Frequently Asked Questions
About Impact-First Investments
All impact investments seek to achieve positive social and/or environmental impact. The question is how important the impact is to the investor relative to the expected financial return. Some weigh them equally, while others prioritize one over the other.
An impact investment is described as “impact-first” if the investor’s top priority is achieving impact, even if that means accepting a below-market financial return. In our model, all investments that prioritize financial returns are treated the same.
You can read more about what makes impact-first investments unique in How IFIs Work.
“Philanthropic capital” is the term we’re using to describe money put aside for charitable purposes. This includes money directly allocated for social causes—such as grants and donations—as well as “impact-agnostic” financial investments meant to grow the asset base for future giving, such as money in donor-advised funds (DAFs) and foundation endowments. Your philanthropic capital is the combination of all of these funds, across platforms, that are ultimately intended for philanthropic giving.
You can find definitions of all the key terms used in the IFI Tool in the Glossary.
There are many types of impact-first investments (IFIs) and they generate different types of impact value creation. Below are some of the most common examples. You can also find more detailed breakdowns in IFIs in Action.
- Redeployment: The redeployment (or recycling) of capital through repayments and interest is a defining characteristic of IFIs. It can significantly extend impact. For instance, loan funds that deploy capital to underserved students at below-market interest rates can ultimately reach many more students than one-time grants. The repaid loan funding from the initial cohort of students is recycled back into the fund to serve more cohorts of students on an ongoing basis without infusing more capital—whereas a grant can only fund one cohort unless more grant funding is added.
- Note that the redeployment effect is built into the model for the IFI Tool, whereas the other forms of impact value creation should be factored into the user-selected “Impact Relative to Philanthropic Giving” variable.
- Social multiplier: In many cases, the expected financial returns of an impact-first investment are below-market rates, but the expected social impact is significantly greater than the financial value captured. An example here is an early-stage venture fund focused on public health interventions. Limited seed investments can be critical to the launch of an impact startup that ultimately generates transformative, outsized results on health outcomes—one whose total value to society significantly outweighs any financial profit the venture generates.
- Financial incentives: Impact-first investments may create stronger financial incentives than grants. A loan, for example, encourages the borrower to achieve sufficient financial success to repay it. It also incentivizes the investor to monitor and support the borrower. For instance, a below-market interest loan fund to an early-stage nonprofit can incentivize the organization to build a sustainable, revenue-generating model—leading to a more stable and lasting impact than might be achieved with grant funding alone.
- Social incentives and alignment: Compared to market-rate investments, impact-first investments can foster stronger social incentives and alignment. For example, impact-first private equity or venture capital funds—ways of providing direct investments in social impact-driven businesses—allow like-minded investors to support companies in balancing financial performance with social goals. This alignment can influence follow-on investments and support mission-preserving exits.
- Catalytic structure: Impact-first investments can be catalytic in their structure, attracting additional capital into a project or fund. For example, an investor taking a junior position—such as subordinated debt, equity, or a guarantee—can attract more traditional capital in senior positions. This structure amplifies the total capital invested in the initiative. Unlike a grant, an investment provides returns and aligns incentives: the impact-first investor is motivated to select and monitor projects for financial performance, benefiting senior investors while supporting the project’s impact goals. An example is the SDG Loan Fund, where FMO Investment Management and the MacArthur Foundation collectively pledged $136 million in “first-loss capital” that catalyzed the closing of a $1.1 billion fund from institutional investors.
- Catalytic for investees: Impact-first investments can catalyze follow-on capital directly into the specific project at hand. For instance, impact-first venture investments into early-stage impact startups can help attract traditional venture capital later on—once the venture has proven the ability to establish a fast-growing revenue model.
- Catalytic for category: Impact-first investments in a specific technology, geography, sector, or business model can de-risk and build infrastructure for that category, attracting future financial investment. For example, successful early investments in microfinance helped establish the category and drew in traditional capital over time.
- Catalytic for public investment: Demonstrating that a model can deliver impact while covering part of its costs can make it more appealing for government adoption, as it raises the social return on investment and reduces fiscal burden. Structuring philanthropic capital to mirror the desired public program—for instance, using a philanthropic loan fund to model government-subsidized community loans—can generate stronger evidence on costs and outcomes, building a clearer case for public or blended funding.
Impact is, by definition, the top priority of an impact-first investment strategy — so impact-first investors are typically willing to accept below-market financial returns in exchange for achieving it.
One key consideration is timing: Instead of quick financial gains or immediate impact, these investments often prioritize patient capital, allowing their investees time to grow and create lasting change. Financial returns may be slower or smaller, but the long-term impact is the primary goal.
About the IFI Tool
No. The IFI Tool is designed to explore the relative impact of different types of funding over time. To make these comparisons, we use an “impact unit” framework that we explain more fully in the Methodology.
Keep in mind that the IFI Tool’s purpose is not to recommend specific portfolio allocations, but to help demonstrate why impact-first investments may be an attractive strategy—one that you can then research more fully in the context of your specific philanthropic objectives.
We know that this is not an easy question to answer: not all problems have investible solutions, and not all impacts look the same.
The IFI Tool acknowledges these tensions by focusing on portfolio-level analysis rather than head-to-head comparisons. The relevant question becomes: “given my portfolio as a whole, what is the relative impact of the dollars I allocate to impact-first investments versus grants?” Your input for this assumption allows the IFI Tool’s model to express all impacts in “grant-equivalent” dollars, which allows apples-to-apples comparisons between the impacts and financial returns of the base case (no IFIs) and the new case (inclusive of IFIs). We explain this framework more fully in the Methodology.
The IFI Tool allows you to explore a range of plausible values and observe how your results change in real time, highlighting which assumptions might be worth a closer look. We recommend starting by looking at some examples—you can find several in the IFIs in Action section—and experimenting with different inputs.
We do not currently provide that level of analysis. The “recycling effect”—the reinvestment of repayments from impact-first investments into future philanthropic grants or IFIs, thus generating a cycle of impact—is built into the model behind the IFI Tool.
For more on the model, read about the Methodology.
We do not currently provide this functionality because the IFI Tool is not designed as an optimization engine. Optimization attempts to tell you exactly what to do, which fails if viable opportunities don’t exist—in this case, if there are no impact-first investment opportunities that address a particular challenge.
Instead, we designed the IFI Tool as an if/then scenario exploration tool, building in the constraint that certain issues may offer fewer (or zero) investible solutions. In other words: if there are impact-first investment opportunities, then what is the effect of moving capital into those opportunities?
For more on the model behind the IFI Tool, read about the Methodology.
The first step is clarifying your impact priorities — whether centered around climate, education, housing, health, or another key issue — and defining your geographic and sector focus.
From there, you can seek out curated opportunities through established networks and intermediaries, starting with impact funds or managed portfolios to reduce complexity. Joining investor networks and working with experienced advisors ensures you build knowledge and connections while achieving meaningful impact — and without needing a full internal team.
While not an exhaustive list, here are some well-known advisers and intermediaries that can help you get started on the next step in your journey: