Sustainable/Impact Investing] First Principles Thinking for Sustainable/Impact Investing: Rebuilding the Stack from the Atoms Up

Hi All,

Impact and sustainable investing has a branding problem.

Not because the ambition is wrong—most of it is directionally correct—but because the industry often operates on borrowed logic: familiar labels, inherited frameworks, and consensus language that sounds rigorous until you ask one stubborn question:

Why?

First principles thinking is the discipline of asking “why” until you hit something you cannot simplify further—then rebuilding the logic from those fundamentals. Aristotle used it to interrogate causes. Scientists use it to derive models from basic laws. Innovators use it to unwind “the way it’s always been done” and redesign the system.

Sustainable investing needs it because we are managing a domain that is easy to narrate and hard to prove.

And if you work in markets long enough, you learn a quiet truth:

Anything that can’t be reduced to a causal chain eventually becomes marketing.

First principles thinking is how we keep the promise of impact investing tethered to reality.

My personal note:

I was on a long international flight recently, half-watching The Big Bang Theory, half-staring into the void the way you do somewhere over Eurasia—when Elon Musk’s favorite phrase popped into my head: first principles thinking.

You’ll hear this terminology a lot from US tech circles. It’s become shorthand for a specific mindset: stop relying on convention, strip the problem down to what’s undeniably true, then rebuild from the atoms up.

On the surface, it sounds like a Silicon Valley buzzword. But in impact and sustainable investing—an industry crowded with ever-changing regulatory regimes around the world, labels, frameworks, and inherited assumptions—it might be exactly the discipline we need.

Below is my latest thinking on how first principles can sharpen impact investing: clarifying what “impact” actually means, stress-testing the causal chain, and separating real-world outcomes from well-packaged narratives. I’d love to hear your thoughts.

I. The sustainable investing stack is full of abstractions

A lot of the field is built on layers:

• ESG scores
• taxonomy alignment
• labels (“impact”, “transition”, “Article 8/9”, “net zero”)
• engagement narratives
• KPI dashboards with gorgeous charts and weak causality

These tools are not useless. But they’re not foundational. They’re interfaces—ways of packaging claims for decision-makers.

First principles thinking asks us to stop arguing at the interface level and move down to the atoms.

Because in markets, the atoms are always the same:

1. Cash flows (who gets paid, when, and for what)
2. Incentives (what behavior the system rewards)
3. Constraints (what is physically/regulatorily possible)
4. Information (what we can reliably measure and verify)
5. Accountability (who bears consequences when reality diverges)

When you rebuild sustainable investing from those, a lot of confusion clears.

II. The first principles definition of “impact” is not a label. It’s a causal claim.

Here’s the simplest, most useful baseline I’ve found:

Impact is a measurable change in the world that occurs because capital was allocated in a specific way.

That’s it.

Everything else—frameworks, narratives, ratings—should serve that causal claim.

So the first principles questions become brutally direct:

• What changes in the real world if this investment happens?
• Why does that change happen?
• What would have happened anyway? (counterfactual)
• How do we know?
• Who is accountable if the claim fails?

If you cannot answer those in plain language, you don’t have an impact thesis. You have a story.

III. Where first principles thinking changes decision quality

1) It forces a split between “good companies” and “good outcomes”

Markets love proxies: “best-in-class ESG” becomes shorthand for “positive”.

First principles thinking separates them:

• A company can have strong policies and still drive harmful outcomes.
• A company can be messy in governance and still deliver essential outcomes (especially in emerging markets).

From first principles, the real question isn’t “is it good?” but:

What outcome is this business structurally designed to produce, and what are the boundary conditions?

This prevents us from confusing polish with impact.

2) It turns “net zero” from a pledge into a system design problem

A pledge is not a plan. A plan is not a pathway. A pathway is not an outcome.

First principles asks:

• What physical assets must change? (plants, fleets, buildings, grids)
• What behaviors must change? (procurement, consumption, regulation)
• What must be built? (renewables, storage, transmission, efficient demand)
• What must be retired? (high-emitting assets, subsidies, legacy contracts)
• What financing structure makes that feasible? (tenor, covenants, blended capital, guarantees)

If the “transition plan” doesn’t resolve constraints—permitting, interconnection, supply chains, unit economics—it’s a marketing document.

3) It upgrades measurement from “metrics” to “verification”

A KPI is not truth. A KPI is a negotiated representation of reality.

First principles asks:

• What is the measurement mechanism?
• Is the metric gameable?
• Does the metric track the outcome or a proxy?
• Can an independent party verify it at reasonable cost?
• What’s the error range? What’s the confidence level?

This is where many impact strategies quietly collapse: they confuse available data with meaningful evidence.

IV. A simple first principles framework for sustainable investing

I use five “atoms” to rebuild an impact thesis. You can apply them to a public equity position, a private credit deal, an infrastructure asset, or a fund strategy.

Atom 1: The unit of change

What is the thing that changes?

• tons of CO₂e avoided/removed
• MWh of clean power generated
• households housed
• liters of water saved
• hectares restored
• jobs created (but define job quality)

If you can’t name the unit, you’re not anchored.

Atom 2: The causal mechanism

How exactly does capital cause that unit to change?

Examples:

• lower cost of capital enables a project that otherwise doesn’t clear the hurdle rate
• growth capital expands production capacity
• covenants force operational upgrades
• governance rights redirect strategy
• structured finance unlocks new customer segments

This is the heart. The mechanism is where seriousness lives.

