Impact-Linked Finance
Impact-Linked Finance is all about unleashing the full potential of (impact) enterprises by providing better terms for better impact. It’s not only about moving money – it’s about making a difference.
Impact-Linked Finance refers to linking financial rewards for market-based organizations to the achievements of positive social outcomes. It is an effective way of aligning positive impact with economic viability and lies at the intersection between blended finance, impact investing, and results-based finance. We defined the practice of Impact-Linked Finance together with the Boston Consulting Group (BCG) as the next logical step in the evolution of SOCIAL IMPACT INCENTIVES (SIINC). If you want to know the bigger mission behind this innovative practice, read more about HOW WE STRIVE TO REINVENT FINANCE.
Design & Features
Rewards for positive outcomes can be built into financing instruments across the board, from equity and debt to guarantees. For example, lenders can link the interest rates of loans to pre-defined impact performance metrics, decreasing the rate as this impact is achieved. Here, the ‘Impact-Linked Loan’ effectively lowers financing cost and creates a strong incentive for enterprises to outperform on positive impact. It is a powerful way to ‘bake’ impact into the core of finance. This approach is particularly appealing to catalytic funders and ‘impact first’ investors.
Principles
To deliver on its promise Impact-Linked Finance has to follow basic principles. Below is a list of select features and design principles that define and differentiate good practice:
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 or proxies of 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 invited to contribute. DOWNLOAD THE ENTIRE DESIGN PRINCIPLES
Impact-Linked Finance in Practice
Roots of Impact and iGravity established the IMPACT-LINKED FINANCE FUND in order to pool know-how and activities for implementing scalable programs called „Impact-Linked Funds“. The Fund, set up as a Dutch non-profit foundation, is acting as an implementation platform for Impact-Linked Finance and manages several IMPACT-LINKED FUNDS. We also advocate for embedding impact-related principles and terms in other areas of business, policy and finance.
Impact-Linked Finance Resources
The resources below are a great start to discovering Impact-Linked Finance. For more, please visit our RESOURCES PAGE or become part of OUR COMMUNITY.
Our concept paper with the Boston Consulting Group:
An independent study by Investing for Good:
An independent case study from SDC:
Impact-Linked Finance Transactions
60+ transactions in various programs – and many more to come
As of year-end 2024, we closed 63 Impact-Linked Finance (ILF) transactions in various programs and Impact-Linked Funds across the globe. If you would like to know more about these Impact-Linked Finance solutions and their evidence, we highly recommend our latest ILF EVIDENCE REPORT with updated insights, external evaluations and figures.
To follow the evolution of this innovative practice from building SIINC to an increasingly global community of Impact-Linked Finance practitioners, we have MAPPED OUR JOURNEY for you.
