What is Impact: Impact Vocabulary and Definitions

16th Nov 2019

What is Impact: Impact Vocabulary and Definitions

What is Impact: Impact Vocabulary and Definitions

Next Generation has developed the Investment Impact Index™ to assist our clients in the social and impact investment sector to measure, verify, analyse and report on impact.

Impact Vocabulary and Definitions

Impact: The term ‘impact’ typically refers only to relatively long-term effects that can be attributed to a specific intervention. However, in the wider impact investment and social business domains, ‘impact’ often refers to a broader concept of the positive and negative social and environmental results accruing to target beneficiaries (including people and the environment) associated with investments or business activities.

Impact Objectives: Depending on their motivation, investors’ impact intentions range from broad commitments, such as “to mitigate risk”, “to contribute to a  sustainable long-term financial performance”, or “to leave a positive mark on the world”, to more detailed objectives such as “to support a specific group of people, place, outcome” or “to address a specific social or environmental challenge”.

Impact Investing:  Impact investing is investing that aims to generate specific beneficial social or environmental effects in addition to financial gain. Impact investing is a subset of socially responsible investing (SRI), but while the definition of socially responsible investing encompasses avoidance of harm, impact investing actively seeks to make a positive impact by investing, for example, in non-profits that benefit the community or in clean technology enterprises.

Impact investments:  Investments made into companies, organizations, and funds with the intention to generate social and environmental impact alongside a financial return. Impact investments can be made in both emerging and developed markets and target a range of returns from below market to market rate and premium returns. Although often associated with risk capital for small-scale, early stage enterprises, an investment is considered “impactful” provided the investor is committed to achieving a social or environmental benefit and to tracking and reporting progress.

Impact First Investor:  Impact first investors targeting social or environmental good as their primary objective, above achieving a financial return. This may mean accepting a below-market rate of return in order to reach tougher social/environmental goals that are seemingly not achievable through mainstream investment or philanthropic activities.

Finance First Investor:  Investors who prioritize the financial return objective over the social or environmental objectives of an investment. This group tends to include commercial investors seeking investments that offer market-rate returns and also yield social or environmental good. Also included in this group are investors that are required to uphold a fiduciary standard and are therefore unable to make investments that lack the potential to yield market rate returns.

Impact Entrepreneur:  The “fourth sector” is an emerging sector of the economy which consists of “for-benefit” organizations that combine market-based approaches of the private sector with the social and environmental aims of the public and non-profit sectors. Also referred to as social entrepreneurs or the 4th sector – meaning after the public, private and civil/social sectors.

Impact Value Chain: The impact chain represents how an investor achieves its impact by linking the organisation’s input resources to its program activities, and the activities to outputs, outcomes and impact. The impact chain forms the central line running through the impact plan.

Impact Goals: Investors set goals about the impacts they do, or don’t want to have on people, organisations and the planet, as well as the contribution they want to make to enable that to happen.

Impact Strategy: Refers to an intention to create impact.  It’s a strategy that aligns societal, environmental and business/investment objectives, with the intention of increasing impact/value. An impact strategy includes a logic model, or Theory of Change/impact thesis that maps the envisaged impact. A Theory of Change is most useful when it can be linked to the specific outputs of the intended investments. Several investors make this link upfront, either at the time of articulating their Theory of Change or when considering investment opportunities.

Impact Thesis: The impact thesis is a tool for screening investment opportunities. Impact investors allocate capital towards positive social and/or environmental change. Many investors articulate a specific “impact thesis” or “Theory of Change” they wish to support through their capital. Some investors utilise a single overarching impact thesis for their entire investment portfolio; while others operate across several impact themes or focus areas, with different portfolios for each. For most, the impact thesis serves as their North Star/mission towards which the portfolio is driving.

Investment Thesis:  The beliefs that investors decide to use when determining what investments to purchase or sell, when to take an action and why. An investment thesis helps investors establish goals for their investments, and measures whether they have been achieved, either in written form or simply as an idea. A sound investment thesis can be a foundation for a profitable portfolio. On the other hand, an incorrect investment thesis can result in sub-par returns or losses.

Impact Management:  This is the practice of intentionally defining, measuring, and making decisions by using information about the social and environmental changes caused by investments. Impact management relies on clarity about what major potential or actual social and environmental changes result from a given investment, and which of these are a priority from the investor’s point of view. It requires metrics by which those changes may be understood and ongoing assessment of those changes. All of this is tempered by what is measurable and what can be justified as cost effective or necessary.

Impact Assessment: This includes the whole process of assessment. From setting goals and benchmark targets, to determining the degree of depth required from the information collected, to measuring impact against the expectations defined at investment, to sharing the results of that measurement with stakeholders and informing future allocations. The term “impact assessment” generally includes the leading indicators as well as the impact itself.

Impact Measurement: Measuring and managing the process of creating social and environmental impact in order to maximize and optimize it. This demonstrates the positive impacts generated for all investment stakeholders. It mobilises greater capital and increases the transparency & accountability for the impact delivered.

Impact Map:  An impact map is a visualization of scope and underlying assumptions, created collaboratively by senior technical and businesspeople. It is a mind-map grown during a discussion facilitated by answering the following four questions: why? who? how? what?

Impact metric/indicator: Impact metrics are units of measurement designed to measure social, environmental or financial outcomes of an initiative or program as a result of an investment

Impact risk:  The likelihood that impact will be different than expected.

Collective impact:  Collective impact is the commitment of a group of actors from different sectors to a common agenda for solving a complex social problem.

Impact reporting and Investment Standards: The Impact Reporting and Investment Standards (IRIS) provide a common reporting language to describe social and environmental performance and ensure uniform measurement and articulation of impact across portfolios. The IRIS initiative defines terms to enable consistent reporting and allows benchmarking of data across companies, funds, investment portfolios and other organizations by serving as a repository for aggregated IRIS-compliant data. IRIS is an initiative of the Global Impact Investing Network.

Impact/social Economy:  The segment of the economy is composed of entities that aim to increase social inclusion and reduce inequalities, while simultaneously creating economic value. Social economy organizations include different types of cooperatives, associations, foundations, mutual and social enterprises (which are businesses of various legal forms using an entrepreneurial approach to respond to an increasing number of social and environmental challenges. While measuring them remains challenging both at national and international levels, existing evidence suggests that they are vibrant agents assisting local and national economic development and contributing to inclusive growth and shared prosperity through job creation, re-integration of vulnerable individuals to society and the labour market, and environmental sustainability.

Together with our clients we have learnt that impact has many dimensions. Feel free to explore our website for more resources on measuring and managing impact.