Glossary

This glossary, while not definitive, provides definitions for some of the key terms and phrases used in the impact investment sector. It is Australasian focused and has been compiled from a variety of sources including:

• Big Society Capital

• Guide to Impact Investing for HNWI, Family Offices, Foundations & Businesses

• Impact Investing Hub's Field Guide for Charitable Trusts & Foundations

• Impact Investing Think Tank

• Impact Investing Australia

• Philanthropy Australia

A

• Accounting: The process of recording, classifying, and summarising financial transactions to provide information that is useful in making business decisions.

• Accelerator: A business accelerator is intended to promote rapid growth of a start-up company. The time frame is usually 3 to 6 months to address operational, strategic, and organisational challenges that a young business may face in transitioning to a mature company. It usually includes mentorship and educational components.

• Additionality: The additional impact achieved by the presence of an impact investor.

• Angel investor: Angel investors (also referred to as seed investors) normally provide funding during the earlier development stages of a business where there is less certainty of success.

• Assets: Money, stock, bonds, real estate or other holdings of an organisation, individual or company.

• Asset class: A category of investment, defined by its main characteristics of risk, liquidity and return. Major asset classes are cash, fixed income, public equity, private equity and real asset.

• fixed income: An asset class, where returns are received at regular intervals and at predictable levels. The most common type of fixed income security is the bond. Some investors include loans and private debt in this category.

• public equity: An asset class where individuals and/or organizations can invest in a publicly listed company by buying ownership in shares or stock of that company.

• private equity: An asset class where money is invested into a private company, or the privatization of a company. Most investors aim to invest into a company, take a majority stake, improve the company and then exit their investment at a large profit.

• Asset lock: A legal clause stating that the company's assets will only be used for its social objectives, and setting limits on the return it can pay to shareholders.

• Assets under management (AUM): The market value of the total financial assets that an investment company manages on behalf of its clients and is often looked at as a measure of success against competition.

B

• Beneficial owner: The natural person who ultimately owns or controls a company or asset, either directly or indirectly.

• B-Corp (or Benefit Corporation): B Corps are for-profit companies certified by the nonprofit B Lab to meet rigorous standards of social and environmental performance, accountability, and transparency.

• Balance sheet: a "snapshot" of the assets and liabilities of an organisation at a single point in time.

• Below market-rate of return/Concessionary return: An investment made with an agreed upon rate of return that is less than the current market rate and sacrifices some financial gain to achieve a social benefit.

• Benchmark: The benchmark is a standard against which the performance of a n investment can be measured (for example, broad market indexes or industry benchmarks for family businesses).

• Benefit corporation: A new type of legal structure for businesses to create a solid foundation for long term mission alignment and value creation.

• Blended finance: Blended finance refers to a combination of financing to meet the needs of for-purpose organisations - for example, part debt and part grants. It is a structuring approach that typically sees impact investors with different expectations coming together to provide capital to impact investing deals. It is often seen as the strategic use of finance and philanthropic funds to mobilise private capital flows, resulting in positive results for both investors and the investee.

• Blended value: A conceptual framework for business that considers all the economic, social and environmental aspects of an organisation’s performance. It is an approach that recognises that value creation is not necessarily an 'either/or' struggle between economic returns and social impact, but rather, a holistic process considering all the economic, social, and environmental aspects of an organisations performance. The term is one coined by Jed Emerson.

• Bond: a formal contract to repay borrowed money with interest at fixed intervals. A bond is like a loan. The holder of the bond is the lender, the issuer or seller of the bond is the borrower, and the coupon is the interest. The seller of the bond agrees to repay the principal amount of the loan at a specified time (maturity).

• Bridge Loan: A short-term loan that is used until a person or company secures permanent financing or removes an existing obligation. This type of financing allows the user to meet current obligations by providing immediate cash flow.

