analysis of systematic risks as, for example, in smart-beta and factor-investment strategies— similar to size, value, momentum, and growth

Based on the survey, the primary reason asset owners use ESG information is to assess investment performance and form an active ownership/shareholder engagement strategy. The major impediment was found to be the lack of comparability across the ESG reporting of companies.

Catalytic Concessionary Capital

Catalytic concessionary investments are structured to generate (catalyze) positive impact and enable investment that would not otherwise be deployed. Catalytic capital achieves this goal by accepting disproportionate risk and/or concessionary returns relative to investment-seeking, risk-adjusted, market-rate returns. This “but for” consideration is critical to the success of catalytic investments.49 While some types of catalytic capital can focus

specifically on debt, it can also include private-equity investments. The subsidy or concession that is an essential element of catalytic capital can take several forms. Debra Schwartz, of the MacArthur Foundation, first described these concessions as the Five Ps in 2013.50

Price: This approach accepts an expected rate of return that is below market, relative to the expected risk. This would include structures such as program-related investments (PRIs), recoverable grants, and any investment in which a subsidy is embedded in the return.

Pledge: This approach provides credit enhancement in the form of a guarantee, allowing impact investors to support an enterprise without deploying capital. The guarantee is a contingent obligation of the investor—for example, it is used only if the enterprise does not meet its obligations. Given that some foundations have endowments that are being managed for perpetuity, a guarantee issued by the foundation can create impact without the need to liquidate or reduce securities holdings in the endowment. The lender looks to the guarantee as collateral for the loan. Exhibit 4-9 shows how MCE Social Capital leverages the guarantees of loans to individuals in order to generate impact. Prioritizing

this tool, The Kresge Foundation has commissioned studies, created helpful instructional videos, and founded an innovative guarantee collaborative, the Community Investment Guarantee Pool.

Position: This approach provides credit enhancement by taking a subordinated/junior position in a “capital stack,” while other investors take a senior position. Roughly defined, the capital stack determines who has the rights—and in what order—to the income and profits generated. In this structure, the impact investor might bear the “first-loss” risk—for example, the subordinated investors get paid after the senior investors in the case of a shortfall. Many complex debt and project finance structures may invite impact investors to take subordinated positions in order to attract senior commercial capital into the project. Unlike a guarantee, these investments are funded with capital and not on a stand- by basis.

Patience: This approach accepts a longer, or less-certain, time horizon for repayment than other commercial investors. In the case of an equity investment, the investment may come with no set repayment schedule, while debt investors have a set repayment timeline. Patient capital may also be a tranche of debt that is not repaid until other investors have been repaid. In certain cases, the repayment is based on a portion of the investee’s operating revenue rather than a set repayment schedule. Impact investors using this approach are willing to defer repayment in order to prove a case for investment in a new company, impact theme, or geography.

Purpose: This approach accepts nontraditional/non-market terms to meet the needs of the enterprise, including no collateral, smaller investment size, higher transaction costs,    or more flexible use of proceeds. This tool becomes particularly important when investing in an innovative structure that requires additional research and development before it can attract commercial capital. The investor should be mindful that nontraditional structures may face challenges when they try to scale.

As defined in Exhibit 4-10, many foundations use PRIs as catalytic investments. In Exhibit 4-11, the Michael & Susan Dell Foundation’s (MSDF) MISSION Framework is shared as a tool for analyzing these opportunities. MSDF, in conjunction with NYU Wagner, developed

its MISSION framework with the following dimensions: Market, Impact, Scale, Sustainability, Incrementality, Organization, and Next. This framework address questions of how a specific opportunity aligns with MSDF’s programmatic strategies.

The Limits of Concessionary Capital

Some impact investors may see the use of concessionary capital as the key driver of their impact investing strategy. Others, however, argue that catalytic capital can provide subsidies that interfere with important market forces and should not be used, while still other impact investors will use both catalytic concessionary capital and non-concessionary tools in the construction of their portfolios. As you consider this tool, remember that some theories of change are advanced by these concessionary tools and some may not be. The use of concessionary capital will be driven by your theory of change and the type of investor you are.

Setting a Time Horizon

Your time horizon has implications on investment decisions. Impact investors seek to align investment timelines with the requirements of social and environmental challenges. This can come into conflict with some traditional investors who may focus solely on short-term results, such as quarterly earnings. It is important to balance the time horizon of desired financial results with desired social outcomes.

Beyond the time component for investment performance, a consideration specific to foundations and other charitable vehicles is an institution’s time horizon, ranging from perpetuity to spend down. More and more foundations are choosing to spend down, or sunset, their endowment in order to have the most impact on the most urgent needs. For more information, see Rockefeller Philanthropy Advisors’ guide Setting a Time Horizon.51

If you are considering spending down, here are some key investment considerations:

  • Priority is placed on fixed income and cash, given the defined timeline for liquidity and exit;
  • Risk tolerance ranges from quite low, in order to meet grant payouts, to quite high, in order to make a significant impact in a short time;
  • Coinvestment opportunities can be compelling to align the short time horizon of one investment with the longer time horizon of others. However, challenges of coinvesting can occur with asset owners who have a different time horizon;
  • Care should be taken when selecting managers given the need for time alignment;
  • One option is spinning out high-performing investments at the end of sunset; and
  • Investment talent should be carefully considered to properly incentivize performance and transition in the final

Exhibit 4-12 shows how the Grove Foundation integrates impact investing into its spend down strategy.

Impact Structures

When constructing an impact portfolio, impact investors need to understand how to select the optimal investor, aggregation, and enterprise vehicles across asset classes. The goal is to select investment vehicles that can optimize impact while operating within the appropriate portfolio construction and management frameworks. As outlined in Exhibit

4-13, the structure of the investor, intermediary, and enterprise can have differing impact characteristics and challenges.

Investor Structure

Asset owners can organize around a wide variety of forms in order to drive impact creation. These different corporate forms allow for different tax benefits, expenses, anonymity, and flexibility. Traditionally, asset owners had their investment portfolio and a private foundation to carry out their social-impact goals. Along with a number of other options, the two structures with the most momentum are Limited Liability Companies (LLCs) and donor- advised funds (DAFs). LLCs were first championed by early adopters, such as the Omidyar Network and Emerson Collective, and they continue in popularity with others such as the Chan Zuckerberg Initiative and Arnold Ventures. These asset owners prioritize flexibility over tax benefits, sometimes forgoing millions of dollars in tax savings. In addition, investors may have more control if they make direct investments or hold partnership stakes rather than holding the debt or equity of a publicly traded company. In another significant trend, Exhibit 4-14 highlights one example of DAFs being used for impact investing.

Intermediary Structure

An intermediary is the bridge between asset owners and investable enterprises. The most common structure is a fund, a supply of capital belonging to numerous investors used to collectively purchase securities while investors retain ownership and control of their shares. An investment fund provides a broader selection of investment opportunities, greater management expertise, and lower investment fees than investors might be able to obtain on their own. Types of investment funds include mutual funds, exchange-traded funds, money-market funds, and hedge funds. Some of these aggregation structures, such as separately managed accounts (SMAs), may allow more control or flexibility in investment selection, which can be important if the investor wants customized screening. Innovative fund structures such as Benefit Chicago (Exhibit 4-15) demonstrate how institutional, retail, and philanthropic investors can coinvest at scale.

Enterprise Structure

An enterprise is the ultimate creator of financial and social value, including for-profit, nonprofit, and hybrid-corporate forms as well as public and private companies. One such innovative structure that has seen significant growth is the benefit corporation, which embeds social and environmental values into its governing documents. Cooperatives are another collaborative model with collective ownership and coordinated decision-making.

