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Impact Investing Glossary

Core Financial Terms

At times, personal finance can seem like a whirl of unfamiliar jargon. What are the distinctions between terms like ‘Impact Investing’ and ‘SRI’?

We put together this glossary of terms as a reference point for anyone who is interested in learning more about the ins and outs of finance and impact investing terms.

You can skim or jump to a specific grouping of words using the table of contents below.

Impact Investing Terms

Blended Value – This refers to the integration of social and financial returns gained through impact investments.
Clean Revenue The measure of a company’s revenue from all goods and services which have clear environmental and social benefits.

Collective Impact – Different entities coming together to help to solve a social problem through carefully considered and planned collaboration.

Community Development – The United Nations defines community development as “a process where community members come together to take collective action and generate solutions to common problems.”

Community Development Financial Institution (CDFI) – Nonprofit private financial institutions that are solely dedicated to delivering responsible, affordable lending to help low-income, low-wealth, and other disadvantaged people and communities join the economic mainstream. These are regulated and considered tax-exempt under section 510(c)(3) of the U.S. Internal Revenue Code.

Community Investment – A subcategory of SRI or impact investing aimed at the improvement of economically disadvantaged communities.

Corporate Social Responsibility (CSR) – A form of corporate self-regulation integrated into a business model. CSR policy functions as a built-in, self-regulating mechanism that governs and serves as a guide as to how a business holds itself socially responsible.

Credit Union – A nonprofit money cooperative whose members can borrow from pooled deposits at low interest rates.

Donor-Advised Fund (DAF) – A vehicle that gives donors the opportunity to contribute to a charitable organization on a tax-deductible basis, enjoy philanthropic rewards in an advisory capacity, while limiting personal administrative responsibility.

Economic Empowerment – The ability of an individual, group, or entity to make and act on decisions that involve the control over and allocation of financial resources.

Environmental, Social and Governance (ESG) – Environmental, Social and Governance refers to three central factors by which a business’s positive impact can be analyzed – both internally and their affect on society.

Green Bonds – Bonds that are used to fund environmentally sustainable and beneficial projects.

Impact Investing – The Global Impact Investing Network defines impact investing as investments made into companies, organizations and funds with the intention to generate measurable social and environmental impact alongside a financial return. Impact investors actively seek to place capital in businesses and funds that can harness the positive power of enterprise.

Impact Report – A report communicating the difference made to an issue a person or group of people are trying to solve or people they are trying to help. It typically takes the form of an annual report and can be shared with investors and shareholders to illustrate the impact of investments.

Investment Thesis – This is typically used as the basis on which to analyze a potential investment. It is based upon decided criteria that is used as a guide as to whether a potential investment could obtain the desired outcomes of financial returns and targeted impact outcomes.

Low-to-Moderate Income Community (LMI) – Often used to refer to targeted investment space in impact investing that is oftentimes overlooked by traditional banks. For example, CNote and our CDFI partners look to support borrowers in LMI communities.

Microlending – A form of financing that provides small loans to typically emerging entrepreneurs to encourage self-sufficiency and economic empowerment.

Mission Related Investment (MRI) – An investment that furthers an investor’s organizational mission.

Native CDFI – Community Development Financial Institutions that work to support Native American communities throughout the United States. These communities have historically been severely underserved by traditional financial institutions. Native CDFIs are able to understand the unique issues of the communities they work in and serve.

Place-based Investing – Often associated with impact investing, place-based investing entails investing in targeted geographic locales, oftentimes looking to support those that have been underserved by traditional financial institutions.

Social Entrepreneurship – An approach by entrepreneurs (individual) or startups (group) in which they develop and execute solutions to social, cultural and/or environmental issues.

Social Finance – An approach to managing money that delivers both a social dividend and an economic return.
Social Impact Broadly speaking, social impact is the net effect of an individual’s or organization’s actions or practices on the social well-being of a community, nation, or even the planet.

Social Impact Bond (SIB) – Financing mechanism in which a government agency enters into agreements with social service providers, such as social enterprises or non-profit organizations, and investors to pay for the delivery of pre-defined social outcomes. In financial terms, SIBs are not real bonds but rather future contracts on social outcomes. They are also known as Payment-for-Success bonds in the United States.

Socially Responsible Investing (SRI Investing) – Sometimes referred to as Sustainable, Responsible, Impact Investing, SRI Investing involves investing in companies that are engaged in ethical and socially conscious fields.

Sustainable Development Goals (SDG) – A collection of 17 global goals designed to be a “blueprint to achieve a better and more sustainable future for all”. The SDGs, set forth in 2015 by the United Nations General Assembly and intended to be achieved by the year 2030, are part of UN Resolution 70/1, the 2030 Agenda.

