Glossary

INCREASING THE FLOW OF CAPITAL FOR GOOD - INVESTING AND GIVING

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Social impact investment has added a tranche of new terms to the philanthropy vocabulary. Here we offer some definitions from leading sector organisations.

First-loss
‘First loss’ refers to a segment of an investment fund that stands ready to absorb any losses up to a pre-agreed maximum. (See Fair Finance Case study 3)
Source: Impact Investors Handbook – Lessons from the world of microfinance, CAF Venturesome, Feb 2011
 

Impact First
‘Impact-first’ investors target social or environmental good as their primary objective, above achieving a financial return. This may mean accepting a lower-than-market rate return in order to reach tougher social/environmental goals that are seemingly not achievable through mainstream investment or even philanthropic activities. Because of their somewhat more altruistic vantage point, Impact First investors are also often willing/able to invest in more innovative products.

Source: An Overview of Impact Investing, November 2010, Phillips, Hager & North Investment Management 

Finance-First
‘Finance-first’ investors, prioritise the financial return objective over the nonetheless desirable social/environmental objective(s). This group tends to include commercial investors searching for investments that offer close-to-market-rate returns and also yield social or environmental good.

Source: An Overview of Impact Investing, November 2010, Phillips, Hager & North Investment Management 

(Social) Impact investing
Impact investments aim to solve social or environmental challenges while generating financial profit. Impact investing includes investments that range from producing a return of principal capital to offering market-rate or even market-beating financial returns. Although impact investing could be categorized as a type of "socially responsible investing," it contrasts with negative screening, which focuses primarily on avoiding investments in "bad" or "harmful" companies - impact investors actively seek to place capital in businesses and funds that can harness the positive power of enterprise. ‘Impact investing’ is rapidly gaining currency as the phrase of choice to describe all investment activity which has an expectation of both a specified social outcome and an explicit financial return.
Source: Global Impact Investment Network (GIIN)

Investment plus
Where positive screens are used to help a foundation select investments which also help it advance its charitable purposes. In the US this is sometimes referred to as mission-related investment.
Source: Esmée Fairbairn Foundation; Social Investment Briefing, 2005

Microfinance
Microfinance can be understood as a section of the broader impact investing marketplace. Although a conclusive definition of microfinance is not universally agreed, it generally refers to financial mechanisms and arrangements that offer “poor people access to basic financial services such as loans, savings, money transfer services and microinsurance”.
Source: Impact Investors Handbook – Lessons from the world of microfinance, CAF Venturesome, Feb 2011
 

Mission-related investment
Loans, equity purchases, or quasi-equity funded from the foundation’s income or capital, with the primary aim of advancing the foundation’s charitable purposes,but including a “for-profit’ motive.
Source: Esmée Fairbairn Foundation; Social Investment Briefing, 2005

Programme-related investment
Loans, equity purchases, or quasi-equity funded from the foundation’s income or capital, with the primary aim of advancing the foundation’s charitable purposes, but in contrast to mission-related investment, does not specifically aim to achieve a financial gain.
Source: Esmée Fairbairn Foundation; Social Investment Briefing, 2005,

Social Impact Bond
See box (link to box)

Socially responsible investment (SRI)
Loans, equity or fixed asset purchases (funded from the foundation’s capital) with the primary aim of producing income or appreciation in value but with some weight given to social considerations in choosing which investments to make and/or how to manage them. Socially responsible investment takes three main forms:

• Negative screening — to avoid socially harmful ways of getting a good return an ethical investment policy is developed and companies which do not match up are excluded.

• Positive screening — socially beneficial ways of getting a good return are sought out and investment is made, for example, in companies with responsible business practices or which offer beneficial goods or services.

• Shareholder action — investors encourage more responsible business practice by voting their proxies and/or making direct contact with companies.
Source: Esmée Fairbairn Foundation; Social Investment Briefing, 2005

Social investment market
Specifically the range of impact investing in the UK (from capital/balance sheetfunding, grants, debt, equity, quasi-equity and underwriting).  The terms ‘social capital market’, ‘social finance market’ and ‘social finance sector’ are more generic and include the global microfinance industry as a subset.
Source: Impact Investors Handbook – Lessons from the world of microfinance, CAF Venturesome, Feb 2011