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Impact Investing

Impact investing glossary

Exploring the impact investing landscape? We put together a list of relevant industry terms to help you make sense of the emerging strategy.

There are a few handfuls of industry terms to know if you’re interested in learning more about impact investing or are considering becoming active in the space. Familiarity with these concepts will provide a solid foundation for further exploration of the impact investing landscape.

For additional context, check out our impact investing FAQ.

Impact investing terminology

Development finance institution (DFI)
A blanket term to describe varying types of financial institutions—investment banks, institutional investors, advisers—with mandates to support economic development via investment and financial service provisions. DFIs tend to target investments in emerging markets, as their support can catalyze and stimulate economic development in underserved regions.

Environmental, social and governance criteria (ESG)
A set of metrics or criteria used to evaluate a company’s risks outside of a financial accounting framework, including environmental, social and governance practices. More public market funds are incorporating this framework, though private market participants are starting to as well. ESG data has gained more attention in the US in the past decade, and it can be useful for analyzing risk and impact of potential investments.

Investors tend to agree that “impact” refers to the social or environmental effects generated by an investment. This simple definition has some flaws though, as impact can vary across business sectors and geographical regions. Impact is informed by the context of the stakeholders, enterprises and populations they serve, too. In developed markets, many impact investments target environmental goals, like reduced carbon emissions. In emerging markets, impact often comes in a social form, like creating jobs and providing basic services.

Impact investing
A strategy of investing in enterprises, organizations and funds that seek to create both financial returns and measurable social and/or environmental impact. Impact investments are most commonly made through the familiar investment structure of closed-end private equity (PE) and venture capital (VC) funds.

Mission-related investments (MRIs)
MRIs are similar in theory to program-related investments (see definition below), but target market-rate returns, as they are made from the portion of a foundation’s endowment that is invested for profit.

Program-related investments (PRIs)
Investments made by private foundations whose primary goal is to advance the programmatic goals of the organization, where capital appreciation or income production is “not a significant purpose.” PRIs can be structured as direct debt or equity investments, or fund commitments.

Social enterprises
Companies that are both financially sustainable and bring about positive social and/or environmental impact. Impact investments often support social enterprises.

Socially responsible investing (SRI)
An investment strategy whereby investors utilize screening and exclusion, divestment, positive reinvestment and shareholder activism to achieve positive social or environmental outcomes. A typical SRI strategy would exclude “sin stocks,” such as companies producing tobacco, firearms or alcohol from a portfolio of public equities. SRI is predominantly used with public market securities and is relatively accessible to non-accredited investors.

UN Sustainable Development Goals (UN SDGs)
A collection of 17 global goals developed in 2015 by the United Nations General Assembly for the year 2030. The SDGs are “a universal call to action to end poverty, protect the planet and ensure that all people enjoy peace and prosperity.” SDGs are recognized across institutions and geographic regions, making them a popular framework for benchmarking impact.

Impact investing terms specific to the United States

Community development finance institution (CDFI)
An umbrella term that encompasses private-sector, community-focused banks, credit unions, and lending institutions that serve low-income communities throughout the US.

Qualified Opportunity Zone (QOZ)
A low-income census tract or a census tract contiguous to a low-income community, designated by the US government to be eligible to receive investments from a Qualified Opportunity Fund (O-Fund) via the Investing in Opportunity Act enacted in 2017.

Qualified Opportunity Fund (O-Fund)
A vehicle organized for the purpose of investing in Qualified Opportunity Zones. By reinvesting recently realized capital gains into an O-Fund, investors can receive preferential tax treatment.

Curious how impact investing is different than socially responsible investing (SRI)? Read our recent blog post. Dive even deeper into impact investing by downloading our recent analyst notes on private market impact investments and sustainable investing.