 

General Finance Terms

Accredited Investor – An investor with special status under financial regulation laws. This varies by country, but in the United States, this qualifies as (but is not limited to) an individual that has earned income exceeding $200,000, or $300,000 when combined with a spouse, during each of the previous two full calendar years, and a reasonable expectation of the same for the current year. The individual must have a net worth greater than $1 million (either alone or combined with a spouse), excluding the person’s primary residence.

Asset Class – A group of financial instruments that exhibit similar characteristics and are subject to the same laws and regulations. Within a class, assets often behave similarly to one another in the marketplace

Assets – The property and resources owned by a person or company, regarded as having value and available to meet debts or commitments.

Automated Clearing House (ACH) – An electronic funds transfer system. The computerized system is designed to accept payment batches so that large numbers of payments can be made at once.

Bond – A debt instrument or loan purchased by an investor from a company or government with an agreement to be paid back their principal with interest.

Cash and Cash Equivalents – The most liquid current assets. They are typically used for short-term investments.

Certificate of Deposit (CD) – A certificate issued by a bank to a person depositing money for a specified length of time. A CD typically offers an interest rate that can be earned with the agreement that the money is left for a specified amount of time.

Crowdfunding – A form of alternative financing where small amounts of money are raised from a large group of people. Crowdsourced funds have become more popular than ever in recent years, partially due to the rise of social media.

Current Assets – Cash, accounts receivable, and other assets that are likely to be converted into cash or expensed in the normal course of business, typically within a year.

Current Liabilities – Debt or other obligations due to be paid to creditors within the current period, which is typically a year.

Current Ratio – Current assets divided by current liabilities. The firm’s ability to use its available resources (assets) to cover its current obligations (liabilities).

Debt – An amount owed for funds borrowed. It is a deferred payment or series of payments to be paid in the future, oftentimes with interest.

Debt Instruments – A documented, binding obligation that provides funds to an entity in return for a promise from the entity to repay a lender or investor in accordance with terms of a contract. This can include a bond or a deposit.

Debt Service – The amount of payment due at regular intervals (usually monthly, quarterly, or annually) to meet a debt.

Default – Failure to fulfill an obligation. Often times used in reference to the failure to meet a loan’s terms.

Deposit – A sum of money placed in a bank or other financial institution.

Deposit Agreement – An agreement outlining the terms of a transaction that transfers funds (deposit) to another party, typically a financial institution, as collateral.

Dividend – A payment made by a corporation to its shareholders (typically quarterly), usually as a distribution of profits for their investment in the company.

Due Diligence – The process of evaluating the opportunities and risks of a particular investment. This includes verifying sources of income, the accuracy of financial statements, the value of assets that will serve as collateral, the tax status of the borrower, and all other relevant legal and financial information.

Equity – The value of shares issued by a company to stockholders or ownership of assets that may have liabilities attached to them. Equity can be measured by subtracting the liabilities from the value of the asset.

Exchange-Traded Fund (ETF) – An investment fund traded on stock exchanges continuously throughout the day, much like stocks. This is typically held close to its net asset value, although deviations can occasionally occur.

Federal Deposit Insurance Corporation (FDIC) – An independent agency created by Congress to maintain stability and public confidence in the nation’s financial system by insuring deposits, examining and supervising financial institutions for safety and soundness and consumer protection, and managing receiverships.

Fiduciary Duty – A fundamental obligation to provide investment advice that always acts in the clients’ best interests. A person acting in a fiduciary capacity is held to a high standard of honesty and full disclosure in regard to the client and must not obtain a personal benefit at the expense of the client.

Fiduciary Responsibility – A relationship in which one person owes a fiduciary duty to another, most often a client.

Fixed Assets – Long-term assets that cannot be quickly converted into cash, such as property.

Fixed Income – Income from an investment that is fixed at a particular figure and does not vary or rise with the rate of inflation. The return is typically paid on a set schedule.

Grant – Money that is gifted by a government or other organization for a particular purpose. It is not expected to be repaid.

Guarantee – A formal pledge to pay another person’s debt or to perform another person’s obligation in the case that they default or are not able to.

Interest – As a borrower, it is a charge for borrowed money which is typically set a percentage of the amount borrowed. Alternatively, as a lender, it is the profit in goods or money that is made on invested capital.

Investment Intermediary – The middleman between two parties in a financial transaction, such as a commercial bank, investment banks, mutual funds, and pension funds.

Liability – Financial debts or obligations.

Limited Liability Company (LLC) – A business form that combines the characteristics of a corporation with the pass-through tax treatment of a partnership. In an LLC, the members of the company cannot be held personally liable for the debts or liabilities of the company.

