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Impact-Linked Finance

Impact-Linked Finance

 

Impact-Linked Finance refers to linking financial rewards for market-based organizations to the achievements of positive social outcomes. It is a highly effective way of aligning positive impact with economic viability and lies at the intersection between Blended Finance, Impact Investing, and Results-Based Finance.

Design & features

The most straightforward Impact-Linked Finance solution is paying enterprises that are raising growth capital directly for the positive impact they create (Social Impact Incentives or “SIINC”). But there is a multitude of other applications. Rewards for positive outcomes can be built into financing instruments across the board, from equity to debt to guarantees.

For example, linking the interest rate of a loan to a pre-defined impact performance effectively lowers financing cost and creates a strong incentive for the enterprise to outperform on positive impact. Put simply, it is a powerful way to ‘bake’ impact into the core of finance. Impact-Linked Finance does not necessarily focus on enterprises that are commercially less attractive. It rather enables and incentivizes market-based enterprises to accelerate and deepen their positive impact by generating additional outcomes (e.g. serving lower income customers, in particular women, or focusing on more rural areas).

Design principles

To deliver on its promise, Impact-Linked Finance has to consistently follow specific principles. Three core features and design principles that define and differentiate good practice are:

Incentives to the value creator:

Financial rewards should be directed to the primary value creator.

Focus on outcomes as opposed to outputs:

Impact-Linked Finance instruments are based on outcomes – not outputs – and measure these wherever feasible, useful, and economically viable as triggers for determining the level of financial rewards.

Impact additionality:

The financial rewards in these instruments should drive the organizations to deliver additional outcomes that would not have happened without these incentives.

More design principles

The Design Principles for Impact-Linked Finance were formulated to promote the most effective use of Impact-Linked Finance. They represent a springboard for a broader involvement of practitioners, experts, academics, and other stakeholders.

Background and future potential

The idea to provide rewards for positive impact to high-impact enterprises who seek to raise growth capital took shape in 2016 with the introduction of Social Impact Incentives (SIINC). SIINC was implemented for the first time by Roots of impact in Latin America, in partnership with the Swiss Agency for Development & Cooperation (SDC) and the Inter-American Development Bank (IDB). Since then, the model has established itself in various programs across the globe and is on its way to become a standard tool for effective blended finance that places impact at the core.

In 2018, Roots of Impact together with the Boston Consulting Group (BCG) defined the term and practice of Impact-Linked Finance as the next logical step in the evolution of SIINC. The number and scope of Impact-Linked Finance transactions and programs is increasing exponentially. The Impact Linked Finance Fund established by Roots of Impact and iGravity is serving as an important milestone to introduce the next evolutionary step for more effective impact finance.

Accelerating Impact-Linked Finance