• Bond: A formal contract to repay borrowed money with interest at fixed intervals. Like a loan, the holder of the bond is the lender, the issuer or seller of the bond is the borrower, and the coupon is the interest. The seller of the bond agrees to repay the principal amount of the loan at a specified time (maturity). See Social Impact Bond, Development Impact Bond or Green Bond.

C

• Capital markets: Financial markets in which businesses and governments raise long-term funds.

• Cash flow: a cash flow forecast shows the total expected outflows (payments) and inflows (receipts) over the year, usually on a monthly or quarterly basis. It is an essential tool for understanding where there will be shortages and surpluses of funds during the year and planning for ways to resolve these.

• Catalytic Capital: first mover investment/investors who accept a potentially lower risk adjusted returns in order to prove a concept and catalyse future investment.

• Circular economy: An alternative to a traditional line-economy (make, use, dispose), in which resources are kept in use for as long as possible, extracting maximum value from them whilst in use, then recovering and regenerating products and materials at the end of each service life.

• Co-investment: investment in a project or fund alongside and often on the same terms as other investors.

• Concessionary return: see Below market-rate of return.

• Convertible debt: A loan that is convertible into equity on pre-agreed terms.

• Convertible grant: A grant that is converted into equity in the event of the (commercial) success of an enterprise.

• Co-operative: An association of persons, who have voluntarily come together to achieve a common economic goal through the formation of a democratically controlled business organisation. They make equitable contributions to the capital required and accept a fair share of the risks and benefits of the venture.

• Corporate social responsibility (CSR): Corporate social responsibility is the responsibility of an organisation for the impacts of its decisions and activities on society and the environment, through transparent and ethical behaviour.

• Corporate foundation: A corporate foundation receives its income from the profit-making company whose name it may bear, but is established as a separate legal entity, usually with a permanent endowment. They often receive staff contributions and/or contributions from company profits on a regular basis. Company-sponsored foundations are different from corporate giving programs which give grants directly to charities and are usually administered through the company’s corporate affairs or public relations department.

• Cornerstone investor: The principal investor in a fund or project whose commitment to invest gives confidence to others to invest.

• Corpus: The original gift and ongoing principal that forms the asset base from which a foundation or trust operates.

• Covenant: In the loan context, a clause in a loan agreement in which a party promises to do, or to refrain from doing, certain things while the loan is outstanding. Covenants that require a party to do something are called“affirmative covenants.” Those that prohibit certain actions are called “negative covenants.” Covenants are designed to protect the lender’s interest.

• Crowdfunding: The process of raising capital from a large number of individuals to finance a project or venture that may include start-up company funding, inventions development and civic projects. Need to distinguish between donations and investments.

D

• Debt: An amount of money borrowed by one party from another. It is used by many corporations and individuals as a method of making large purchases that they could not afford otherwise.

• Debt financing: A type of financing in which a company borrows money from a lender and agrees to pay it back over time with interest.

• Development capital: enables organisations to invest to build capacity, for example by purchasing property or other assets, or developing new products and services.

• Development impact bond: An adaptation of social impact bonds, development impact bonds channel money from investors to local public and private service providers in developing countries. If set results are achieved, government and/or donors repay the investors alongside a financial return that is linked to performance.

• Dilution: Occurs when an investor's percentage share in a company is reduced by the issue of new securities. The term may also refer to the effect on earnings per share and the book value per share if convertible securitieis are converted tor stock options are exercised.

• Dividends: Proceeds paid by the company to an investor as a return on an original investment. Dividends can be paid either in cash or in kind, i.e. additional shares of stock.

• Due diligence: The investigative and analytical process that precedes a commitment to invest. The purpose is to determine the attractiveness, risks and all issues relating to a transaction with a potential investee company.

E

• Endowment: A capital fund, usually invested in perpetuity, to provide income for grant making purposes (also see Corpus).

• Entrepreneurship: The ability to convert an idea or a prototype into a business that can sustain itself on internally generated cash flow.

