Are impact-first investments bad investments? Key considerations for advisors

As an advisor, your role is to protect and grow your clients’ capital. Naturally then, investments are most often assessed through the lens of risk-adjusted returns.

So, when a client brings forward an investment whose primary objective is to prioritize impact outcomes over financial return, it can feel like a quick “no” or outside an advisor’s purview.  

However, while impact-first investments may offer lower returns or exhibit higher risk, they should not be dismissed as bad investments. Impact-first investments are simply optimizing something different and thus require a slightly different lens to evaluate them responsibly.

To truly understand how impact-first investments fit in a client portfolio, advisors must think differently about conventional notions of risk and return.

The ask isn’t to suspend rigor — but to apply it appropriately.

What are impact-first investments?

Impact-first investments prioritize measurable social or environmental outcomes over maximizing financial return.

Impact-first often shows up under different labels, such as hyperlocal, place-based, program-related or catalytic investments. These are terms that are sometimes used interchangeably. While the language may vary, there is a common thread in intentionality: Impact comes first; financial return comes second.

For some clients, this intentionality is deeply aligned with how they think about stewarding their assets. Many values-oriented clients may already be using philanthropic capital to pursue similar outcomes: Impact-first investments can allow them to invest in ways that feel more integrated and intentional.

That said, not every impact-first investment is good investing either. But the evaluation needs to go beyond an advisor’s traditional frameworks.

Here are critical factors to consider when evaluating if your client’s impact-first investment is a good investment — balancing both fiduciary and impact integrity.

When concessions are the point: Assessing trade-offs

One of the fastest ways impact-first opportunities get dismissed is through the lens of concessionary return. But in impact-first strategies, concessions are often deliberate design features.

The important question isn’t simply whether there is a concession. It’s whether the tradeoff is clear, intentional and proportionate to the impact being created.

If there is financial concession or outsized risk, can you clearly articulate what impact is being created that would justify that tradeoff? How big is the delta between market rates or term length and what’s being offered? Does the impact generated justify the difference?

For instance, if a fund caps returns to investors, can you understand where the excess return goes? Do they flow to end beneficiaries like low-income renters? If a fund is a longer lock-up than the norm for its asset class, is its strategy contingent on patient capital to succeed? If a loan exhibits higher credit risk, does it unlock financing for borrowers excluded from conventional credit markets?

If the delta from market terms is modest and transparently tied to a defined outcome, that may be entirely consistent with a client’s goals. If the concession is vague or poorly justified, that’s a different story.

Advisors are already skilled at evaluating tradeoffs. Impact-first investing just asks you to widen the aperture of what’s being weighed.

Useful proxies in lieu of track record

It can be common for impact-first managers to lack the institutional track records that many market-rate strategies have spent decades building. These strategies often require new thinking from fresh managers operating in emerging markets or with proximity to populations that conventional capital has historically overlooked.

Absent formal track record, consider the team’s prior investment experience, their alignment of interests, their policies around decision making and controls and their history of working together or managing a similar structure. Supplement analysis with reference calls, additional market research and interviews with advisors or collaborators familiar with the manager’s history where traditional track record may not be available.

Often, these alternate approaches may yield similar results to traditional track record analysis for non-impact aligned managers. As with any other investment team diligence, the goal is to assess if this is the right team with the right set of skills to capture the opportunity and achieve your client’s goals.

Operational integrity still matters

Good impact-first investments don’t compromise on fundamental operational integrity. While impact-first investments may not yet be at a size or scale to parallel the operational capacity of a large institutional firm, even impact-first investments can and should uphold core operational safeguards. 

As an advisor, don’t compromise on basic safeguards. There should be no unaddressed flags in a background check, and managers should display adequate management of conflicts of interests and reporting discipline. Importantly, there should be no significant concerns about the financial sustainability of the investment or firm that, if actualized, could compromise mission outcomes.

There are many examples of impact-first vehicles, including highly rated Community Development Financial Institution, or CDFI, note programs. These operate with strong controls while offering lower yields than comparable fixed-income products. Impact orientation and operational rigor are not mutually exclusive. 

Expanding fiduciary discipline to impact-first opportunities

When a client brings you an impact-first investment opportunity, resist the reflex to immediately dismiss it as outside the bounds of prudent portfolio construction. Instead, bring the same rigor you’d apply to any investment — adapted for the unique characteristics of impact-first strategies.

An impact-first investment may merit consideration when:

1. Concessions are clearly justified by transparent, measurable impact outcomes aligned with your client’s goals.
2. The team demonstrates credible capability through relevant experience, sound governance and market validation, even if formal track record is limited.
3. Core operational standards are in place to steward capital and sustain the mission over time.
4. The strategy aligns with an impact-first mandate within your client’s broader investment plan.

By developing fluency in how to evaluate impact-first investments, you may be able to position yourself as an advisor who can navigate the full spectrum of your clients’ financial picture — from maximizing returns to maximizing purpose. In doing so, you’re not only managing assets, but helping clients deploy them in the ways that matter most.

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Jordana Pleat is managing director of impact-first investments at CapShift.

Advisors’ Corner is a content partnership between ImpactAlpha and CapShift. CapShift’s impact investing platform empowers financial and philanthropic institutions — and their clients — to invest in their vision for a better tomorrow. All content is solely for informational purposes and should not be used as the basis for investment decisions.