Liquidity – Measures a company’s ability to meet short term obligations. It can be assessed by evaluating a company’s current ratio and working capital.

Loan – Funds provided to an organization with a commitment to repay the principal.

Loan Loss Reserve – Funds retained by a firm as risk mitigation towards loan default.

Market Rate – A generally agreed upon “going rate” that is charged for a financial instrument, good, service, etc. in a free market.

Net Worth – The value of all financial and non-financial assets minus the value of all liabilities.

Principal – The amount of an initial investment, deposit, loan, etc.

Private Debt – An asset class that includes any debt held by or extended to private companies, such as in the case of the sale of equity shares.

Promissory Note – A legal document in which one party promises to pay a determinate sum of money to the other, either at a fixed or determinable future time or on demand of the payee, under specific terms.

Quick Ratio – Also known as an Acid Test, it is the sum of the firm’s cash, marketable securities, and accounts receivable, divided by its current liabilities. This illustrates the ability of a firm to meet its current liabilities.

Registered Investment Advisor (RIA) – A person or firm who advises individuals on investments and manages their portfolios. RIAs have a fiduciary duty, or obligation to act in their best interest, to their clients.

Return on Investment (ROI) – Earnings before interest and taxes (or profit) divided by the amount invested. (EBIT / Investment = ROI)

Security and Exchange Commission (SEC) A U.S. government agency that oversees securities transactions, activities of financial professionals and mutual fund trading to prevent fraud and intentional deception.

Term – The length of time until a loan or other obligation is due.

Venture Capital – Growth equity capital or loan capital provided by private investors (the venture capitalists) or specialized financial institutions (development finance houses or venture capital firms) for new or growing businesses. Also called risk capital. The venture capital firm or individual investor gives funding to the startup company in exchange for equity in the startup.

Other Finance Terms

B Corporation – A business that has been certified by the nonprofit, B Lab, to meet rigorous standards of social and environmental performance, accountability, and transparency.

Entrepreneur – A person who organizes and manages any enterprise, especially a business, usually with considerable initiative, responsibility, and risk.

Philanthropy – The desire to promote the welfare of others, often expressed through financial gifts or acts of kindness.

Small Business Administration (SBA) – The SBA is a U.S. government agency established in 1953 to promote the economy in general by providing assistance to small businesses. One of the largest functions of the SBA is the provision of counseling to aid individuals in trying to start and grow businesses.

By Impact Investing

Positive and Negative Investment Screening Explained

If you have explored socially responsible investing (SRI), then you might also be familiar with the concept of investment screening.

Socially responsible investing, a form of impact investing, is a strategy used to align investments with social goals.

Investors understand that their money can produce positive outcomes in more than just a financial sense by achieving both financial growth and positive social change. Investment screening is used to filter out companies or organizations that do not meet investors’ standards, and instead allocate capital to those that do.

Positive and negative investment screening is used to distinguish between different organizations based on how restrictive investors would like their investments to be. Positive screening identifies and focuses investments into companies that are considered top performers based upon chosen criteria. Alternatively, negative screening looks to exclude companies that perform poorly on environmental, social, and corporate governance (ESG) criteria and removes them from investment portfolios. Understanding some of the different approaches to socially responsible investments can help you to learn how your portfolio is managed, and which investment strategies best fit your objectives.

What is Impact Investing?

Impact investing is a way to invest your money with the intent to bring about some socially desirable outcome with the expectation of a financial return. 

CNote specifically defines impact investing as deploying capital with the aim of creating some measurable positive social outcomes with the expectation of financial returns. Like your vote, your dollar is powerful. Whenever you give money to an institution, whether in the form of an investment or a transaction, you are supporting their mission – whether you morally agree with it or not. It’s that simple.

Of course, there is some subjectivity when it comes to what it means to do good. Something that one investor believes to be a good cause may not be important to another investor. Overall, the goals of impact investing generally reflect popular social and political opinions of the time. In the mid-twentieth century, this included a focus on civil rights, women’s suffrage, and anti-war efforts. Nowadays, common causes people look to support through the power of their investments are environmentally sustainable initiatives, increasing economic opportunity for minority or underrepresented communities and ending world hunger.

There are three key components to impact investing: investment with the intention to do good and the expectation of financial return all while creating measurable impact. Measuring the impact of one’s investment is a central tenet of impact investing. If you are investing to make a difference, you should utilize measures to understand the true impact your investment is having.

What is Socially Responsible Investing?

Socially responsible investing (SRI) is a strategy that considers specific investor values when choosing organizations to invest in.  Sometimes referred to as Sustainable, Responsible, Impact Investing, SRI Investing involves investing in companies that are engaged in ethical and socially conscious fields. Also known as ‘green investing’ or ‘ethical investing,’ SRI has become a popular way for investors to support causes they believe in while earning positive financial returns.

