The distinction between impact investing and impact-first investing

“Impact investing” as a category has grown significantly in recent decades and is currently estimated at $1.57 trillion, but despite these growth numbers there is a gap in a specific type of impact investing: impact-first investing.

It is important to distinguish between finance-first impact investing (or market-rate impact investing) and impact-first investing. In the case of finance-first impact investing, investors seek to allocate capital to ventures and projects that make an impact while still ensuring risk-adjusted market-rate returns; indeed, 74 percent of impact investors state that they target market-rate returns. This type of investing has grown significantly, driven in large part by private equity firms seeking out companies that have a more intentional focus on societal and environmental impact. While this concept—shifting a portfolio toward more impactful investments where possible while still maintaining the same returns—has an important role, it excludes a huge array of critical projects that have below-market risk-adjusted expected returns, in some cases because of their unproven models and in others because their specific impact goals preclude higher returns.

Most impact investing falls into the broader category of market-rate investing; impact-first investing prioritizes social or environmental impact, expecting a risk-adjusted below-market-rate return. That said, impact-first investing differs from philanthropic giving—which is donating money for charitable purposes without expectation of repayment or financial return; the funds are deployed once and not recovered, generating what is effectively a negative 100% return. Impact-first investments may at times generate significant returns, but investors take on a higher level of risk in pursuit of impact objectives—especially as they often deploy capital to initiatives that are unable to attract traditional investors.

IFIs are critical because there are increasingly innovative and sustainable market-based solutions that generate some level of financial return—just not market-rate returns. Because of the limited adoption of impact-first investing, these solutions are frequently misunderstood by both philanthropists and investors—even impact investors.

Potential to drive substantially more impact through IFIs

The important role of impact-first investing in an effort to maximize overall impact cannot be overstated. Even with modest allocations to IFIs, the impact of a philanthropic portfolio has the potential to be substantially greater than staying with an approach of only making market-rate investments and philanthropic gifts. This is due to the power of impact-first investments’ ability to create impact while also recycling capital for ongoing impact.

The idea underlying impact-first investments is that if an institution explicitly—or even implicitly—allocates some of their capital to philanthropic objectives, they should prioritize the overall social impact of that philanthropic portfolio. To achieve that goal, one can use a combination of philanthropic giving, market-rate investments (as described above, this includes the majority of impact investments), and impact-first investments.

Market-rate investments allow the allocator of capital to maximize its resources for future philanthropy, and giving allows the allocator to focus resources directly on creating social impact. Impact-first investments, meanwhile, create some direct social impact and provide a financial return for future philanthropy. The critical question is how these impact-first investment opportunities trade off impact and financial returns—more specifically, in what circumstances an impact-first investment’s combination of financial returns and social impact leads to preferred outcomes, compared to a conventional strategy of just giving and market-rate investments. This is particularly important as market-rate investments can at times be contributing to the problems one tries to address through giving—or, put another way, they can create a negative impact.

One of impact-first investments’ primary advantages over philanthropic giving is that they earn a return that can be recycled into future projects—rather than only a one-time deployment with a negative 100% return. Meanwhile, impact-first investing’s advantage over market-rate investing is that these investments deploy much-needed capital to high-impact initiatives that are unable to attract market-rate investments due to their risk levels or return profiles, though they still generate a return.

Accordingly, impact-first investing has shown tremendous promise. It includes investments in loan funds that provide capital to underrepresented communities at below-market interest rates, as well as equity investments in early-stage for-profit impact startups that are aiming to transform the health, education, and financial sectors for the better. These investments can prove out the impact and commercial viability of innovative new initiatives, reducing risk for other investors and thus catalyzing more funding for greater impact over time. There is also a “cost of not investing”—the idea that so many creative interventions will never get off the ground without this type of more patient capital. However, because allocators of philanthropic capital tend to focus on the two classic buckets of charitable giving and market-rate investing, the implementation of impact-first investing remains sub-scale—with significant potential for impact left untapped.

It is important to note that while IFIs can be powerful levers for addressing social challenges, they are certainly not always the right solution. In many contexts—including but not limited to humanitarian response efforts and initiatives without a viable revenue model—traditional grantmaking is more appropriate. Decisions between grantmaking and IFIs ultimately depend on the nature of the specific problem, the goals of the philanthropic investor, and—critically—their assumptions about return and relative impact between a given IFI and a comparable grant. The IFI Tool is designed to help philanthropic investors navigate these choices—not by prescribing answers, but by provoking thoughtful, assumption-driven analysis of what allocation approach best fits their aims.

Experimenting with the Impact-Investing Tool

To illustrate how the overall impact of a portfolio is affected and frequently amplified by the inclusion of impact-first investments, the Social Finance Institute and the Rustandy Center for Social Sector Innovation at the University of Chicago’s Booth School of Business launched the Impact-First-Investing Tool. To engage with the IFI Tool, you can click here; for more on how the IFI Tool works and how impact may be maximized with IFIs in a portfolio, you can read about the IFI Tool’s methodology.

Categories of IFI impact value creation

There are many types of impact-first investments. You can click here to view a few case studies of IFIs to learn more. Meanwhile, below are a few types of impact value creation that IFIs—depending on the category—can generate. Note that when it comes to the IFI Tool, the redeployment effect is explicitly modeled, whereas the other forms of impact value creation should be factored into the user-selected “Impact Relative to Philanthropic Giving” variable.

• Redeployment: As noted, the redeployment—or recycling—of capital is a defining characteristic of IFIs. It can significantly extend impact. For instance, below-market interest rate loan funds that deploy capital to underserved students (and generate some return) can ultimately reach many more students than grants (which have a negative 100% return). The repaid loan funding from the initial cohort of students is recycled 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.
• Social multiplier: Impact-first investments can act as a social multiplier. In many cases, the expected financial returns of such an 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: IFIs 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 early-stage nonprofits 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: Impact-first investments can also foster stronger social incentives and alignment compared to market-rate investments. For example, impact-first private equity or venture capital funds—or direct investments in social impact-driven businesses—allow mission-aligned 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: IFIs can also 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: Finally, IFIs can also catalyze public sector investment. In this case, the uncertainty addressed by the IFI can involve both the program’s public fit and financial sustainability. 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.

Conclusion

Ultimately, if philanthropic capital allocators thoughtfully and intentionally integrated impact-first investments into their portfolios, we would see two transformative effects. First, the immediate benefit: more capital directly flowing to innovative market-based solutions that prioritize our most pressing societal challenges. Second, the more powerful long-term impact: these investments act as proof points. By demonstrating the viability of sustainable and impactful business models, they de-risk these opportunities for traditional investors—unlocking new flows of capital to impactful solutions around the world.