Investment Structures to Drive Impact

Some innovative impact transaction structures are designed to create specific impact outcomes, including pay-for-success (see Exhibit 4-16), blockchain, responsible exits, or impact covenants. When negotiating the terms of your impact investment, you can embed specific provisions into the transaction that targets the creation of specific impacts. For example, impact covenants can require that a loan be deployed in particular locations or used to support specific beneficiaries. Affordable housing loans may be targeted to residents who earn less than a community’s median income. The use of loan proceeds can be tied to a set purpose, such as small business enterprises, or sector, such as retrofitting homes with solar. Pay-for-success structures are contractual agreements that link the repayment of capital to specific impact outcomes. They have, for example, been used to test and scale the delivery of social services. By requiring your consent to the sale of an investment, you can increase the likelihood that the enterprise will retain its impact focus through a responsible exit.

Product Selection and Portfolio Construction

Now that we have presented the categories of impact structures and impact tools, you are ready to begin selecting the impact investing products that will comprise your portfolio (see Exhibit 4-17). These products will have the impact attributes that support your theory of change and incorporate impact tools and impact structures. As you (and your advisor) begin to construct your impact portfolio, you will want to have it reflect your governance documents, such as your impact investment statement and your investment policy statement. As all of your assets have impact, you will want to select products that best represent your impact goals. You will want to consider the impact characteristics of each product and how it relates to asset classes. This process may unfold through conversations with your advisor and should also consider how you will measure and manage impact in your portfolio. The following list describes common considerations specific to certain asset classes.

  • Cash is a low-risk asset class that can be deployed into impact vehicles, such as certificates of deposits in community
  • Fixed income provides the opportunity for you to direct debt capital to specific purposes, such as municipal and corporate bonds that focus on targeting specific locations or activities, green bonds,
  • Public equity is very liquid with broad ownership and disclosure of data, providing opportunities to engage with management or to integrate ESG data into your selection
  • Hedge funds and other alternative investments may have specific thematic strategies but may not be transparent in their holdings and
  • Private equity and other early-stage investments can create impact through innovative and high-growth business models in specific impact themes, and investors may use board seats to direct impact-integrated corporate
  • Real estate creates impact through its environmental footprint as well as through the important role it can play in housing, community building, and enterprise
  • Commodities and real assets, such as timber, environmental finance, water, and renewable energy, provide targeted impacts leveraging tangible resources.

Impact Product Matrix

An investment product, as we use the term here, is a specific vehicle that expresses your impact goals using the impact tools and impact structures introduced throughout this chapter. One approach to portfolio construction is introducing these products at the intersection of the two key variables of asset class and impact theme. Exhibit 4-18 provides an illustrative impact-product matrix, with impact themes in each row and asset classes in each column. This matrix was first developed for Rockefeller Philanthropy Advisor’s Solutions for Impact Investors: From Strategy to Implementation in 2009,52 and updated by Sonen Capital. For each product, a corresponding theme and asset class exists. Specific products should reflect the impact goals and impact structures aligned to your theory of change. When reviewing the matrix, you should note that each box represents not only a distinct risk/reward characteristic, but also varying degrees of impact for the particular theme. This matrix, of course, does not capture all impact themes and products currently available to impact investors.

Concrete Steps to Portfolio Construction

Although many possible steps and sequences exist for constructing an impact investing portfolio, we have included some concrete actions you can take. While each asset owner will have a different approach, we recommend starting with the parts of the portfolio with which you are most familiar—from an impact or a financial perspective. For example, a foundation’s impact goals may lead to tools such as PRIs and ESG screens. If you are very familiar with your grantees and outsource your investment management, consider starting with a loan to a familiar grantee and building a portfolio of PRIs. On the other hand, if you have an active investment committee and aligned CIO, you may be most familiar with public equities and start with the ESG screens through familiar fund managers. In general, the following four approaches can be taken to shift or build an impact investing portfolio.

First Step: Know What You Own. A common first step is to know what you own—for both financial and social purposes. This is the corollary to “all assets have impact.” While you likely have a good sense of your portfolio’s investment composition, get to know your portfolio’s existing impact. For example, take a look at underlying holdings of your mutual funds in order to assess mission alignment. You may find objectionable holdings and proceed with a disciplined approach to removing them from your portfolio.

Mission-Driven: Create Your Impact Portfolio. The approach starts from the ground up in order to create a theory of change, then incorporate your investment and impact goals into your portfolio. This approach has been our focus in this guide, as it is the most comprehensive and challenging. Most asset owners will not begin impact investing with a blank slate but rather will have legacy assets that will need to be transitioned.

Portfolio-Driven: Transition Existing Portfolio. This approach keeps the existing investment philosophy and asset allocation while layering in the impact considerations. Often this method starts with the “do no harm” mentality and builds in other impact considerations, which frequently requires less time and resources compared to rebuilding the portfolio. In some cases, legacy positions may be locked up for a certain time before they can incorporate impact.

Blend: Carve Out or Use of Specific Tool. This approach is a combination of the first two approaches since it has high-impact intentionality yet only engages a subset

of the portfolio. This can be an important first step or testing ground for broader implementation. One downside to this approach is the possible artificial ceiling of total portfolio activation. Many investors use this strategy as a starting point, not an ending point, which can complement a portfolio-driven approach. Be mindful with this approach that different parts of your portfolio may be working against each other.

Current Approaches to Portfolio Construction

The ability to translate your goals and theory of change into investable opportunities is critical to the success of your impact investing strategy. In our conversations with

advisors, it was clear that they draw upon similar tools and structures when building impact portfolios; however, the process varied depending on client goals as well as the advisor’s expertise and business model.

Some of the approaches proposed by the advisors include:

  • Constructing a top-down strategic asset allocation based on the advisor’s macro views and then applying it to a tactical asset allocation for each client that seeks to incorporate specific impact In some cases, major themes—such as climate— are being used to reengineer the strategic asset allocations for some investors with specific impact tools and structures used at the security-selection level.
  • Incorporating impact into goals-based portfolio construction tools by drawing out a client’s impact goals, including values, risk, and time horizon. The advisor then sets goals with clients, such as catalytic, growth, stability, and risk, for parts of the portfolio. Once the goals and priorities are established, specific impact themes are then applied across the asset classes using fund managers or direct
  • Following a research-driven approach that targets specific impact sectors, with the advisor finding opportunities that combine high investment and impact This deep, thematic-research approach identifies market-rate impact opportunities but may not be customized for specific clients.
  • Some advisors will go deep into specific themes with clients as they seek to create transformation rather than simply complete transactions. This may lead to specific thematic investments or place-based approaches.
  • Standardization and simplification of impact products is also a key driver as both clients and advisors seek out competitively priced funds that can deliver intentional and measurable impact to a wide range of
  • Seeking to balance the depth and breadth of their portfolios, investors realize that targeted investments can lead to concentration risk while less-direct investments may dilute the contribution of their investments or limit their influence and control. While this trade-off is not linear, balancing concentration risk against impact intensity needs to be considered in portfolio construction.

Regardless of the approach, transitioning a portfolio toward impact is a highly consultative and iterative process between you and your advisors. Many advisors see their ability to create a sound and meaningful client experience during this transition as a central part of their value add. Advisors typically begin this process with an assessment of the current portfolio and a survey of the investor’s goals. Given that advisors cannot be deep experts in every possible impact theme, some are building out their expertise within clusters, such as climate, social justice, and community development. Ongoing education and engagement with clients is critical.

From Product Scarcity to Quality Control

As impact investing products proliferate, quality control is critical if you want to further your theory of change. The current environment has changed dramatically since the early days of impact investing when the goal was to simply support the idea that investment products could exist across impact themes and asset classes. Now, the challenge is not product creation but rather quality control. The institutional investment industry will fill this

vacuum with impact products, but impact investors need to come to the table with a clearly articulated vision of the impact investing goals they are trying to achieve.

Traditional Investment Practice Is Not Static

As impact investors seek to have impact goals expressed alongside traditional investment goals, we should note that traditional investment practices are also evolving to incorporate new disciplines, such as behavioral finance. All investors are seeking to use models and heuristics to inform their capital deployment in the future. Remember past performance is not an indicator of future results. Investments made in the future will exist in a future world that is not the same as the past. We must create investment philosophies and strategies to match these changes. We see impact investing as one of these strategies rather than an entirely new discipline.

Portfolio construction is an iterative process as you align your investments with your theory of change. In the next chapter, we will explore how you can maintain and monitor your impact portfolio using the tools of impact measurement and management.

So What

So What: Impact Measurement and Management

Impact Measurement and Management

We now turn to how you can measure the success of your impact investing portfolio over time—and how you might use this information for future decisions. The foundation for success is laid out in the theory of change that you developed in the “Why” chapter. The theory of change is the bridge connecting your impact goals to the investment products you selected in the “How” chapter. Impact measurement and management (IMM) will provide you with a framework to test whether your portfolio of investments is achieving those impact goals. For most impact investors, the portfolio will be the focus of the impact measurement and management system. Depending on impact tool and asset class, varying levels and specificity of impact information will be available.

IMM is the process by which impact investors can understand the effects of their investments on people and the planet (measurement) and then take action to adapt processes and improve outcomes (management). IMM has evolved through many decades of social science and philanthropic research. During that time, IMM has had various labels, such as monitoring and evaluation (M&E) and social-impact measurement (SIM). IMM as a term has been popularized through the Impact Management Project and the Global Impact Investing Network—and has been increasingly adopted by investors. IMM uses some of the evaluation methods of M&E, along with the tools of financial accounting and reporting such as the use of ratings, key performance indicators (KPIs), and disclosures.

IMM is relatively young and still somewhat fragmented but, encouragingly, growing in scope and sophistication.53 In this chapter, we provide some starting points and initial tools with the expectation that these will be improved as the field matures. We also provide guidance based on current practices and emerging trends. Impact investors have tended to default to output-level metrics as a proxy for long-term outcomes and impacts. For example, investors may measure the amount of capital deployed or number of housing units constructed, which may not tell you much about the quality of housing, the changes for resident families, or the effect on neighborhoods. As we noted earlier, a robust theory of change can help distinguish between and link these different levels. Although the trend is to concentrate

on quantitative measures, qualitative data can also be collected and analyzed in a robust manner to help you understand what types of impact have occurred—and why—and what has yet to happen.

Three core characteristics are critical: a consistent and disciplined approach, transparency in impact due diligence and reporting, and the use of appropriate approaches and tools.

No one line of inquiry and evidence is going to tell you everything. IMM should help you “manage forward” to improve your impact over time, rather than just look back at what impact has occurred. IMM can be daunting and the risk of analysis paralysis exists, but remember the importance of beginning thoughtfully and taking one step at a time. Regardless of where you start, IMM is an iterative process that will grow and evolve.

Core IMM Questions: Why, What, How

Now, we move on to the overarching questions you can use to construct your impact measurement and management system. These questions will build on each other throughout this chapter: why measure, what to measure, and how to measure it.

Why Are You Measuring?

In Chapter 3, we started with the Why of your overall impact investing strategy. Similarly, we encourage you to start here with the Why of impact measurement. You are setting out to measure the success of the strategy you have developed, but to what end? We suggest that you explore at least three aspects of your Why.


The most common reason is to understand whether the short-term changes and long-term effects are occurring in ways that you anticipated, while also accounting for unexpected developments that may cause you to outperform or underperform on impact.


Impact investors are not only trying to “prove” impact but, like financial performance, are interested in improving it over time. Similarly, IMM should help inform how you get more impact at any level—from a specific deal to the overall portfolio.


We encourage you to also include specific learning goals for your own approach, to inform your future portfolio. Consider how you might also help existing and aspiring impact investors who are working in your relevant impact themes. Your learning can support the maturing field of IMM.

Building a Portfolio from Your Theory of Change

This is a good moment to return to your theory of change, your guide and starting point for IMM. Once you have articulated your overall objectives, you want to ensure that your portfolio and transactions are aligned with these goals—recognizing that each individual investment may have stronger or weaker alignment. Depending upon your impact approaches and structures as well as your investment products, your assets will generate different types of impact data that will affect your ability to measure and manage that data. For example, impact data from disclosures of a publicly traded corporation will be different from the data from early-stage enterprises focused on research and development. The impact generated through a direct investment is quite different from the impact you have by investing through a fund structure. Again, the goal is for your overall portfolio to reflect your theory of change. As developed in Chapter 3 (Exhibit 3-13, “Theories of Change: From Broad Fields to Specific Interventions”), impact can be measured at a number of levels. Similar to rolling up financial performance from the deal to portfolio level, you may also want to roll impact measurement up to the portfolio level.

What Are You Measuring?

Based on your Why, you can now determine What you want to measure and the principles, frameworks, and standards you can use to drive the gathering of the relevant impact data.

The practice of IMM has developed out of several distinct disciplines, and different ways to organize the various components exist. For this handbook, we have simplified these components into three categories: Principles, Frameworks, and Standards (see Exhibit 5-2). Each category has a wide array of approaches, which can be applied at different units of analysis—industry, portfolio, asset class, investment, or intervention. While IMM approaches are still somewhat fragmented, efforts are underway to link some of them in order to promote efficiency and broaden their applicability. In the following sections, we will explore one example for each in more detail, namely the International Finance Corporation (IFC) Operating Principles for Impact Management, the Impact Management Project’s five dimensions of impact framework, and the IRIS+ standards. In addition to being some of the most prominent IMM approaches, they are also linked to other principles, frameworks, and standards that you may want to explore or adopt. Impact investors can use these to guide and evaluate their portfolios of investments.

Selecting and applying specific impact principles, frameworks, and standards to your investment will provide useful information to drive your future decision-making. For example, the Sustainable Accounting Standards Board (SASB) is a standard that generates industry- specific impact data. SASB is appropriate to compare industry peers but would not be appropriate for assessing an early-stage social enterprise. Particular investments and asset classes in your portfolio will have varying levels of impact and may require distinct measurement tools. At the end of this chapter, we will apply these to create your IMM framework.


Principles are broad rules and best practices that ensure the overall integrity of processes and behaviors. They are not typically industry specific but set the rules of the road.

Principles often come in the form of a public commitment to certain practices, transparency, measurement, and accountability. Principles differ from frameworks and standards in that they communicate intention rather than specific measurement techniques. Examples relevant for impact investing include the IFC Operating Principles for Impact Management, the Principles for Responsible Investment (PRI), and the European Venture Philanthropy Association’s (EVPA) Impact Management Principles.

IFC Operating Principles for Impact Management

The IFC has developed operating principles (Exhibit 5-3) as a guide to help investors with the design and implementation of their impact management systems, ensuring that impact considerations are integrated throughout the investment lifecycle. You can work through each principle systematically to describe how you are interpreting and applying it within your own portfolio. Across all categories, Principle 9 calls for public disclosure of alignment with these principles through independent verification, which can function as a review of areas of good practice, possible gaps, and room for improvement.


Frameworks are specific methodologies and conceptual frames to organize IMM. This category organizes your IMM strategy alongside an established framing tool. Frameworks take the intention of principles and put them into practice. They exist at a general, strategic level that is then put into practice by more tactical standards. Examples include the United Nations Sustainable Development Goals (UN SDGs) and the Impact Management Project’s (IMP) five dimensions of impact.

