The ABCD of Impact Fund Due Diligence

By Mohit Saini

The global impact investing market is rapidly expanding, with a projected market of over USD 4.5 trillion by 2030. This growth, however, is accompanied by three key challenges. First is the concern around Impact (SDG/SFDR/ESG/Green) washing among capital allocators. The second problem revolves around the limited adoption of best practices for establishing robust impact processes and publishing comprehensive impact performance reports. The third challenge lies in the absence of a composite score and peer benchmarking at the fund level.

In this blog, we explore the fundamentals of impact fund due diligence (DD), offering insights into our proprietary Impact Fund Assessment (IFA) service. Phenix has designed this offering to empower the impact investing community to address the challenges outlined above, ultimately aiming to enhance the integrity and accountability of the market.

Whether you are a fund manager seeking to assess the robustness of your fund's impact proposition and benchmark its performance against peers, an ESG or sustainability-focused manager preparing to launch your inaugural impact fund, or an institutional investor seeking guidance in conducting impact DD on a prospective fund, this blog is tailored for you!

A Glimpse into Phenix’s Impact DD Framework and Rubric

The first edition of our proprietary framework was developed in 2018 in consultation with a diverse group of institutional investors and industry experts. The framework, aligned with leading market frameworks, standards, tools, and regulations, spans six dimensions. These dimensions form the foundation for our rubric, which comprises 45 criteria for a comprehensive assessment of funds.

The rubric takes into account both pre- and post-deployment considerations. As a result, the IFA service is tailored to meet the diverse needs of institutional investors and fund managers throughout investment lifecycles, diverse sectors, and asset classes. Since the launch of IFA, we have evaluated 46 funds.

Our DD process involves a thorough review of documents, discussions with the fund manager, and rigorous internal deliberations. This five-phase process to conducting impact DD on a fund is summarised in Exhibit 1.

Exhibit 2 below provides an overview of our proprietary impact due diligence framework, consisting of 45 criteria organised into six dimensions. These criteria are assessed at the fund, investee, or manager levels based on their relevance.

Our rubric allows us to provide a three-tiered scoring and rating. This includes:

• Individual scores across 45 criteria using a 3-point (0-1-2 scale). A score of 2 indicates a robust alignment with our rubric guidance, indicating minimal areas for improvement. Conversely, a score of 0 signifies the fund’s poor alignment with our rubric, indicating a need for significant improvement to align with best practices. This detailed assessment offers a comprehensive understanding of the fund's performance across specific criteria.
• Aggregate scores and ratings across the six dimensions, highlighting the fund's strengths and areas for improvement within each dimension.
• A composite score at the fund level, providing an overview of the fund's overall impact robustness.

The Phenix Advantage

Both institutional investors and fund managers derive multiple benefits from our Impact DD offering.

First, this unique offering allows us to provide a composite score at the fund level —a feature highly valued by our clients. Moreover, our offering assesses the fund's alignment with established industry standards and best practices for both impact practice and performance reporting, thereby enhancing the significance of the composite score.

Second, our assessment includes detailed ratings across the six dimensions and benchmark comparisons against peer funds. For repeat assessments, we also include Year-over-Year ratings to highlight progress. The exhibit below visually illustrates the outcome of a fund's assessment.

Third, we provide a comprehensive report with actionable recommendations and guidance to help fund managers strengthen their alignment with industry best practices. This guidance is continuously updated based on the latest leading IMM practices extracted from the Impact Fund Database. The database includes over 2,600 impact funds and over 1,000 asset managers, collectively committing over USD 640 billion as of December 2023.

Keeping Pace with Market Developments

The impact investing landscape is undergoing dynamic regulatory and market developments, particularly in the European and U.S. regions. For example, Impact Frontiers has recently released the draft of Impact Performance Reporting Norms to help investors mitigate risks associated with impact washing and cherry-picking.

We remain at the forefront of the latest trends in the impact investing market through active participation in panel discussions and convenings, as well as interactions with over 100 fund managers every month. The insights gained through these exchanges as well as our impact advisory offerings are incorporated into our rubric and recommendations on a timely basis. This way, we ensure that we are continuously refining our offerings to align with the evolving needs of the impact investing community.

Access the template of our IFA report here.