Bold Idea: Akin to what a business plan is to financial return, the Impact Blueprint is to social return: it provides a roadmap of how the organization’s activities are expected to deliver the desired social and/or environmental impact by making use of certain inputs and resources.

How can early-stage impact investors better gauge social and environmental impact potential and mitigate impact risk? This has been a pressing question in the impact investing field and is precisely what Echoing Green, with support from the Rockefeller Foundation and a team of graduate students at Columbia University’s School of International and Public Affairs (SIPA), recently set out to research.

Echoing Green’s findings—stated in a report to be published later this summer—places a “theory of change,” or as the report terms it, an “Impact Blueprint,” at the center of an investor’s social and/or environmental due-diligence process. The report lays out how to build an Impact Blueprint and identifies seven elements—social mission, evidence, social entrepreneur, impact measurement, potential for disruptive innovation, potential for scale, and governance—that investors should probe in order to mitigate impact risk and increase the potential for an investment to achieve its social targets.

The research, conducted primarily by a team of graduate students at SIPA, drew on interviews with twenty-eight practitioners from the impact investing field including fund managers, social entrepreneurs, field builders, academics, accelerators, foundations, and development banks. Contributors included impact-first investors such as Acumen Fund and Root Capital as well as financial-first investors such as the Capricorn Investment Group and New Island Capital.

Motivation for the research came from what Echoing Green and the Rockefeller Foundation have identified as a capital gap between investors and early-stage social enterprises. This gap, they hypothesized, is in part due to misaligned expectations of social impact and existing models to assess risk. This led Echoing Green to question how investors and entrepreneurs, in the pre-investment stage, can better understand an enterprise’s impact potential and increase the chances of achieving their desired impact.

Theory of Change as an Impact Blueprint

Echoing Green views a theory of change, or as the report coins it, an Impact Blueprint, as essential in aligning investor and investee expectations around social impact and impact risk mitigation. An Impact Blueprint links an enterprise’s intentions, resources, and activities to defined and measurable outputs, outcomes, and impacts by understanding the causal relationships and assumptions embedded within the blueprint. Akin to what a business plan is to financial return, the Impact Blueprint is to social return: it provides a roadmap of how the organization’s activities are expected to deliver the desired social and/or environmental impact by making use of certain inputs and resources. Though the theory of change framework was born in the International Development field, it is not new to impact investing.

As proposed by the Nexii Platform, “a theory of change articulates the steps needed to achieve a company’s vision and mission. Particularly in the impact investing space, it serves as a strong framework for both testing and accountability, creating more transparency and line of sight in the impact due diligence process.”

Echoing Green believes this joint report adds to the discussion, however, by identifying criteria commonly assessed by practitioners in the due diligence phase and elaborating on how to use these criteria to test the assumptions of the enterprise’s theory of change. By assessing these criteria within the context of a theory of change, an investor can gain a better understanding of the investment’s impact risk.

Embedded within the Impact Blueprint are a set of assumptions that hold an “If…then…” (causal) chain of reasoning which investors need to assess. One can think of miscalculations in these assumptions as the “risk equivalent” for the impact return. The risk associated with the investor’s expected social return, or impact risk, is represented by the proportion of unsound assumptions in the entity’s Impact Blueprint.

Seven Elements for Mitigating Impact Risk and Increasing Impact Potential

Through the series of practitioner interviews, as well as an extensive literature review, the research team identified seven elements for mitigating impact risk: social mission, evidence, social entrepreneur, impact measurement, potential for disruptive innovation, potential for scale, and governance. While these elements are not a guarantee of success, nor are they the only relevant elements to assess for when screening social enterprises, strong consideration of these elements should increase the potential for successful implementation of an Impact Blueprint.

For each element the team identified a series of guiding questions along with descriptions, and indicators of success—all of which are described in the report. The document also includes challenges investors face in assessing each element and provides viewpoints from the practitioners the team interviewed.

Echoing Green is actively seeking practitioner feedback on the Impact Blueprint prior to the report’s official publication. A preliminary presentation of our work is available now for download.

Learn about existing research on assessing impact risk:

• All companies intending to issue shares on the Nexii platform are required to articulate a theory of change to facilitate the due diligence process. Nexii has also written a number of blog posts on the subject.
• Big Society Capital incorporates a theory of change framework in their investment approach.
• Investing for Good’s The Good Investor project explains how to integrate a theory of change into an overall impact plan.
• The 2012 Rockefeller Foundation report, Accelerating Impact, described the importance of a theory of change in understating impact potential. 

About the authors

[Updated 9/18/2013] Dennis Price and Rodulfo Prieto, two members of the research team, authored this blog post. Mr. Price and Mr. Prieto recently graduated from SIPA and are founding members of 118 Capital (www.118capital.org), a nonprofit impact investing organization. The research team also included Beth deBeer, Konstantin Mehl, Gopi Shah, and Akshay Verma.