Do you want to get up to speed and discover the main features and terminology around Impact-Linked Finance? Then this page is a very good starting point. We suggest to all Impact-Linked Finance practitioners use these resources so we can effectively collaborate together.
At a glance:
Impact-Linked Finance offers funders, investors and entrepreneurs a unique opportunity to re-invent finance: by pursuing “better terms for better impact” and baking impact into ANY type of financing. High-impact organisations with market-based models receive direct financial rewards for creating positive impact. They also become empowered to attract (more) suitable capital for scaling their solutions. Funders and investors, on the other hand, enjoy “more impact bang for the buck” and make smarter use of their monies for the benefit of people and planet.
As a pioneer of this approach, Roots of Impact – with support from the Swiss Agency for Development and Cooperation – recognizes that to grow this movement, we need to let as many funders, implementers, investors and enterprises as possible know about the state-of-the-art tools, best practices, successful examples, and secret sauces. This is exactly the driver behind the Open Platform for Impact-Linked Finance: By sharing knowledge from multiple Impact-Linked Finance transactions across the globe, we want to build a community of like-minded practitioners. The mission is simple but bold: to create system-level impact and re-invent finance in a way that impact is ALWAYS an integral part of the equation (not only of the story).
Read more about the mission to re-invent finance in this opinion piece.
The Impact-Linked Finance glossary gets you up to speed in no time and introduces to you the main terminology. Are you curious to understand this new concept? Then check out the selected terms below or download the entire glossary.
Time-limited rewards are aimed at incentivizing the impact enterprise to deliver additional (i.e. more, faster and/or better) outcomes that would otherwise not have happened. Impact-Linked Finance can also be additional in financial terms, e.g. by enabling the impact enterprise to:
(1) (better) raise private capital via receiving an additional revenue stream (in case of Social Impact Incentives or “SIINC”) or
(2) lower financing costs (in the case of other Impact-Linked Finance instruments).
This is one of the core Design Principles for Impact-Linked Finance.
Nine Design Principles for Impact-Linked Finance represent a springboard for a broader involvement of practitioners, experts, academics and other stakeholders in this innovative practice. To ensure the most effective use of Impact-Linked Finance, any of these transactions need to consistently follow these principles. Three core principles are particularly vital:
(1) Incentives to the value creator (financial rewards should be directed to the primary value creator, which is typically the impact enterprise)
(2) Focus on outcomes as opposed to outputs (outcomes are measured wherever feasible and useful, and used for determining the level of financial rewards*), and
(3) Impact additionality (financial rewards should drive the organizations to deliver additional outcomes that would not have happened without such incentives). More information can be found in the publication Accelerating Impact-Linked Finance, co-authored by the Boston Consulting Group and Roots of Impact.
*outputs can be used in case there is strong evidence of linkages to outcomes.
A complete version of the Design Principles as of February 2023, including some refinements and explanations on how to apply them in practice, is available from Roots of Impact.
Impact-Linked Finance aims to incentivize direct and measurable outcomes. As such, the focus lies on the case-specific impact that is attributable to the impact enterprise’s intervention. Inputs, activities or outputs (which are generally more likely to be the focus of results-based finance) are not at the core of Impact-Linked Finance. Instead, the positive changes and effects spurred by the solution of the impact enterprise take center stage.
If outcomes are not available, or if it is not feasible to measure these efficiently, outputs can be used as proxies. In these cases, there needs to be supporting evidence on how those outputs lead to outcomes. The enterprise should ideally either be measuring such outcomes or be able to provide relevant raw data. This ensures that an Impact-Linked Finance practitioner can identify the baseline data necessary to structure the right incentives.
“Effective impact finance” is how innovative Impact-Linked Finance instruments and mechanisms are often referred to. “Effective” characterizes the use of public and catalytic funds to enable deep(er) and (more) transparent impact. In the case of Social Impact Incentives (SIINC), this also includes mobilizing private investment. Effective impact finance solutions comprise innovative finance, blended finance, Social Impact Incentives (SIINC) and other Impact-Linked Finance projects and programs.
