There is a strong need for effective financing solutions to close the enormous funding gap for achieving the SDGs. It’s not only about moving money – it’s about making a difference.
Impact-Linked Finance (ILF) refers to linking financial rewards for market-based organizations to the achievements of positive social outcomes. It is a highly 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).
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.
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 – not outputs – and measure these wherever feasible, useful, and economically viable as triggers for determining the level of financial rewards.
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 by the Initiative for Blended Finance at the University of Zurich.
Impact-Linked Finance in Practice
About the Impact-Linked Finance Fund
Roots of Impact and iGravity established the Impact-Linked Finance Fund in order to pool our know-how and activities for implementing scalable programs and facilities. The Fund, set up as a Dutch charitable foundation, is acting as a capital provider and knowledge hub for the practice of Impact-Linked Finance. We also advocate for embedding impact-related principles and terms in other areas of business, policy and finance. Read more about the fund here or watch the video essay to learn more about the Impact-Linked Finance concept, design principles and real life examples.
More food for thought?
If you would like to stay up-to-date on Impact-Linked Finance, feel free to register for our Impact-Linked Finance Fund newsletter, check out our SIINC case studies or read the latest publications on related subjects. For concrete Impact-Linked Finance solutions, this Innovative Finance Toolkit is a great resource that we prepared together with our partners in the B-Briddhi program.