• ESG: Environmental, social, and governance (ESG) criteria are a set of standards for a company’s operations that socially conscious investors use to screen potential investments. Environmental criteria look at how a company performs as a steward of nature. Social criteria examine how a company manages relationships with its employees, suppliers, customers and the communities where it operates. Governance deals with a company’s leadership, executive pay, audits, internal controls and shareholder rights. See also 'sustainable and responsible investing'.

• Ethical investment: An investment policy which specialises in environmental and socially responsible investment, and is informed by shared commitment to improve the ethics of corporate Australia and promote ecologically sustainable and socially just enterprises through judicious investment. Ethical investment (sometimes referred to as green, socially responsible or conscious investment) comes from the desire to ensure that an investor’s investments are working in the same direction as an investor’s ethics. For many people this means investing in investments that protect the natural environment while contributing to a just and sustainable human society. Ethical investment has two sides:

• avoiding unethical investments that damage others or the environment

• promoting environmentally and socially responsible investments such as green and sustainable technologies.

• Evergreen fund: An evergreen fund is a system of funding a start-up enterprise in small amounts over a long period of time. They tend to be lower risk arrangements for those providing capital.

• Exit/Exit strategy: A moment when an investor gets rid of their stake in a company and therefore makes a profit or loss on the money they invested.  It can happen by them selling their share to another investor, another firm, or by the company listing on the public stock exchange.

F

• Family office: A professional organisation dedicated to managing the investments and trusts of very wealthy families. A single-family office (SFO) serves the needs of one family, while a multi-family office (MFO) serves more than one family.

• Family foundation: A family foundation is a descriptive term used to refer to private foundations that have been established by a family. They are either run by family members or managed by members of the original donor’s family with, in most cases, second or third generation descendants serving as trustees or directors on a voluntary basis.

• Fiduciary duty: Refers to a relationship in which one person has a responsibility of care for the assets or rights of another person or entity. Directors, trustees and managers of foundations and endowments owe fiduciary duties to the organisations they oversee, similar to the duties of directors at for-profit companies.

• Financial return: The profit or loss on an investment.

• First loss capital: Refers to socially and environmentally-driven credit enhancement provided by an investor or grant-maker who agrees to bear first losses in an investment in order to catalyse the participation of co-investors that otherwise would not have entered the deal.

• Fixed income: A type of investment that provides a fixed return on investment, such as a bond.

• Foundation: In philanthropic terms, it is usually used to refer to a trust designed to make grants to charities or to carry out charitable purposes.

• Forgivable loan: A loan that does not need to be repoaid if certain pre-agreed conditions are met.

• Fund: A collective investment scheme that provides a way of investing money alongside other investors with similar objectives. Individual investors are allowed access to a wider range of investments than they would be able to access alone and also reduces the costs of investing through economies of scale. Funds are managed by fund managers for a management fee on behalf of investors.

• Fund of Funds (FoF): A fund that invests in other funds, rather than directly in companies.

• Fund advisor: Company or companies that are given primary responsibility for managing a fund.

• Fund manager: The individual(s) responsible for overall fund strategy, as well as the buying and selling decisions relating to securities in a fund’s portfolio.

• Fundraising: Fundraising is the practice of seeking funds for the support of a particular organisation, individual or cause. Often confused as the same thing, philanthropy is the act of giving while fundraising is the act of asking.

G

• GIIN: Global Impact Investing Network

• Grant: A conditional or unconditional payment to a non-profit organisation or social enterprise for a specific project to further the organisation’s goals and fulfil its mission, with no expectation of a financial return.

• Green bond: Debt securities that are issued to finance projects that have environmental benefits. For example, a bond issued to raise finance for climate-change solutions, such as clean energy, energy efficiency or climate-change adaptation.

• Gross/Net Return: Gross return is the total return on an investment before the deduction of any fees and expense. Net return is the return after the deduction of such fees and expenses.

H

• High net worth individual (HNWI): Individuals whose investible assets exceed a given amount. In Australia, HNWIs are categorised as those controlling net wealth of $30 million or more.