As introduced in the “Why” chapter, IMP’s ABC framework illustrates how investors may contribute to impact through their investments as part of a portfolio. In this ABC framework, investors can contribute to impact by:

  1. Acting to avoid harm,
  2. Benefiting stakeholders, and
  3. Contributing to solutions.

Building on this framework is IMP’s Five Dimensions of Impact (Exhibit 5-4). It recognizes that all investments have effects on people and the planet, positive and negative, intended and unintended. Using the five dimensions of impact (and their respective subcategories), investors and investees can identify which effects matter and assess the performance of those effects. You can work through each of these data categories to inform what type of data (and level of specificity) you would seek to collect across your entire portfolio, or for certain parts of your portfolio, depending on the type of capital and instrument.


Standards are taxonomies and core metrics applied to specific industries, sectors, and themes. This is the most specific category, which arrives at the “nuts and bolts” of measurement. With standards, you choose how you define a particular term (for example, a “job” may or may not include minimum wage) and specific metrics to indicate impact progress. Examples of standards include SASB, B Lab, and IRIS+ (Exhibit 5-5).

IRIS+ and Housing Subtheme Standards

The Global Impact Investing Network (GIIN) launched IRIS+ as a generally accepted standard for impact measurement, which identifies performance indicators by impact theme or category. The system is aligned to the SDGs, the IMP’s five dimensions, and more than fifty other conventions. It allows impact investors to efficiently identify and select appropriate metrics from a comprehensive open list and offers guidance to standardize data collection and reporting. IRIS+ standards have been developed for broader themes and subthemes, which often correspond to the thematic focus and outcome levels of a theory of change—though most of the metrics are output-level measures. Over time, this should enable more standardized and comparable impact reporting, as shown in the following example of the IRIS+ standards for the housing sector.

How Are You Measuring?

Now that you have established the Why and What of your IMM strategy, you can now construct the process of your IMM activities.

IMM Life Cycle

IMM is an iterative process starting with goal setting, through data collection and approach, to analysis and validation, and ultimately leading to better judgments and decisions for the future. This cycle of designing, collecting, assessing, and then acting should drive your impact investing strategy and implementation. You can adapt this life cycle to meet your specific approach.

The Impact Measurement Working Group of the G8 Social Impact Investment Task Force created the four-phase framework seen in Exhibit 5-6.

Impact Due Diligence

Impact due diligence is a key part of the IMM cycle. A number of distinct approaches to impact due diligence can be made—from qualitative storytelling to more technical and quantitative data. Narratives are common starting points for understanding how change is occurring and what implications result from that change. These are sometimes expressed as a narrative form of the theory of change and are used to indicate broad alignment with a theory of change. However, impact investors often need to go further when making investments. We recommend incorporating a combination of qualitative and quantitative approaches.

A starting point is to use impact due diligence questionnaires as initial screens for alignment to your theory of change. A well-designed set of questions can identify linkages with the components of the theory of change and also identify areas of potential misalignment. A follow-up step is to design a quantitative tool that provides nuanced translation of the theory of change into weighted criteria, to provide a degree of specificity that can inform targeted actions during due diligence and post investment. As seen in Exhibit 5-7, each approach has merits and should be calibrated to the capacity and goals of the impact investor.

Impact Management Considerations

A disciplined approach to designing, implementing, and using IMM is both possible and necessary for impact investors. Various approaches can help you go deeper in terms of understanding whether outcomes and impacts have occurred.

IMM at the Portfolio Level

One challenge is how to aggregate across the portfolio, especially if you are involved in different sectors and instruments. The IMM field does not yet have the maturity of frameworks and platforms to do this across all portfolios, but the two examples we have highlighted, IMP and IRIS+, are facilitating aggregation through their standardized language and structures.

Your IMM framework will also reflect the impact characteristics of the specific asset classes in your portfolio and how you hold those investments. For example, some fund managers will have their own IMM frameworks for their funds while direct investments may require the creation of customized approaches. The distinctions between debt and equity, and public versus private investments, also need to be considered in constructing an IMM framework.

The KL Felicitas Foundation has developed a multilayered approach that integrates the elements we have described earlier. The foundation has publicly reported on its impact performance and learning across its portfolio and transactions.54 This impact management approach builds upon the foundation’s theory of change presented in Exhibit 3-12, “KL Felicitas Foundation’s Institutional-level Theory of Change.” We provide two excerpts from the foundation’s most recent impact performance report. The first (Exhibit 5-8) describes a portfolio-level view that integrates the theory of change, various thematic and instrument segments, and alignment with the Impact Measurement Working Group Principles. The second (Exhibit 5-9) describes an individual fund’s performance, integrating IMP and SDG frameworks, as well as IRIS+ and the KL Felicitas’s customized Impact Risk Classification (IRC) standards. This scorecard contains both quantitative and qualitative data as context for impact alignment and reporting. As you review these examples, remember that this is one of many interpretations. Consider how elements of these examples might inspire your own approach.

IMM from the Beneficiary Perspective

Unsurprisingly, a tendency exists in impact investing to favor numbers when describing impact. These provide comparability and standardized reporting, which can be an efficient solution when dealing with complex challenges. At the same time, these numbers may not account for the context and, in particular, the perspectives of those who are most affected by impact investments. It is critical to consider and design for the ultimate beneficiary.

One relevant approach is Lean Data, which was incubated at Acumen and now operates independently as 60 Decibels. Lean Data seeks to efficiently integrate beneficiary voices directly into IMM through the use of technology. By blending quantitative measures and qualitative insights across large samples, it can identify emerging patterns for expected and unexpected effects and triangulates various data points over time. One key goal is to promote a culture of stakeholder accountability by sharing results with targeted users, beneficiaries, and communities.

Self-reported Surveys

Exhibit 5-10 details several approaches that can be used to collect new data. Each provides varying degrees of certainty, and some are more appropriate and effective in different contexts than others. Self-reported data through surveys is particularly valuable when beginning to measure the impact of an enterprise. This approach complements the quantitative and standardized approaches, such as IRIS+ and IMP, and can be particularly important for investors who want to amplify beneficiary voices within community-based initiatives. It is important to recognize that none of these data types are necessarily better or more rigorous than any other. Each has relative strengths and weaknesses. The best option will depend on the type of impact or business model in question.

Impact Preservation

One common shortfall when measuring the effectiveness of an impact investment is not paying attention to its influence beyond the initial investment selection. As impact investments begin to scale, the asset owner does well to estimate and track the preservation of impact. If not, an investment may grow in market share or returns, while impact erodes. Some impact investors are attempting to explicitly connect their impact measurement to their financial measurement, so they have a holistic view of how their investments are performing positively and negatively over time (Exhibit 5-11). This leads to an understanding that investments can underperform or over perform along either side of the impact or financial scale.

Monetizing Impact

A long debate continues to focus on how to monetize impact when comparing impact investing across themes. One widely used approach to monetizing impact is cost-benefit analysis. While some investors, philanthropists, and policy makers pursue this method, it requires them to select one specific variable that can be captured in monetary terms. For example, the Robin Hood Foundation has pursued a strategy of monetization to evaluate which interventions can most increase the economic well-being of poor New Yorkers.

This plan is useful to assess the impact of a preschool program relative to a job-training program. This approach is more challenging for an impact investor who is deciding whether to save human lives or save acres of rainforest. Once an investor is constructing an entire portfolio, the challenges of monetization increase further. The Impact-Weighted Accounts initiative (Exhibit 5-12) is exploring how monetized-impact estimates can be integrated into financial statements.

