Impact Investing Glossary

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1 Impact Investing Glossary A B Absolute Returns: An absolute returns strategy is one by which a fund invests across a range of different instruments and asset classes in order to hit a specific targeted return. 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. Alpha and Beta: Alpha and Beta are both used by investors to determine the risk-reward profile of an investment. Alpha is the return on an investment that is in excess of the compensation for the risk borne by making that investment. Alpha is commonly referred to as the value that a portfolio manager adds beyond a fund s risk/reward profile. Beta is a measure of volatility or risk of an investment or portfolio of investments in comparison to the market as a whole. 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. Benefit Corporations B Corp : A benefit corporation is a new class of corporation that voluntarily meets higher standards of corporate purpose, accountability, and transparency. Benefit corporations: 1) have a corporate purpose to create a material positive impact on society and the environment; 2) are required to consider the impact of their decisions not only on shareholders but also on workers, community, and the environment; and 3) are required to make available to the public an annual benefit report that assesses their overall social and environmental performance against a third party standard. Becoming a benefit corporation gives entrepreneurs and investors an additional choice when determining which corporate form is most suitable to achieve their objectives. 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). Blended Value: A framework that evaluates a business or nonprofit based on the ability to generate financial, social and environmental value. Blended value is sometimes used interchangeably with the terms triple bottom line and social enterprise.

2 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 Default (on debt): Failure to meet the financial obligations on a loan or other debt contracts by not making scheduled payments or by violating loan covenants in a contract. Default can trigger seizure of collaterals. 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. Development impact bonds: A financial model to deliver international development aid based on a payfor performance contract and involving at least three parties: a donor or outcome payer, an investor, and an implementer or service provider. The investor provides capital up front, the implementer or service provider implements the activities, and the donor or outcome payer pays the investor returns on their investment if the implementer or service provider achieves predetermined targets on specific performance metrics. Typically, an intermediary agency helps to design and structure development impact bonds, and an independent evaluation agency is hired to evaluate progress against performance indicators. 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.

3 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. Dual-purpose assets: These are internal assets NGOs have developed in the course of implementing donor-funded projects that could be monetized to generate income outside the project. These include physical assets such as buildings or equipment or intangible assets, such as brand, knowledge, and data that can be used to generate impact and income. Income can be generate while generating impact, could be through the provision of services to beneficiaries at a basic fee or use of the assets to deliver services at a fee for non-impact related activities while they would otherwise be idle are idle. 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 Equity type model : This is a financial model in which the investor provides up-front capital for a venture, and can claim a share of the profits once the venture has paid off all liabilities (obligations). 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. 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 General Partnership GP: A arrangement by which partners conducting a business jointly have unlimited liability, which means their personal assets are liable to the partnership's obligations 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.

4 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 Impact investing: The term is used to refer to investments that can generate both social impact and a financial return. There are variations in the level of returns expected from the investment depending on the type of investors, but for institutional investors, an impact investment is an investment that generates social impact and a market rate of return. 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, selfemployment, 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. J

5 Joint Venture JV: A business arrangement in which two or more parties agree to pool their resources for the purpose of accomplishing a specific task. This task can be a new project or any other business activity. In a joint venture (JV), each of the participants is responsible for profits, losses and costs associated with it. However, the venture is its own entity, separate and apart from the participants' other business interests. 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 Limited Liability Corporation: A corporate structure whereby the members of the company cannot be held personally liable for the company's debts or liabilities. Limited liability companies (LLC) differ slightly from one country to the next. However, it is essentially a hybrid entity that combines the characteristics of a corporation and a partnership or sole proprietorship. Limited Partnership: Two or more partners united to conduct a business jointly, and in which one or more of the partners is liable only to the extent of the amount of money that partner has invested. Limited partners do not receive dividends, but enjoy direct access to the flow of income and expenses. 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

6 Outcome-based contract: Also known as performance-based contracts, this is a mechanism through which donors only disburse funds to NGOs once the NGOs achieve specific targets against key performance indicators that have been previously determined. 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. S Social Impact Bonds: These are contracts that allow the public sector to commission social programs and only pay for them if the programs are successful. These contracts also allow for private investment which only earns a return if the social programs achieve their goals. Social impact bonds can leverage social change and earn a financial return. Risk is often high. Special purpose vehicle: In the context of this document, this is a business entity with an independent legal structure that allows investors and NGOs to contribute resources (e.g. capital, workforce etc.) toward a venture, with the governing body of this entity responsible for implementing this venture, and paying both the NGO and investors returns based on their share of investment/ownership of the entity. 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 profitgenerating 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. V

7 Venture Philanthropy: Applies concepts and techniques from venture capital finance to achieve philanthropic goals and create social return. W Waterfall Payment: A type of payment scheme in which higher-tiered creditors receive interest and principal payments, while the lower-tiered creditors receive only interest payments. When the higher tiered creditors have received all interest and principal payments in full, the next tier of creditors begins to receive interest and principal payments.

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