• Hurdle Rate: A return ceiling that an investment needs to return to investors, in addition to the repayment of their initial commitment, before fund managers become entitled to carried interest payments from that fund.

• Hybrid investment: Traditionally hybrid investments refer to investments that combine elements of equity and debt. In Impact Investing, it refers to investments that combine elements of grants and investments, such as recoverable grants, forgivable loans and convertible grants.

I

• Impact investing: investments that set out to achieve positive social and environmental impact, alongside a financial return, and measure the achievement of both.

• Initial public offering (IPO): The first sale of a company's stock to the public.

• Impact: Long term benefits for society and environment more broadly. The longer-term social, economic, and/or environmental outcomes (effects or consequences) of a program. This term is sometimes used to describe long-term outcomes, but can also be a broader measure, such as changes to a community or society as a whole.

• Impact-first investment: Investment made with the primary aim of generating social or environmental good.

• Impact measurement: A way to assess the value your organisation or program is delivering to the people or places it serves.

• Impact Reporting and Investment Standards (IRIS): A common reporting language for impact-related terms and metrics.

• Incubator: An organisation or a unit within a business that helps start-ups to develop by offering mentorship, physical office space and basic business services.

• Indicators (in relation to impact measurement): Indicators are measurable markers that show whether progress is being made on a certain condition or circumstance. Different indicators will be needed to determine how much progress has been made toward a particular goal, output, or outcome.

• Intermediary: An organisation that raises funds from investors, including individuals and organisations, and re-lends these funds to other individuals and organisations or offers intermediation services between other parties. Services that can be provided by intermediaries include: introducing parties to the deal; gathering evidence and producing feasible options; facilitating negotiations between parties; raising investor capital; establishing a special purpose vehicle; and managing performance.

• Internal Rate of Return (IRR): The rate of return on an investment computed by finding the discount rate that equates the present value of a project's cash outflow with the present value of its cash inflow. In other words, the IRR is that discount rate that will cause the net present value of a project to be equal to zero.

• Investment readiness: The process of developing and preparing the resources a organisation/company needs to identify, apply for and secure investment or a loan.

J

• Junior capital: A type of financing that ranks below senior debt in a company's capital structure, meaning it has a higher risk of loss in the event of a bankruptcy.

L

• Layered capital/structure: Investment structures that blend different types of capital with different risk-return requirements and motivations.

• Legal structure: The way a company or organisation is set up and governed, such as a corporation, partnership, or sole proprietorship.

• Lead investor (deal lead): The investor who helps the entrepreneur get all other investors involved and often take the lead on doing the due diligence and negotiating the valuation.

• Leverage: The use of borrowed capital, to increase the potential return of an investment. Leverage is also thought of as the level of debt in a project. “Highly leveraged” projects have a high level of debt compared to equity as a source of funds.

• Limited partnership: The legal structure used by most VC and PE funds . The partnership is usually a fixed-life investment vehicle and consists of a General Partner or GP (fund manager) and Limited Partners (investors). The GP receives a management fee and a percentage of profits. The LPs receive income, capital gains , and tax benefits.

• Liquidity: The degree to which assets are held in cash or in a form that can easily and immediately be converted into money.

• Loan guarantee: A legally binding agreement under which the guarantor agrees to pay some or all of the amount due on a loan in the event of non-payment by the borrower.

M

• Matching loan: A loan that is provided only if additional capital is raised, and typically on the same terms as such additional capital.

• Market return: The return that can be expected from a traditional investment.

• Mezzanine financing: A type of financing that is intermediate in terms of risk and return, between senior debt and equity.

• Mezzanine loan: Loan that combines features of equity and secured debt.  Typically, some of the return on the instrument is deferred, in the form of rolled-up payment-in-kind interest and/or an equity kicker.

• Micro-finance: A form of financial services (loans, insurance, deposits) provided to low-income individuals, or to groups who would otherwise have no other means of gaining access to such services.

• Milestone investing: Investing capital in several tranches, with each beng triggered by and subject to management's reaching agreed performance objectives (milestones). If the milestone is not reached, the investor can either opt out of further investment, or can renegotiate the terms of that investment (company, valuation etc.)