Progress in the IMM Field

The field of impact measurement and management has made substantial progress in the development of principles, frameworks, and standards. The more than 150 tools, resources, and methods claiming to support IMM can be difficult to navigate or clarify what constitutes best practice versus what is noise. Impact performance remains largely self-reported and is not audited, and a lack of transparency exists on impact performance across the industry. More broadly, IMM is still seemingly focused on a “reporting and disclosure” mindset, which incentivizes investors to focus mostly on positive, measurable, standardized metrics—which may not tell the full story and, worse, promote an inaccurate one.

As the practice of IMM continues to grow, choices and trade-offs will need to be considered based on costs, approaches, and uses. The inherent limitations of each customized approach will remain; however, encouraging progress has been made on aligning various frameworks and standards. Early efforts are obtaining the benchmarked impact data that investors seek, such as GIIN’s recent surveys in clean-energy access and housing.55 A strong interest exists for integrating beneficiary and user perspectives and finding an appropriate balance of numbers and narrative. Investors are testing integrated approaches that combine financial and impact data in an effort to understand the relationships between them and report them more efficiently.

A general rule of thumb to remember: The more sophisticated the measurement approach, the more resources will be required. At the same time, you would not just spend additional money to get a more precise evaluation without considering if and how it would influence your decision-making. One pertinent example is the allure of randomized control trials (RCTs) that have been promoted as a “gold standard” for measurement. In reality, they are well suited to provide specific answers to narrow questions and not necessarily applicable to other contexts. Given the significant investment of time and money they require, alternative approaches may be a better fit. Regardless of the approaches you use or test, it is important to describe your views on why, what, and how to measure.

Now What

Now What: Implementation and Best Practices

Organizing Frameworks for Impact Investing

The preceding chapters and each resulting exercise have prepared you to develop your implementation plan and act. The time has come for you to start building your impact portfolio. Although impact investors often consider themselves one of a kind, common organizing frameworks can help shape an implementation plan. Your organizing framework for impact investing will depend on what type of asset owner you are. If you are an individual or a family, your operating model will reflect that you are investing your own assets. Those who are responsible for investing the assets of institutions, such as foundations and endowments, will have a different model that addresses their role as fiduciaries of assets rather than direct owners.

In this chapter, we will share ideas and best practices for a range of frameworks. Exhibit 6-1 shows an example of a plan for philanthropy, applying Peter Drucker’s “The Theory of the Business” to the foundation context. This framework may be useful to impact investors as they build out their implementation plans. We will also provide a more detailed overview of legal issues relevant to institutional philanthropy and other fiduciaries. But regardless of your structure, having an operating model that fits your needs will make your implementation plan more effective, provide concrete steps for you to take, and set you up for success.

The Philanthropy Framework aims to help foundations examine how they make decisions, interact with society, and marshal resources and capabilities. This tool, which includes the concepts of charter, social compact, and operating model, can be used as a guide to help foundations align all of their resources for maximum impact. The charter, shaped by a founder’s vision, defines a foundation’s intended scope, culture, and values. The social compact refers to the foundation’s implicit or explicit agreement with stakeholders about the value it creates in society, defined in part by to whom the foundation is accountable and how independent or interconnected it is with other institutions. The operating model includes the resources, structures, and systems that enable a foundation to deliver on its goals. This includes how it carries out its funding and decision-making, what resources it uses to execute its work, and the way it functions internally and with grantees or partners.

When foundations are internally aligned on their framework and able to articulate their values, culture, approach, and ecosystem of stakeholders, they are able to better fulfill their mission and goals.

Investor Readiness 

We encourage you to reflect on whether you have the necessary building blocks for a successful implementation plan. “Investor readiness” denotes the extent to which an asset owner has the core components in place to build an impact portfolio. To be clear, each component will always be a work in progress, needing to be refined by iteration. The key is to develop a baseline of competency in each category. Exhibit 6-2 shows how the Surdna Foundation went through a nine-month process to learn, explore approaches, and finally recommend next steps in its impact investing journey.

Categories of investor readiness include:

  • Clearly defined implementation goals and strategies, including a relevant timeline;
  • Consensus with key stakeholders, such as family, board, staff, and others;
  • Relevant experience and expertise, internally from staff or externally from advisors;
  • Organizational momentum and capacity, such as processes and systems; and
  • Intentional approach to building the portfolio and finding investment opportunities.

Implementation Goals

Similar to your impact and investment goals described in the “Why” chapter, take a moment to set a target for success in implementation. For example, if your organization is new to impact investing and you have a skeptical board or family members, perhaps the goal is to achieve incremental early successes. For another investor, it may be to test internal expertise alongside a consultant in order to gauge the need for future team resources. Other asset owners may want to simply start screening their existing portfolios.

To begin this process, we suggest you first review any strategic or governing documents that might influence your implementation process. You can also review and incorporate the documents you have developed through the exercises in the previous chapters. Governing documents specifically for impact investing would include an investment policy statement, an impact investment statement, and any other board-approved statement or policy to address roles and responsibilities for your organization’s investing function.

Consensus Building

Unless you are acting alone, impact investing can be as much about organizational change or interpersonal dynamics as it is about investment. Beginning with the stakeholder and power map you created in the “Who” chapter, determine the highest-priority stakeholders and their opinion of impact investing as well as any worst-case scenarios. For example, investment committee members may be more likely to think about added risk or lower returns. Impact-oriented stakeholders, on the other hand, may be more concerned about unintended consequences or dilution of impact. Varying views on cost structures and the relative merit of different investment approaches will be likely.

With your priorities in mind, approach each group or individual with a collaborative tone in order to listen to their points of view. In other words, do not start with a hard sell. From that initial interaction, develop an engagement plan for each person or group—keeping them updated along the way. Strategies to keep in mind:

  1. Tailor your approach and language to your audience and meet them where they are, looking for easy
  2. Root your engagement in your goals, and show how impact investing is one of many tools to achieve those
  3. Leverage advocates, partners, stories, and data to support your
  4. Consider how to merge the often-separated finance and impact considerations, aligning impact goals with financial
  5. Use an exploration of your existing investments to trigger a conversation with your other stakeholders about what you This can establish a common knowledge base without any incremental cost or risk.
  6. Start from a place of strength: Consider a loan to an existing organization that you know well or look at an environmental, social, and governance (ESG) screen for the next investment in an already familiar sector or asset

As you begin building consensus, recognize that this will be an ongoing process of informing, educating, and responding to key stakeholders. This is also true for seasoned impact investors. The Michael & Susan Dell Foundation (MSDF), for example, has been a leading impact investor in India for more than ten years. In recent efforts to apply this tool to its U.S. education work, MSDF has taken thoughtful education and communication from program officers and impact investing staff to begin implementation. In Exhibit 6-3, we share The Nathan Cummings Foundation’s journey of investor readiness on its way to committing its entire endowment to impact investing.

Finding and Evaluating External Support

As part of a buy-versus-build analysis, asset owners can assess when they will build internal resources and when they will buy external support. External advisors may bring specific expertise in areas including tax and accounting, legal and investment management, or support to your organization as you explore a new area such as impact investing.

As described in the “Who” chapter, an investment advisor is an intermediary that sits between you and the investments you are making. Understanding the nature of this relationship is critical to your success. An investment firm has “discretion” if it has the authority to decide which securities to purchase and sell for the client. A firm also has discretionary authority if it has the authority to decide which investment managers to retain on behalf of the client.

Here are a few guiding principles for choosing an appropriate investment advisor for you:

  • Do they have expertise at the intersection of your impact and investment goals? And do they have specific examples of their experience and the role they played in desired strategies and investments?
  • Do they have credentials to satisfy the work requirement and satisfy your key stakeholders?
  • Do they have experience working with organizations and governance structures like yours? For example, do they operate on a discretionary or nondiscretionary basis?
  • Can they speak your language and help you reach your specific goals? Do they exhibit values alignment with you on how they operate as an organization?
  • Are they able to measure impact in line with your goals?
  • What are their business strengths and weaknesses: customer service, reporting capabilities, customization, fees, etc.?

