Theory of change
Theory of change is an explicit causal explanation linking activities and outputs to intended outcomes and impacts through stated assumptions. Applying Theory of change requires a stated reporting boundary, decision user, financial instrument, materiality lens, and governance responsibility. Those choices determine how Theory of change can be compared or acted upon.
In simple terms
In practical use, Theory of change is an explicit causal explanation linking activities and outputs to intended outcomes and impacts through stated assumptions. For Theory of change, the selected inputs, ordered steps, decision rule, assumptions, and limitations form part of the result within a declared reporting boundary, decision user, financial instrument, materiality lens, and governance responsibility. Theory of change connects with Impact investing and Green bond; each can affect its application without sharing its definition. The candidate link between Theory of change and Sustainable Finance Disclosure Regulation remains a separate expansion question supported here by Organisation for Economic Co-operation and Development.
Why it matters
Theory of change matters because decisions about it determine what enters a disclosure or transaction, which decision user it serves, and who is accountable for supporting evidence. A defensible use of Theory of change therefore exposes its boundary, method, evidence, responsible actor, and uncertainty before a conclusion is accepted. That discipline keeps Impact investing and Green bond from being treated as proof of Theory of change when their criteria, scope, or results differ.
Example
A reporting and finance team evaluates Theory of change for a defined decision and records the relevant reporting boundary, decision user, financial instrument, materiality lens, and governance responsibility. For Theory of change, the team uses cited material from Organisation for Economic Co-operation and Development to structure the analysis and follow its ordered steps, documenting the period, data, assumptions, and comparison with Impact investing. It treats Green bond and Sustainable Finance Disclosure Regulation as separate questions rather than proxies for Theory of change.
How it differs
Impact investing
Theory of change is a method; Impact investing has a different function. Evidence for Impact investing does not establish Theory of change unless both sets of applicable criteria are met.