There are three key categories of due diligence for impact investments:
- Experiential due diligence
- Analytical due diligence, including commercial, financial, and legal due diligence
- Impact due diligence
Experiential due diligence
In terms of impact investing in private ventures, experiential due diligence takes the form of meeting with the company CEO and other key members of the team. It is a way of gathering data that is best collected through experiencing how the leadership team makes decisions, witnessing what they can achieve over time, and getting a sense of whether the leadership does what they say they are going to do.
Experiential due diligence is also conducted with CEOs of established companies in the case of impact investing in mature or public companies or asset managers in the case of fund of funds investing.
Analytical due diligence
Analytical due diligence encompasses analyzing and evaluating everything including risk, scenarios, financial, commercial (including market and customers, industry and competitors, and business model), and legal (including good standing, material contracts, and liabilities). McConnell Foundation, a private foundation in Canada that has been a leader in social finance, created a great guide of analytical tools for Impact Investing Due Diligence. Toniic, an international network of impact investors, also published their due diligence resources.
Impact due diligence
I’ve placed this under a different category because this is a part of the due diligence process that distinguishes impact investing from conventional, non-impact focused investing.
This may include evaluating where in the business model positive impact happens, who benefits, and what impact the opportunity has achieved or is predicted to be able to achieve.
Different firms may have different due diligence processes and frameworks to cover these different areas. For example,applies a decision-making framework called , which includes a toolkit that reminds investors the areas of analytical and impact due diligence that needs to be covered. Experiential due diligence is baked into our process and is where we begin – with several meetings with leadership teams before any other due diligence even commences.
Due diligence is often, but not always, split into two or more stages with a preliminary due diligence or screening stage, followed by a more detailed due diligence phase for those opportunities that look particularly interesting and could be a good fit for the investor.
Within larger firms, due diligence may be conducted by a team. The duties of collection, synthesis, analysis, and evaluation of information may be shared and carried out by several people.
Within smaller firms, due diligence may be carried out by one person, by a community of investors, or by volunteers.
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