Investment Advisor Search Process

When searching for an investment advisor, it is critical to have a clear understanding of your goals and objectives. By being certain about what you want to achieve, you can better target your search for an impact investment advisor who will work best for you. Some advisors specialize in impact investing while it is ancillary to a broader investment practice for others. In order to prioritize potential candidates, you should understand all of the services you will need from an advisor. Once you have developed your key selection criteria, you may want to have preliminary screening conversations with candidate firms and then send out a more detailed request for proposals (RFP) to a few select firms. In-person interviews are the final step in the process. You may consider hiring a search consultant, who can work with you, your board, and your investment committee on this process. Exhibit 6-4 outlines the Jessie Smith Noyes Foundation’s advisor search, emphasizing the advisor’s understanding of social justice.

While formal consulting helps bring focused attention to your specific needs, many investors supplement this support with key peer relationships—another asset owner on a similar path, who can support you along the way. To find these peers, we recommend joining an aligned affiliate group or attending relevant conferences, including the Asian Venture Philanthropy Network, Confluence Philanthropy, European Venture Philanthropy Association (EVPA), Global Impact Investing Network (GIIN), Global Steering Group for Impact Investing (GSG), The ImPact, Mission Investors Exchange, Principles for Responsible Investment (PRI), Skoll World Forum, Social Capital Markets (SOCAP), and Toniic.

Whole Team Approach

Both financial and impact expertise are needed to implement thoughtful impact investing. However, most asset owners have established two operational silos for investment and impact functions. In institutions, this divide may be reflected in separate departments and staffing, while individuals and families may be working with separate external advisors who are not coordinated. When these two approaches are merged into one—even in a subset of assets—pressure will be put on the traditional organizational design. This may trigger the need for additional talent and integration related to interactions, communications, processes, and systems. While such a change may seem daunting, remember it is possible to take one step at a time and only make changes specific to your desired approach. For example, if you plan to consider loans, invite one credit analyst from the investment team to sit on your impact due diligence committee. See how that goes and iterate.

Building a Team

As you recall from the “Who” chapter, investment is a nuanced, broad field. Social impact and philanthropy are also nuanced, broad fields. Selecting expertise at the intersection of these fields can be complex. To take your first steps, think of supply and demand. What supply of existing talent do you have that matches the demand of the strategies resulting from your theory of change. When considering talent resources, pay attention to key quasi- staff roles like your board, investment committee, and existing advisors/consultants.

Again, start slowly with your goal in mind and assess gaps as they develop. If screening public equities for ESG factors, do your analysts/advisors have a good grasp of the different screening options and approaches? As you find gaps in experience or expertise, first consider a consultant or advisor then begin to build or reshape your team to ensure it has the necessary skills. As the field of impact investing matures, an increasing pool of talent with the appropriate mix of investment, policy, and philanthropic experience exists.

In addition to staff and consultants or advisors, one compelling option is an investment- advisory committee, a group of experts who share their knowledge about the investment process and are committed to your mission. The group is often made up of both internal and external parties with an understanding of your organization and/or the issues and structures of the impact investing strategy. See Exhibit 6-5 for how the Catalyst Fund has used an advisory board to execute its strategy.

Roles and Responsibilities

When developing a team, be clear about roles and responsibilities, since impact experts can step on the toes of finance experts and vice versa. A few questions to ask are:

  • How deeply does each party need/want to engage?
  • If there is more than one team or person, how is the due-diligence process being shared?
  • What is the right frequency of meetings between investment-oriented and impact- oriented team members?
  • How can more intentional communication be encouraged between investment and impact personnel?
  • How do roles change from strategy through individual investment selection?
  • How do roles change throughout the investment process from sourcing to due diligence, selection, monitoring, and exit?

While determining roles and responsibilities, be mindful of the overall culture change that will likely need to take place across your organization.

Investment Decision-making

An effective investment policy statement ensures that the roles and responsibilities of all parties are not only clearly defined, but also appropriately delegated to the investment committee, staff, investment advisors, and asset managers. These roles and responsibilities will vary depending on your governance structure and operating model. But regardless of where specific responsibilities are located in your organization (see Exhibit 6-6), you should consider the following questions:

  • Who has the responsibility to vote on/approve issues, such as asset allocation or hiring an asset manager?
  • Who provides advice or formal recommendations?
  • Who reviews and provides oversight on the decision?
  • Who implements the decision?
  • Who is notified as an interested party?

Processes and Systems

In a way similar to how you assessed your team resources, consider the processes and systems that need to be created or changed to implement an impact investing strategy.

Categories of procedural changes within foundations include:

  • Governance: Board and investment committee review, sign off, and reporting for impact investments;
  • Legal: Professional review of any new impact investments and related documentation, particularly relevant for direct investing;
  • Administration: Grants personnel executing expenditure responsibility for any charitable investment, including relevant reporting;
  • Accounting: Finance teams tracking repayments and accounting for impact investments on financial statements and tax returns, such as Form 990-PF; and
  • Reporting: Combined impact and financial metrics and reporting process to key internal and external

Categories of changes in organizational systems may include:

  • Grants management or portfolio management software to track investments;
  • Customer-relationship management (CRM) system;
  • Project-management system; and
  • Document-management

Other asset owners, such as family offices, high net–worth individuals, and institutions, will have their own ways of addressing these changes in procedures and systems.

Legal Considerations

Three broad categories of legal considerations exist for impact investing: fiduciary, charitable, and securities law. We will focus on the first two, since most securities-law considerations are not unique to impact investing. These legal considerations are most directly applicable to charitable organizations and private foundations, in particular, and build on Exhibit 2-2 in the “Who” chapter. Please keep in mind that we are presenting certain general and high-level legal considerations—not legal advice or opinion—for impact investing.

Although we will present detailed reflections on a range of legal issues, our key message is this: Impact investing does not conflict with the duties, rules, and responsibilities assigned to asset owners. In fact, for mission-driven organizations, impact investing can increase the ability to achieve their purpose.

Fiduciary Duty Satisfied

A fiduciary, in the investment context, is a person or an organization that acts on behalf of another entity/person to manage assets or those individuals who oversee the management of the institution’s charitable assets. Essentially, a fiduciary owes the charitable institution the duties of good faith and trust. A fiduciary is bound ethically to act in the institution’s best interests—it is the highest legal duty of one party to another.

A fiduciary’s responsibilities or duties are both ethical and legal. When a party knowingly accepts the fiduciary duty on behalf of another party, that party is required to act with reasonable prudence and care and in the best interest of the institution whose assets the fiduciary is managing. This is known as a “prudent person standard of care.”

The prudent-investment rule requires that a fiduciary invest institutional assets as if they were the fiduciary’s own. Under this rule, the fiduciary should consider the needs of the institution and avoid investments that are excessively risky or inappropriate.

Fiduciaries of charitable institutions have three basic responsibilities.

Duty of Care: Perform duties in good faith and with the care that an ordinarily prudent person would exercise in a similar position under similar circumstances. Be diligent and informed, and exercise honest and unbiased business judgment when making decisions on behalf of the charity.

Duty of Loyalty: Make decisions for the benefit of the charity with undivided commitment to the charity and without regard to personal concern. Relevant issues include conflicts of interest, confidentiality, and corporate opportunity, such as diverting a corporate business opportunity for personal gain.

Duty of Obedience: Act with fidelity to the charity’s mission; its governing rules, documents, and policies; the duly adopted acts of the board and applicable laws; and avoid any acts beyond your legal authority.

