Impact Investing Glossary

Impact Investing Glossary

This list of key terms decodes the concepts, words and acronyms used in the impact investing industry

A

  • Access to Education: Students provided with schooling who previously were not in school because of the distance they had to travel, cost they had to pay or entry requirements that prohibited them from attending.
  • Access to Energy: Previously un-electrified households with access to electricity either from utility/community generation, distributed generation or improved distribution.
  • Access to Finance: Households or individuals that previously did not have access to credit.
  • Access to Healthcare: Individuals who previously were not served by the formal healthcare system because of distance they had to travel, cost they had to pay or entry requirements that prohibited them from seeking such services.
  • Access to Water: Households that previously did not have reasonable access to water, defined as the availability of at least 20 liters per person per day from an acceptable source within 1 kilometer of the dwellings.
  • Accredited Investor: According to the Securities and Exchange Commission (SEC), in the context of a natural person, an individual who has either 1) earned income exceeding $200,000 (or $300,000 with a spouse) during the prior two years and reasonably expects the same income in the current year, or 2) has a net worth of over $1 million (alone or with a spouse) excluding the value of the primary residence. Unregistered SEC-exempt offerings, often called private placements, may only be offered to and purchased by accredited investors, who may be better prepared to understand and assume the risks of investments with lower disclosure requirements.
  • Affordable Housing: Housing for which the associated financial costs are at a level that does not threaten other basic needs and represents a reasonable proportion of an individual’s overall income.
  • Amortization – Gradual repayment of a loan by making regular payments over time. To be fully amortizing, payments must cover both the principal amount and interest due on the loan for the given period. An amortization schedule is an established timetable for making payments.
  • Angel Investor: An affluent individual who provides capital for a start-up enterprise, usually in exchange for some stake in ownership equity.
  • Appreciation: Increase in the value of a financial instrument or currency as a result of market forces of supply and demand.

B

  • BoP: Base of the Pyramid. The term describes groups of people in emerging markets who earn less than $3,000 a year (2002 purchasing power parity).
  • Biodegradable: Capable of decomposing under natural conditions.
  • Blended Value: Concept that the value generated by an organization (whether for-profit or non-profit) is financial, social and environmental, and that these three constituents of value are indivisible from one another and must be taken into account when assessing value creation through investment.

C

  • CDFI: Community Development Finance Institution. These are institutions, mainly in the U.S. and the U.K., that seek to reduce poverty in economically depressed areas through credit, financial and other services to underserved markets or populations.
  • Collateral: Item of value that a lender can take as compensation if a borrower fails to repay a loan. Borrowers generally are required to secure a loan with personal property as collateral. On mortgage loans, the property serves as collateral. For microloans, collateral can vary from fixed assets (a sewing machine) to cross-guarantees from peers.
  • Co-operative: Association of persons, usually of limited means, who have voluntarily joined together to achieve a common economic end through the formation of a democratically controlled business organization, making equitable contributions to the capital required and accepting a fair share of the risks and benefits of the undertaking.
  • Corporate Governance: The system by which companies are directed and controlled. The corporate governance structure specifies the distribution of rights and responsibilities among different participants in the company, such as board members, managers, shareholders, and other stakeholders, and spells out the rules and procedures for making decisions on corporate affairs.
  • CSR: Corporate Social Responsibility. A form of corporate self-regulations integrated into a business model. The goal of CSR is to embrace responsibility for a company’s actions and encourage a positive impact through its activities on the environment, consumers, employees, communities, stakeholders and all other members of the public sphere who may also be considered as stakeholders.

D

  • Depreciation: A decline in the value of a currency in comparison with a reference currency.
  • Devaluation: A fall in the value of a currency against other currencies. In contrast to depreciation, devaluation implies an official lowering of the value of a country’s currency by a monetary authority.
  • DFI: Development Finance Institution. Government-controlled institutions that invest in private sector projects with a double bottom line objective of spurring development in emerging countries while remaining financially viable institutions.
  • Diversification: The spreading of risk by putting assets in several categories of investments (e.g. stocks, bonds, money market instruments and precious metals), or several industries, or a mutual fund, a broad range of holdings.
  • Double (or triple) Bottom Line: The simultaneous pursuit of a social enterprise or business to achieve financial, social and/or environmental returns on investment.

E

  • ESG: Environment, Social and Governance. ESG issues are central to measuring the sustainability and non-financial impacts of an investment and can have a material impact on the long-term risk and return profile of investment portfolios.
  • Ethical Investing: Choosing to invest in companies that operate ethically, provide social benefits and are sensitive to the environment. Also called socially conscious investing.
  • External Audit: A formal, independent review of an institution’s financial statements, records, transactions and operations. The external audit process is key to transparency, and is usually performed by professional accountants to lend credibility to financial statements and management reports, ensure accountability for donor funds or identify internal weaknesses in an organization.

F

  • Financial First: Investors who prioritize the financial return objective over the social or environmental objectives of an investment. This group tends to include commercial investors seeking investments that offer market-rate returns and also yield social or environmental good. Also included in this group are investors that are required to uphold a fiduciary standard and are therefore unable to make investments that lack the potential to yield market rate returns.
  • Fund Advisor(s): The company or companies that are given primary responsibility for managing a fund.
  • Fund Manager: The individual(s) responsible for the overall fund strategy, as well as the buying and selling decisions of the securities in a fund’s portfolio.

G

  • GIIRS: Global Impact Investing Ratings System. A project of B Lab that assesses the social and environmental impact (but not the financial performance) of companies and funds, using a ratings approach analogous to Morningstar investment rankings or rating agency credit risk ratings.
  • Greenfielding: Refers to starting a new microfinance organization where none existed before.

