'Impact due diligence is the blind spot in impact investing'

Impact investors increasingly agree on one thing. When it comes to measuring and maximising impact, what matters is not simply how many people a company reaches, but whether lives actually improve. There is also growing acceptance that the best judges of that improvement are the people being served themselves. Yet when an investment committee decides where capital goes, those voices are usually absent.

This is the quiet contradiction at the centre of modern impact investing. At the moment when investors make their most consequential decision, whether to back a company at all, customer outcomes remain surprisingly peripheral. Financial due diligence is established, disciplined and institutionalised. Impact due diligence is not.

At the moment when investors make their most consequential decision, whether to back a company at all, customer outcomes remain surprisingly peripheral

To be fair, the sector is still evolving. Practices vary widely, and some investors already apply rigorous impact screens that genuinely shape their pipelines. But across much of the industry, and more often than not, impact due diligence still resembles a filtering exercise more than a substantive assessment of real-world outcomes.

Investors screen for whether a company is locally owned, whether leadership teams are diverse, whether businesses operate in priority geographies or sectors, and whether management presents a credible theory of change. These are useful indicators. They tell us something meaningful about the type of business being funded and have influenced capital allocation in important ways.

But they remain proxies. They describe the profile of the company more clearly than the experience of the people it serves.

What really matters: changes in real-world outcomes

Through our work measuring outcomes directly with customers of impact-backed businesses, we have repeatedly observed a gap between operational indicators and what really matters: changes in real-world outcomes. Moreover, companies that appear similar through the lens of traditional impact metrics often produce very different outcomes in practice. Businesses that report strong operational performance do not always deliver equally strong outcomes for customers once those customers are asked directly.

Consider, for example, two fintech lenders serving low-income women entrepreneurs in peri-urban Kenya. On paper, both businesses appear highly impactful: repayment rates above 95%, strong customer retention and rapidly growing loan books. One produces slightly stronger financial returns. Most impact screening processes would conclude that both companies are high-performing and might favour the financially stronger lender.

Businesses that report strong operational performance do not always deliver equally strong outcomes for customers once those customers are asked directly

Yet customer-level data reveals a very different picture. Borrowers from one lender report greater financial resilience, improved ability to manage emergencies, reduced stress and greater confidence using digital financial tools. Customers describe repayment schedules aligned with business cash flow, transparent pricing and flexibility during periods of economic shock.

Customers of the other lender tell a harsher story. Many report anxiety around repayments, repeated refinancing and cutting household spending to avoid default. Weekly repayment structures, opaque fees and inflexible penalty systems create pressure that standard operational metrics fail to capture.

This isn’t an abstract story, it the sort of things we see with reasonable regularity in the data from real customers that we collect. Without customer outcomes data, both companies appear equally impactful. With it, they look fundamentally different.

This is not a marginal problem. If operational proxies consistently diverge from lived experience, then capital is being allocated on incomplete information. Impact investors could make better decisions by bringing customer outcomes into investment due-diligence itself, rather than relying on such data primarily for post-investment reporting.

Without customer outcomes data, both companies appear equally impactful. With it, they look fundamentally different

When evaluating a deal, investors should be able to ask relatively straightforward questions. What do customers actually say about this company? How do those outcomes compare with peers operating in similar markets? Is the inclusivity of the customer base consistent with management’s claims?

It's easier than many investors assume

These questions are no longer prohibitively difficult to answer. Collecting end-stakeholder-level outcomes data has become faster and less expensive than many investors assume. The constraint is often more about norms and expectations than it is about technical or even financial constraints. It’s just not something that is done.

The question the sector needs to credibly answer, if it wants to optimise the use of capital for maximum impact, is a simple one. Why not?

Investors routinely define minimum expectations around margins, leverage or cash-flow quality, why not consider similar norms for impact rather than relying on narrative, intent and proxy indicators.

None of this suggests that financial discipline should be subordinated to impact considerations. A company that cannot sustain itself financially is unlikely to deliver lasting impact. But a company that performs well financially while producing limited improvement in customers’ lives also falls short of what impact investing claims to achieve.

The question the sector needs to credibly answer, if it wants to optimise the use of capital for maximum impact, is a simple one. Why not?

The encouraging news is that the sector is not starting from scratch. Some investors and some of the largest development finance institutions are already incorporating real-world outcomes gathered from end-stakeholders more directly into investment decisions and demonstrating that rigorous impact assessment can strengthen judgement rather than complicate it.

As these practices evolve, perhaps the most useful next step is a more candid conversation about what evidence truly matters when capital is allocated. When investors assess impact, whose experience is genuinely shaping the decision? What evidence is considered sufficient when it comes to customer outcomes? How material is that information to the final allocation of capital? And how accountable are investment processes to the impact objectives they claim to serve?

These are not abstract questions. They go to the heart of whether impact investing is truly learning from the people it ultimately exists to benefit.