Charitable Purpose and Impact Considerations

The exempt purposes set forth in Internal Revenue Code section 501(c)(3) are charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and the prevention of cruelty to children or animals. The term charitable is used in its generally accepted legal sense and includes relief of the poor, the distressed, or the underprivileged; advancement of religion; advancement of education or science; erection or maintenance of public buildings, monuments, or works; lessening the burdens of government; lessening neighborhood tensions; eliminating prejudice and discrimination; defending human and civil rights secured by law; protecting and preserving the natural environment; and combating community deterioration and juvenile delinquency.

The Uniform Prudent Management of Institutional Funds Act (UPMIFA) provides guidance and authority to charitable organizations concerning the management and investment of their institutional funds, among other things. UPMIFA describes the factors that a charity should consider when making investment decisions, including a modern prudence standard.

It also requires a charity—and those who manage and invest its funds—to act in good faith, with the care an ordinarily prudent person would exercise, and in general develop an appropriate investment strategy.

Under UPMIFA, a charity is required to make decisions about each asset in the context of the entire portfolio of investments, as part of an overall investment strategy. This means that an asset, which in isolation might seem imprudent for a charitable organization to hold because of its risk profile, may nevertheless be retained by the charity if it fits into a diversified portfolio comprised of various asset classes. Indeed, another general UPMIFA investment directive is to diversify investments.

UPMIFA allows for mission considerations when assessing fiduciary duty and carves out investment assets that have a primary program or mission purpose, as opposed to an investment purpose from the traditional investment-prudence analysis. In addition, as an element of its prudence analysis, UPMIFA invokes the consideration of “an asset’s special relationship or special value, if any, to the charitable purposes of the institution.”

Prudence and Charitability to Satisfy Fiduciary Duty

Taking these considerations together, the following continuum chart (Exhibit 6-8) shows how the blending of prudence and impact (or mission alignment) inform fiduciary duty. On the far left, you have pure financial prudence as with traditional investing. As you move to the right, less financial prudence and more impact are exhibited. Here, both the financial issues and the special relationship of an investment to the charitable mission/purposes of the institution are considered. As you move further to the right, you demonstrate more and more impact prudence, which applies UPMIFA’s mission considerations and blends in prudence from an impact perspective such as whether sufficient relatedness to an institution’s exempt purposes warrants engaging in the activity. To be sure, if an investment is not adequately prudent from a mission or impact perspective, the investment should not be made.

To simplify the key point, a private foundation considers an investment in the middle of this spectrum—the prudence of which is determined by a mix of investment prudence (say 70%) and impact prudence (say 30%). Though it may be riskier or have a lower expected return than a comparable investment with no impact component, the foundation believes that it is still a prudent investment and fiduciary duty is satisfied if the investment has the sufficient alignment with the foundation’s mission to offset the lower expected return than a pure financial investment. In other words, the investment combines 70% investment prudence with 30% impact prudence, leading to 100% fiduciary duty satisfied.

The following section continues to focus on private foundations yet has analogous considerations for other charitable organizations. For example, although public charities are not subject to the PRI rules, many now seek to make PRI-like investments. While PRIs provide no additional benefit to noncharitable institutions, other organizations such as endowments are choosing to use PRI-like instruments as part of their investment practice.

As a reminder from the “How” chapter, an important structural distinction for private foundations is the difference between a program-related investment (PRI) and a mission- related investment (MRI). A PRI is a specific and statutorily defined type of charitable investment—treated like a grant for many regulatory purposes, including qualifying toward a foundation’s 5% minimum distribution requirement—that arises in the context of the general prohibition on jeopardizing investments under Section 4944 of the Internal Revenue Code. Section 4944(c) and the Treasury Regulations articulate a three-part test for an investment to qualify as a PRI: (1) The primary purpose of the investment is to accomplish one or more charitable purposes; (2) no significant purpose of the investment is the production of income or the appreciation of property; and (3) no purpose of the investment is to lobby or engage in political campaign intervention. In contrast, an MRI is not a legal term but describes an investment that integrates mission alignment into the investment decision-making process. These investments are a component of the foundation’s overall endowment and investment strategy and must comply with the state and federal prudence requirements applicable to a foundation’s investing activities. They are unique in that the degree of mission alignment becomes an essential factor in the prudence analysis, in some cases allowing for a lower financial-return objective than for a non–mission aligned endowment investment. See Exhibit 6-9 for how to test an investment for prudence and fiduciary duty.

Jeopardizing Investment Rule Section 4944 of the Internal Revenue Code

Jeopardizing investments are generally investments by private foundations that show a lack of reasonable business care and prudence in providing for the long- and short-term financial needs of the foundation in carrying out its exempt function. No single factor determines a jeopardizing investment, but certain investments bring extra scrutiny. An excise tax will be imposed on any jeopardizing investments. This rule imposes a federal- level prudence requirement on the investment activities of private foundations. The IRS recently harmonized the application of the jeopardizing-investment rules with the state-level prudence analysis, acknowledging that, in essence, if you satisfy prudency on the state level, you satisfy it federally.

Other Legal Considerations

Related to and beyond the key consideration of fiduciary duty, the following section describes additional legal elements to keep in mind.

Expenditure Responsibility

Expenditure responsibility64 relates to certain heightened grantmaking and reporting procedures required in connection with any grant to or PRI in an entity that is not a Section 501(c)(3) public charity (or foreign equivalent), governmental entity, or a designated international organization. Failure to exercise expenditure responsibility when required will result in excise taxes.

Expenditure responsibility means that the foundation exerts all reasonable efforts and establishes adequate procedures to:

  1. See that the grant is spent only for the purpose for which it is made,
  2. Obtain full and complete reports from the grantee organization on how the funds are spent, and
  3. Make full and detailed reports on the expenditures to the IRS.


The self-dealing rules65 prohibit almost all business and financial transactions between a private foundation and its “disqualified persons”—a broad category of foundation insiders that includes substantial contributors to the foundation, its trustees and managers, certain family members and businesses owned by disqualified persons, and certain government officials. It also includes transactions where the income or assets of the private foundation are used to benefit a disqualified person.

Beyond the important grantmaking considerations for any foundation, self-dealing becomes particularly relevant for impact investing activity related to coinvestment. For example, if a disqualified person’s investment in Company A benefits from the foundation’s investment in the same company, self-dealing may be triggered. The IRS imposes an excise tax on each act of self-dealing between a private foundation and disqualified persons.

Intermediate Sanctions: Excess Benefit Transactions

Under the so-called intermediate-sanctions rules67 applicable to Section 501(c)(3) public charities and Section 501(c)(4) social-welfare organizations, an excess-benefit transaction is a transaction in which an economic benefit is provided by an applicable tax-exempt organization, directly or indirectly, to or for the use of a disqualified person—and the value of the economic benefit provided by the organization exceeds the value of the consideration received by the organization.

The excess benefit rules are the public charity analog to self-dealing and allow for arms- length transactions, which are generally not permitted in the private foundation context.

Tax and Accounting Considerations for Program-Related Investments

As an IRS defined category, a PRI counts toward the 5% required charitable distribution in the year the PRI is disbursed. PRI principal repayments (not including capital gains, dividends, or interest) count as a “negative distribution” against payout requirements to be applied to the tax year in which the repayment is received. PRIs are also excluded from the foundation’s assets on which the 5% required distribution is calculated. Interest, dividends, and capital appreciation count as regular income to be included in the calculation of Excise Tax on Net Investment Income, and PRIs generally are not subject to the Unrelated Business Income Tax (UBIT) by being “substantially related” to a foundation’s exempt purposes. For details on how to report PRI income, appreciation, and asset value on the annually required tax form 990-PF, refer to the IRS’s Instructions for Form 990-PF68 and search “program- related investment.” To get a quick summary of a private foundation’s PRI activity, look for Part IX-B on the 990-PF.