H

  • HNWIs: High Net-Worth Investors. A classification used by the financial services industry to denote an individual or a family in terms of liquid assets over a certain figure, but the exact amount differs by financial institution and region.

I

  • Informal Sector/Economy: A subset of the economy consisting of businesses that are not registered with any taxation or regulatory bodies. The main features of the informal sector are ease of entry, self-employment, small-scale production, labor-intensive work, lack of access to organized markets and lack of access to traditional forms of credit.
  • Interest: The fee charged by lenders for extending credit, usually a percentage of the loan amount. Responsible lenders adjust interest rates according to their level of risk in a loan.
  • Institutional Investor: A non-bank person or organization that trades securities in large enough share quantities or dollar amounts that they qualify for preferential treatment and lower commissions. Institutional investors face fewer protective regulations because it is assumed that they are more knowledgeable and better able to protect themselves.
  • Impact First: Impact first investors targeting social or environmental good as their primary objective, above achieving a financial return. This may mean accepting a below-market rate of return in order to reach tougher social/environmental goals that are seemingly not achievable through mainstream investment or philanthropic activities.
  • Impact Investing: Investments made into companies, organizations, and funds with the intention to generate social and environmental impact alongside a financial return. Impact investments can be made in both emerging and developed markets, and target a range of returns from below market to market rate and premium returns. Although often associated with risk capital for small-scale, early stage enterprises, an investment is considered “impactful” provided the investor is committed to achieving a social or environmental benefit and to tracking and reporting progress.
  • IRIS: Impact Reporting and Investment Standards. A set of standardized metrics that can be used to describe an organization’s social, environmental and financial performance. Like financial accounting standards, IRIS provides a basis for performance reporting, and is increasing accepted by the impact industry as a universally accepted set of measurement principles.

K

  • KPIs – Key Performance Indicators. KPIs are commonly used by an organization to evaluate its success or the success of a particular activity in which it is engaged.

L

  • Line of Credit: Agreement by a bank that a company may borrow at any time up to an established limit.
  • Liquidity: the degree to which assets are held in cash or in a form that can easily and immediately be converted into money. Liquidity can also be defined as the ability of an institution to meet its current financial obligations.
  • Loan Term: The length of time before the loan is due to be repaid in full.

M

  • Microfinance: Financial services targeting low-and-moderate income businesses or households that are underserved by traditional financial institutions. Microfinance services include credit, savings, insurance and remittances.
  • MDG: Millennium Development Goals. Eight international development goals established following the United Nations Millennium Summit in 2000 whose aim is to encourage development by improving social and economic conditions in the world’s poorest countries.
  • MFI: Microfinance Institution. A financial institution whose legal structure may be a nonprofit organization, non-bank financial institution, regulated financial institution or commercial bank and that provides banking products and services to low-income clients.
  • MRI: Mission-Related Investment. An investment made using assets from a foundation’s endowment that seeks to create social impact as well as typically risk-adjusted financial returns.

O

  • OECD: Organization for Economic Co-Operation and Development. An international economic organization founded in 1961 to stimulate economic progress and world trade, and that currently comprises 34 countries. It is a forum committed to democracy and the market economy, providing a platform to compare policy experiences, seek answers to common problems, identify good practices and coordinate domestic and international policies of its members.

P

  • PRI: Program-Related Investment. An investment made by a U.S.-based foundation that qualifies as a charitable expense under the tax code, allowing the foundation to include the investment as part of the 5% of assets it must distribute philanthropically each year to maintain its non-profit status.
  • Private Debt Plus™:  A mark orginated and used by TriLinc to describe a type of Private Debt that seeks both Competitive Market Rate Returns PLUS Measurable Positive Impact.

R

  • Renewable Energy: Derived from natural processes that are replenished from renewable resources, including electricity and heat generated from solar, wind, ocean, hydropower, biomass, geothermal resources, and hydrogen.
  • Retail Investor: Individual who makes investments for his/her own account, rather than for a company or organization, and whose income and asset levels are below the criteria for accredited investors established by the Securities and Exchange Commission.

S

  • SGB: Small and Growing Business. A commercially viable business that has significant potential for expansion and social impact in the communities where it operates.
  • SME: Small and Medium Enterprise. Subject to various definitions, but generally a company characterized by the number of its employees or annual sales or assets. The World Bank defines a small enterprise as meeting two of the following three criteria: minimum 50 employees, under $3 million in each assets and sales, and a medium enterprise as meeting two of the following three criteria: up to 300 employees, total assets and total sales of up to $15 million. TriLinc defines SMEs as those businesses having less than 500 employees.
  • SRI: Socially Responsible Investing. SRI primarily employs negative screening (although some SRI managers engage in shareholder activism) so that investors don’t invest in companies whose profit-generating activities produce negative social or environmental outcomes.
  • Social Entrepreneur/Enterprise: An entrepreneur or organization that pursues a double or triple bottom line business model, either as a for-profit business or as a mixed entity whose revenue includes charitable contributions and public sector subsidies.
  • Sustainable Development: Development that meets present needs without compromising the ability of future generations to meet their own needs. It assumes the conservation of the natural assets for future growth and development.

T

  • TA: Technical Assistance. Providing advice, assistance and training pertaining to the management of a business or development project.
  • Triple Bottom Line: The simultaneous pursuit of a social enterprise or business to achieve financial, social and environmental returns on investment.

U

  • Underserved: Potential consumers, particularly within the BoP, who lack access to mainstream suppliers of goods and services.

V

  • Venture Philanthropy: Applies concepts and techniques from venture capital finance to achieve philanthropic goals and create social return.