• Mission drift: When an impact-driven organisation moves away from the organisation's social or environmental mission/purpose.

• Mission lock: A legal restriction on the ability of the owners to change or abandon the social mission of the business.

• Mission-related investments: Investments that broadly support a foundation’s programmatic goals, but do not count toward a foundation’s charitable-distribution requirements.

• Multi-Family Office (MFO): see Family office.

N

• Named fund: A Fund established by, or named for, an individual, family, corporation or other group to carry out the charitable interests of the donor(s) or deceased/honouree.

• Non-discretionary fund: Funds given to support a particular organisation selected by the donor at the time of the gift.

• Net asset value (NAV): In private equity, the NAV of a fund is the amount estimated as being attributable to the investors in that fund on the basis of the fair value of the underlying portfolio companies and other assets and liabilities.

• Net return: See Gross return.

O

• Opportunity cost: The cost of an opportunity forgone, or the benefits an individual could have received by choosing a different course of action.

• Outcomes: The sustained, long term observable changes in behaviours, level of functioning, status, skills, knowledge or attitudes that result from activities. For example, the changes or benefits to the participants and/or community because of the service or program delivered by your organisation. The intention is usually to achieve a positive long-term outcome; however, it is important to remember that an outcome may also need to be recorded as ‘no change’, or even a ‘negative change’, depending on the type of service the situation.

• Outputs: Things an organisation, program or does or provides. The direct products or services resulting from your program or interventions’ activities. For example, the number of people, places, supports or activities your program has produced.

P

• Patient capital: Another name for long term capital. With patient capital, the investor is willing to make a financial investment in a business with no expectation of turning a quick profit. Instead, the investor is willing to forgo an immediate return in anticipation of more substantial returns down the road. This may include loans or equity investments offered on a long-term basis (typically 5 years or longer) and on soft terms (e.g. capital/interest repayment holidays and at zero or sub-market interest rates).

• Pay for Success/Performance: Practice of paying providers of public services based wholly or partly on the social results (outcomes) that are achieved, as opposed to the common practice of paying for the services delivered. (see Social Impact Bond)

• Philanthropy: The planned and structured giving of time, information, goods and services, voice and influence, as well as money, to improve the wellbeing of humanity and the community.

• Positive Screening: Actively seeking out typically publicly listed companies that make a positve contribution to the environment or society or which stand to benefit from long-term sustainability trends.

• Private Equity (PE) and Venture Capital (VE): PE is the provision of equity capital by financial investors, over the medium-to-long term, to non-quoted (unlisted) companies with high growth potential. VC is a sub-set of PE, and refers to equity investments in early-stage businesses.

• Probono: Generally refers to the provision of professional services voluntarily and free of charge.

• Program-related investment (PRI): These investments provide capital at below-market terms or guarantees to non-profit or for-profit enterprises whose efforts advance the investing foundation’s mission.

• Public markets: Financial markets that are open to the public, such as stock exchanges.

Q

• Quantitative easing (QE): A monetary policy used by central banks to stimulate the economy by increasing the money supply and lowering interest rates.

• Quasi-equity: See Mezzanine financing

R

• Real assets: Investments into identifiable and tangible assets whose value is derived from physical properties. Includes investments in real estate, forestry, land and agriculture.

• 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.

• Responsible investing: The practice of considering environmental, social, and governance factors when making investment decisions. Approaches include negative screening, shareholder activism, positive screening, and impact investing.

• Retail investor: Investors that do not meet the threshold test as a wholesale investor (see Wholesale investor).

• Risk: The possibility of loss or injury.

• Risk-return trade-off: The idea that the higher the potential return on an investment, the higher the risk of loss.

S

• Seed capital/investment: Financing/capital provided to research, assess and develop an initial concept before a business has reached the start-up phase.

• Seeding a fund: Providing the operational capital necessary to develop the fund strategy, and market the fund to investors in order to raise capital.