Atom 3: The counterfactual (additionality)

What would happen without you?

Additionality isn’t a moral badge; it’s a model input.

• Is the project bankable anyway?
• Is demand already guaranteed?
• Is there policy support that makes private capital redundant?
• Are you financing acceleration, scale, or substitution?

Sometimes the best answer is: “We are not additional; we’re allocating efficiently to the inevitable.” That can still be valuable—but call it what it is.

Atom 4: The constraints

What can break the thesis?

• permitting delays
• grid interconnection
• commodity price swings
• labor constraints
• political risk
• technology readiness
• community acceptance
• supply chain bottlenecks

Great sustainable investing is not idealism; it’s constraint management.

Atom 5: Accountability and governance

Who is responsible for outcomes—and what levers exist?

• board seats
• covenants and reporting
• step-ups/step-downs
• use-of-proceeds controls
• third-party audits
• remedies if outcomes miss

If there is no accountability, “impact” becomes optional.

V. A worked example: “green” infrastructure vs real-world decarbonization

Analogy-based approach:
“Renewables are good. This is a renewable asset. Therefore this is impactful.”

First principles approach:

• Unit of change: MWh of clean electricity delivered and emissions displaced
• Mechanism: capital enables new capacity and grid connection
• Counterfactual: would the asset be built anyway under current policy + utility procurement?
• Constraints: curtailment risk, interconnection timelines, merchant price volatility
• Accountability: contractual structure, guarantees, performance reporting, verification method

This quickly reveals the difference between:

• assets that look green in a deck, and
• assets that actually displace fossil generation under real grid conditions

It also clarifies what “impact measurement” should focus on: not just generation, but displacement and system effects.

VI. First principles thinking also protects you from impact-washing—internally

The most uncomfortable but useful consequence of this method is that it forces honesty inside the investment team.

Because it’s easy to sell a narrative upward:

• to an IC
• to marketing
• to a client
• to yourself

First principles thinking is the internal audit.

It makes you write the causal chain in a way that can be attacked.

And that’s the point: if the thesis can’t survive skepticism, it doesn’t deserve capital.

VII. How to use this in your process

Step 1: Write the thesis in one sentence

“We believe allocating capital to X will cause Y change via Z mechanism, verifiable through Q.”

If you can’t do this, stop.

Step 2: List assumptions like a prosecutor

Not “risks” in the abstract—assumptions that must be true.

• technology performs at spec
• policy remains stable
• customer adoption happens
• supply chain holds
• measurement is verifiable

Step 3: Build the “impact P&L”

Not a formal accounting statement, but a discipline:

• what outcomes are created
• what outcomes are shifted (elsewhere)
• what outcomes are hidden (leakage)
• what outcomes are paid for vs claimed

Step 4: Engineer incentives into the deal (or stewardship)

Tie outcomes to:

• covenants
• pricing
• governance
• reporting requirements

If you can’t, be honest about what you can influence.

Step 5: Monitor the mechanism, not just the metric

Track the leading indicators that the causal chain is working:

• permitting milestones
• customer onboarding
• unit economics
• operational performance
• policy triggers

Outcomes lag. Mechanisms lead.

VIII. The payoff: first principles restores integrity to the category

Sustainable investing is not short on ambition. It’s short on precision.

First principles thinking doesn’t make you colder. It makes you clearer.

It respects the reality that:

• capital is powerful
• narratives are seductive
• and the world is constrained

And it gives us a way to build strategies that can survive:

• a skeptical CIO
• a hostile regulator
• an investigative journalist
• and, most importantly, reality itself

IX. First Principles Checklist

• Unit of change: What exactly changes, in what units?
• Mechanism: How does capital cause that change?
• Counterfactual: What happens without this investment?
• Constraints: What breaks the thesis in the real world?
• Verification: How do we measure credibly, with what confidence?
• Accountability: Who owns outcomes, and what levers exist?
• Leakage: What harms or trade-offs are created elsewhere?
• Time: When should change be visible, and what are leading indicators?

Bonus: Deep-dive on the First Principle Thinking

A first principle is a fundamental, self-evident truth or basic assumption that cannot be broken down further, serving as the foundation for complex reasoning, knowledge, or problem-solving. Instead of relying on analogy or convention, thinking from first principles involves deconstructing a problem to its core elements (like atoms, basic laws, or fundamental components) and then rebuilding understanding from those absolute truths, a method championed by Aristotle and used in science, math (axioms/postulates), and innovation (like Elon Musk's approach). 

Key Concepts

• Fundamental Building Blocks: First principles are the indivisible truths or raw materials of an idea, distinguishing core facts from layers of abstraction or assumptions.
• First Principles Thinking: A problem-solving method to challenge assumptions by asking "why" repeatedly (like a child) until you reach undeniable truths, enabling creative solutions.
• In Science & Math: In physics, it means reasoning ab initio (from the beginning) without fitting empirical models; in math, these are axioms or postulates.
• Contrast with Analogy: Instead of saying "It's like X," first principles asks, "What are the fundamental constituents of X?" and reasons from there, leading to innovation. 

Examples in Practice

• Physics: Understanding how a battery works by analyzing the properties and costs of cobalt, nickel, and aluminum, rather than just its historical price.
• Product Design: Deconstructing a product to its most basic functions and components to find novel ways to combine or improve them.
• Philosophy: Aristotle's concept of the "first cause" or basic propositions from which other knowledge is deduced

Note) The deep-dive part was put together with the help of AI.