An exit in the context of an Impact-Linked Finance transaction does not refer to the usual exit strategy of selling financial or business assets. Rather, it describes the “end game” after an Impact-Linked Finance transaction has completed its entire cycle. There are two potential types of exit: Impact enterprises can a) reach or maintain (commercial) viability while continuing to deliver the outcomes incentivized, or b) enter into public contracts.
Financial leverage denotes how much additional (repayable) investment the enterprise is able to raise with the support of Social Impact Incentives (SIINC). The underlying assumption is that enterprises will become more attractive for investment thanks to the additional revenue stream or funding coming along with this type of Impact-Linked Finance support. Financial leverage is also referred to as financial additionality.
Impact enterprises provide impactful solutions to social and/or environmental problems, and as such, are the main focus of Impact-Linked Finance. Unless specified by the outcome funder, there are no specific criteria that such enterprises need to meet (e.g. legal entity, revenue model, type of impact) other than having a market-based model. For the purpose of consistency, it is recommended to use the term “enterprise” rather than “organization” or “company”.
Impact leverage refers to how much an Impact-Linked Finance instrument can incentivize the enterprise to increase the depth and/or breadth of its impact. From a donor’s perspective, impact leverage is equivalent to “value for money”.
This specific Impact-Linked Finance Design Principle defines that financial rewards should be directed to the actors that create the impact. Typically, these actors are the impact enterprises creating impact “on the ground”. However, such actors can also be
(1) intermediaries supporting impact enterprises, or
(2) investors, provided that the incentives lead to practices that the investors would not have performed otherwise (e.g. lending to very small businesses that would not be attractive investment targets without these incentives).
The measurement period is the period during which the enterprise needs to create the pre-agreed impact. Upon verification of the data provided for any given period, the enterprise will receive the agreed-upon financial rewards. Impact incentives are bound to specific periods. In the case of Social Impact Incentives (SIINC), this period generally spans either 6 or 12 months.
An outcome payer or outcome funder is an entity that:
(1) provides non-repayable capital to reward the enterprise for the impact created (in case of Social Impact Incentives), or
(2) compensates investors for providing financial rewards once a pre-defined impact is achieved (in case of other Impact-Linked Finance instruments).
Typical outcome funders are development agencies, NGOs, foundations, development finance institutions or similar organizations.
This term is used when referring to the financial rewards that are provided to impact enterprises or other actors, based on their impact achieved. Rewards for impact should not be defined as grants or subsidies.
While in the case of SIINC for instance, the rewards are indeed non-repayable, the purpose of the incentives are not to subsidize enterprises as typical grants do, but rather to enable them to sustainably grow both in impact and economic terms. All Impact-Linked Finance instruments are aimed at incentivizing enterprises to (continue) deepen(ing) their impact, also beyond the instruments’ lifetime (see “exit” listing).
In addition, in this context, rewards are often mentioned with reference to “social” outcomes (e.g. for Social Impact Incentives | SIINC), which, however, should be understood to include environmental outcomes. As a suitable alternative, the term “positive outcomes” may support this notion better.
These terms are another way of describing Impact-Linked Finance instruments. This emphasizes the fact that incentives are provided only for a limited time, e.g. in the case of Social Impact Incentives (SIINC) typically from 2 to 4 years.
These video essays are an easy and engaging way to dive into the concept of Impact-Linked Finance and listen to real-life examples. The first video introduces you to the wider concept of “baking” impact into financing instruments across the board. The second video focuses on the very first Impact-Linked Finance solution that was implemented in practice: Social Impact Incentives (SIINC). In the meantime, there are more instruments from the Impact-Linked Finance family that have made the jump from theory to practice. You can check them out on the next level of the Open Platform, the “deep dive”.
Are you a public or philanthropic funder who would like to provide catalytic capital and create more “impact bang for the buck”? Then this Primer on Impact-Linked Finance is a great inspiration and introduction to this topic.
Would you like to read about some Impact-Linked Finance programs and enterprise examples? Then these blogposts will be the right place for you to go to. Enjoy some inspiring video snippets, program pages and Impact-Linked Funds in various impact sectors and regions.