• Shared value: Strategy focused on creating economic value in a way that also creates value for society, by addressing socail problems that intersect with business interests. Term coined by M. Porter and M.Kramer in 2011.

• Social enterprise: A social enterprise is a business that exists to create positive impact through trade by 1) Having a defined primary social, cultural or environmental purpose consistent with a public or community benefit; 2) Deriving a substantial portion of their income from trade (which includes retail revenue, corporate contracts and government fee-for-service agreements); and 3) Investing efforts and resources into their purpose such that public/community benefit outweighs private benefit

• Social entrepreneur: A person who recognises a social problem and uses innovative, entrepreneurial methods to create, manage and measure a venture for social change.

• Social Impact Bonds (SIBs): A type of bond that is used to finance social programs, with the investor being paid based on the achievement of predetermined social outcomes.

• Social Impact Investment Taskforce: A global taskforce established under the UK's presidency of the G8 to bring together government officials and senior figures from the worlds of finance, business, and philanthropy, from across the G8 countries to stimulate the development of an effective social impact investment market.

• Socially responsible investing (SRI): Investing with the intention of generating financial return and positive social impact.

• Social impact measurement: A form of measurement that provides benchmarks and mechanisms to asses, monitor and track the social impact of an investment.

• Social-Purpose real estate: Financing that facilitates the acquisition, construction, or tenure of land and buildings by social-purpose organisation and underserved communities.

• Start-up: A company that is in the first stage of its operations. These companies are often seeded with capital in its early stages as they attempt to capitalise on developing a product or service for which they believe there is a demand, or a problem that needs solving.

• Stock Options: A right to purchase shares at a fixed price. Stock options are widely used form of employee incentive and compensation.

• 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.

• Sustainable & Responsible Investing: The practice of incorporating environmental, social, and governance (ESG) factors when making investment decisions. Approaches include negative screening, shareholder activism, positive screening, and thematic investing.

• Sweat equity: Ownership in a business or initiative granted in return for labour (instead of a financial contribution)

T

• Technical Assistance (TA): Provision of advice, assistance, and training to an investee company. Often financed from a separate (charitable) pool of capital, provided by private donors or charitable trusts and foundations.

• Total portfolio approach: The commitment to align 100% of a wealth owner’s assets with his/her values over time.

• Trust: A trust is a fund or property legally held or administered by a trustee for the benefit of others. There are many different types of trust, not all of which are for the public benefit. In philanthropic terms, a charitable trust is the legal vehicle used to hold and invest money or property which is disbursed for the public benefit to charitable causes and organisations.

• Triple-Bottom-Line: A framework incorporating social, financial, and environmental criteria into business/investment decision-making.

U

• Ultra High Net Worth Individual (UHNWI): Typically individuals with more than US$300 in liquid financial assets or over US$50 in liquid assets.

V

• Venture capital (VC): See Private Equity.

• Venture philanthropy: Venture philanthropy is the application of venture capital principles and practices, such as long-term investment and capacity building, to not-for-profit organisations. Venture philanthropy assists nonprofit organisations in the plan, launch and management of new programs or social purpose enterprises.

• Vesting/Vesting period: The process by which an employee/management team accrues rights over the stock options or other incentives. Vesting period/schedule determines when the person acquires full ownership of the asset.

W

• Warrant: A right to purchase equity of the company at a specific price, within a certain time frame. Warrants are often included in PE deals as 'sweeteners' to entice mezzanine debt investors.

• Wholesaler investor: Classification type of investor who falls into either professional or sophisticated investor categories. To be classified as a sophisticated investor the investor must either (a) have net assets of at least $2.5 million or gross income for each of the last two financial years of at least $250,000 (as appears on a certificate given by a qualified accountant which is no more than six months old); or (b) must pay a minimum subscription amount of $500,000 for the securities being offered. To be classified as a professional investor, the investor must either be a financial services licensee or have or control gross assets of at least $10 million. (see Retail investor)