25 Impact Investing Terms Every Beginner Should Know

Impact Investing has emerged as a powerful strategy for generating social and environmental impact alongside financial returns.

Here's a glossary of essential terms to help beginners navigate the landscape of impact investing.

1. Impact Investing

Investing that aims to generate specific beneficial social or environmental effects in addition to financial gains. Learn more about Impact Investing.

2. Social Enterprise

An organization and/or company that applies commercial strategies to maximize improvements in human and environmental well-being, rather than maximizing profits for external shareholders. Learn more about social enterprises.

3. ESG (Environmental, Social, and Governance)

ESG is a framework for assessing a company's impact on the environment, its social responsibilities, and its governance practices. Investors use ESG criteria to identify sustainable and ethically responsible investment opportunities.

4. SRI (Socially Responsible Investing)

An investment strategy that seeks to consider both financial return and social/environmental good to bring about a positive change.

5. Green Bonds

Bonds specifically issued to fund projects that have positive environmental and/or climate benefits. Learn more about Green Bonds.

6. Capacity Building

Investments or initiatives aimed at improving the abilities, skills, and expertise of organizations or communities so that they can sustain themselves and scale their impact over time. This often includes training, technology transfer, and organizational development support.

7. Divestment

The process of selling an asset for either financial or social goals. In impact investing, this usually refers to the selling of assets that are harmful to the environment or society.

8. Impact Measurement

The process of assessing the effects of an investment or a company’s business activities on its social, environmental, and economic goals.

9. Triple Bottom Line

A framework that encourages companies to focus not just on profit, but also on the planet and people. Learn more.

10. Community Investing

Directing capital to communities underserved by traditional financial services institutions, typically for affordable housing, childcare, and other vital community services.

11. Microfinance

Providing small loans and other forms of finance to entrepreneurs and small businesses in emerging markets that do not have access to traditional banking services.

12. Social Impact Bonds

A type of bond where the return on investment is linked to the social outcome achieved.

13. Blended Finance

The use of capital from public or philanthropic sources to increase private sector investment in sustainable development.

14. Stakeholders

All the people who stand to be affected by a project or a company, including but not limited to investors, employees, customers, and the community at large.

15. Concessionary Returns

Accepting a below-market rate of return on investment in exchange for generating a social or environmental impact.

16. Philanthropic Investment

Investments made by individuals or foundations to support charitable activities, often with no expectation of financial return.

17. Venture Philanthropy

An approach to building stronger social enterprises by providing them capital and strategic management support.

18. Social Return on Investment (SROI)

A method for measuring extra-financial value (i.e., environmental and social value not currently reflected in conventional financial accounts).

19. Corporate Social Responsibility (CSR)

A business model that helps a company be socially accountable to itself, its stakeholders, and the public.

20. Impact First Investments

Investments made with the primary goal of achieving social or environmental impact rather than financial return.

21. Responsible Exit

The strategy of an investor exiting an investment in a way that ensures the long-term sustainability of the enterprise’s social or environmental benefits.

22. Patient Capital

Long-term investment capital that acknowledges both the extended time horizon needed for social enterprises to show financial profitability and the investor’s willingness to make a long-term commitment.

23. Theory of Change

A specific type of methodology for planning, participation, and evaluation that is used to promote social change in various sectors.

24. Screening

The process of including or excluding stocks based on social and environmental criteria.

25. Transformational Capital

Investment capital aimed at creating transformative change within sectors or systems by focusing on outsized impacts on society’s most pressing challenges.

Understanding these terms is the first step in becoming an effective impact investor. With this knowledge, you are better equipped to make informed decisions that align with your values and investment goals.