Legal Process and Investment Lifecycle

Building on these legal and accounting considerations, best practices should be followed by different actors at different points in the investment process. Specific actors will have distinct tools, goals, and requirements—in some cases for the same investment. Overall, it is useful to ask the following sequence of questions as you consider impact investing opportunities:

  1. Can I do this?
  2. Should I do this?
  3. How do I do this?

Each stage of the investment lifecycle (Sourcing, Selection and Execution, Monitoring and Exit) can also bring up specific legal considerations.

  • Goal Setting: Be clear about your goals for this investment, including prudence and charitability, along with any themes or
  • Decision-making: During the initial phases, be clear about who will be making what decisions, including any investment-advisory committee and Be particularly mindful of any disqualified persons involved.
  • Write-up: A summary write-up is recommended to memorialize the analysis on how this investment meets the goals previously This is particularly important for PRIs or other investments prioritizing social impact.
  • Investment Execution: Be sure that these documents satisfy regulatory requirements for both prudence and Pay attention to securities law for this step.
  • Monitoring: Regular reporting should be aligned to the investment’s dual purpose as well as to the reporting requirements (for example, as a result of expenditure responsibility) for any charitable investment/PRI.
  • Exit Considerations: Think about exit on the front Assess the reason for exit, including “Successful,” “Unsuccessful,” or “Violative” (for example, in violation of investment terms), and be clear on the terms of exit.

Consider how these are placed along the investment process in Exhibit 6-10.

Coinvestment and Collaboration

Collaborating with other investors can bring a host of benefits from learning to expanding your influence to risk mitigation. As discussed in the “Who” chapter, given that impact investors are seeking to drive social and environmental change, along with the complexity of the systems impact investors are trying to shift, the role of partnering and collaboration is critical. Many impact strategies require collective action to be effective. See Exhibit 6-12 for the collaboration model between a community foundation and a family foundation in Texas. For your operating model, consider the role of peers and coinvestors. Approaches to coinvestment and collaboration include sharing due diligence, peer coaching, shared learning, and making the same investment at the same or different place on the capital stack.

Impact Investing Field Building Through Grantmaking 

Philanthropic grantmaking has an opportunity to continue to support and expand the field of impact investing. At a recent convening,69 impact investing leaders proposed the following areas of focus for philanthropists to support impact investing.

  • Narrative change, including common misconceptions (e.g., fiduciary duty);
  • Impact principles, frameworks, and standards (e.g., Sustainability Accounting Standards Board [SASB]);
  • Policy and regulation (e.g., S. Impact Investing Alliance and Opportunity Zones);
  • New corporate forms to emerging markets (e.g., benefit corporations);
  • Impact reporting (e.g., Impact Management Project);
  • Asset-owner training (e.g., practitioner cohorts);
  • Education and talent development (e.g., MBA faculty);
  • Support field data and research (e.g., ESG effect on returns, Catalytic Capital Consortium);
  • Map the field (e.g., Case Foundation);
  • Networks and convenings (e.g., Confluence Philanthropy, Mission Investor Exchange, Global Impact Investing Network);
  • Place-based ecosystems (e.g., community foundations);
  • Pre-investment pipeline (e.g., grants to for profits, Catalyst Fund); and
  • De-risk investments (e.g., technical assistance, loan guarantee bank).

If grantmaking is one of the tools you use to support impact investing, consider surveying existing efforts and joining where you find alignment with your goals and interests.

You should consider some well-established pooled funds. See Exhibit 6-13 for how the Woodcock Foundation combined the use of grants and PRIs to drive change in a sector they want to support and grow.

Building an Implementation Plan

Your action plan will depend on your context, priorities, and sequencing. That said, the following list contains key characteristics of a robust implementation plan. Consider these components to be sure your plan is adequately detailed, nuanced, and actionable.

Key components for an implementation plan include:

  • Clear goal and scope of the plan;
  • Overall roles for internal and external resources;
  • Activities in sequence;
  • Activity roles, g. RACI (Responsible, Accountable, Consulted, Informed) framework;
  • Timeline with milestones or deliverables;
  • Budget and other resources required;
  • Risks, assumptions, and contingencies along the way;
  • Communication and stakeholder-management strategy; and
  • Change-management plan (e.g., organizational culture change).

Now that you have the components of an implementation plan, we invite you to draft your plan. Though it may seem overwhelming for some, remember to take one activity at a time and build from one to the next. This will be an iterative journey with successes and challenges along the way.


All Investments have impact—both positive and negative.

Impact investments are made with the intention to generate positive, measurable social, and environmental impact alongside a financial return.

This handbook is meant to inspire you to reimagine and redefine your relationship with your assets, while encouraging you to consider how your investments affect our world. Disruption and change are coming to investing. Impact investing requires organizational change and planning to make it happen. We hope that this handbook provides you with the tools and strategy you need to help you become an engaged asset owner who can be accountable for your assets.

Over the last decade, many investors who in the past dedicated just a portion of their assets to intentional, positive impact have now moved to 100% mission alignment. With expanding data, transparency, and measurement tools, you can now advance your impact investments and refine your approaches in a way that was unimaginable a few years ago. Investors are redefining themselves as stewards who are accountable for how their assets are in the world. Investing is shifting from extraction to accountability.

As the complexities of the challenges facing the world deepen each day, the need to
apply impact to investing increases in urgency. Even prior to the current pandemic and its resulting economic dislocations, this decade was set to underscore the necessity to work together to address the climate emergency, inequality across the world, and the fragility of the environmental and social systems that sustain us.
This is a tall order for all investors.

To guide you through this journey, this handbook lays out a framework that translates these high aspirations into concrete action.

We live and invest in complex systems. Markets do not exist independently but are grounded in a social and environmental context. Using intention, measurement, and contribution, investors have the ability to step up to their role as system changers while working with policy and philanthropy when it is needed. Interconnection and collaboration will be key as traditional business models and investment approaches face increased stress.

In order to successfully create impact, investors will need to navigate a network of relationships that are part of the investment process. Understand where you sit in the impact capital chain and how you can drive change through it. Pick your advisors and managers with consideration of how they can help you achieve your intended impact goals. The intermediaries, who are the bridges between your assets and impact creation, can also be barriers. Remember, power matters; not just financial capital.

Your theory of change anchors your impact investing strategy. This is an essential element of impact investing. By identifying your impact goals, you can focus on the approach you want to pursue, be it engaged ownership or systems change. Once your broad impact goals are established, you can translate these into a clear theory of change that will inform how you frame, measure, and manage the impact of your investments. Whether you are seeking broad alignment of your assets and your values or are focused on a specific theme, establishing a clear theory of change is critical for your success.

The construction of your portfolio will reflect the impact tools and structures you select. You can focus on the impact tools and impact structures available to express your theory of change. Impact tools are actions, such as screening, shareholder engagement, ESG integration, thematic investment, catalytic concessionary capital, and setting a time horizon. Impact structures are the investor, intermediary, and enterprise vehicles you can select to optimize impact. Transaction structures, such as pay for success—and covenants—can also drive specific outcomes. Given the increasing range of impact products in the market, knowing your goals will help you select the appropriate impact tools and products.

Through impact measurement and management, you are developing a framework to measure the success of your impact investing portfolio over time—and how you might use this information for future decisions. This is directly tied to your theory of change and the investment products. It is important to ask Why, What, and How of your impact measurement and management framework.

Finally, remember to keep trying and learning as you move forward. We hope you will share your successes and challenges with us as we take this handbook and share it through other forms, such as digital and through trainings. Please send us your comments and questions, and let us know what worked for you.