Much like impact investing, there is a level of subjectivity when it comes to socially responsible investments. In general, SRI indexes or mutual funds look to invest in organizations that support environmental and social causes. They typically avoid companies that deal with alcohol, gambling, tobacco, and weapons.

Why Engage in Socially Responsible Investing Practices?

People invest in SRI indexes and funds for a variety of reasons. An investor may be driven by strong personal values that guide their investment decisions. If investors are dedicated to green living, they may want to invest in companies that pass ESG criteria for green companies. A company or investor may pride themselves in supporting organizations that celebrate diversity. They may pursue investments in companies that champion these initiatives as a way of improving their own ESG profile.

We are seeing more often than ever before that clients and shareholders are demanding that companies take action to improve their own ESG standing, like through investing in SRI opportunities. Shareholder activism has forced organizations to reevaluate their own practices and invest in causes that their shareholders value.

Does SRI Result In Lower Financial Returns?

You may have heard that committing to socially responsible investing may result in lower returns. However, that is often not the case.

Consider the Domini 400 Social Index, which is essentially the S&P 500 for socially responsible investing. In a study from Morningstar and MSCI that compared the index total returns from the year 1990 to 2008, it was determined that the return and risk characteristics were nearly identical for both indices. In fact, the Domini 400 Social Index slightly outperformed the S&P 500.

As the tide changes towards more socially responsible investing, companies are learning that raising their ESG standards can earn them more investors and a stronger client base. Consumers are looking for companies that reflect their values now more than ever. Socially responsible investing has built a bridge between enacting positive change and growing wealth.

The Difference Between SRI and Impact Investing

While SRI and impact investing both seek to enact social change and produce wealth, they differ in their need for measurable change.SRI is concerned with deploying investment dollars in a way that is responsible and positive. Impact investing requires that the change be, as the name implies, impactful. A good way to understand the difference between SRI and impact investing is that SRI can simply stop at “do no harm” while impact investing seeks to proactively “do good” with investments.

Screening and Socially Responsible Investing

While impact investors seek to do measurable good, socially responsible investors seek to support causes that align with their views and avoid causes that they find undesirable. This is done through a process called screening.

Investment screening is the process of determining whether an organization’s values align with that of the investors. In today’s market, screens help identify firms based on environmental, social and corporate governance (ESG) criteria.

When evaluating companies based on environmental factors, a screen may take into account the amount of waste they produce, greenhouse gas and carbon outputs, raw materials used in production and how materials are sourced.

Companies evaluated based on social standards will typically look at the health and safety of workers, gender equality within the company, and diversity within the workplace. However, sometimes the assessment of socially responsible practices does not stop at the company themselves; Some fund managers will even evaluate the workplace practices of suppliers to ensure that they pass the screens as well.

Governance standards refer to how the business conducts itself. These screens will typically test for corruption, instances of retaliation, scandals, or even the compensation differences between executive members and entry-level workers.

There are two forms of investment screening: positive screening and negative screening. Screens are essentially filters that define what is an acceptable investment. They help to identify companies that may have risks that are not recognized by traditional fiscal standards. For example, if an analyst would like to screen for companies that are cruelty-free, this would set a clear screen parameter for investment opportunities.

The History of Screening

Investment screening was originally used by religious investors who were concerned about investing in industries that they found sinful. This was meant to exclude companies that were involved in industries like weapons manufacturing, alcohol and tobacco companies, and gambling operations.

Eventually, this shifted from just being utilized by religious investors to also being used investors who were interested in using their money to advance their social beliefs. This especially included women’s right to vote and civil rights in the early 20th century.

Investors also used screening to divert funds from companies that they found did not represent their values. In the 70’s and 80’s, investors used divestment as a way to negatively screen companies that benefitted from South Africa’s Apartheid policy. If a company benefitted from apartheid, investors pulled all of their investments out of the company. The lack of economic support helped to aid in the breakdown of apartheid.

What is Negative Screening?

Negative screening, or exclusionary screening, is one of the most basic methods of separating socially responsible investments from those that are likely to have a negative effect on society.

Negative screening is much less restrictive than positive screening. It simply excludes investments in companies that actively work against the investor’s values, such as organizations with a history of international bribery or corruption. Effectively, this process works to remove investments in entities that are deemed as having a negative impact on society or the environment from the investor’s portfolio. For this reason, negative screens help to embody the “do no harm” initiative of impact investing.

Early socially responsible investors used negative screens to weed out companies in ‘sin industries’, such as alcohol or gambling. The negative screening process has evolved to also exclude companies that do not meet diversity standards, emit large amounts of greenhouse gases, or engage in corrupt business practices.

Advantages

Negative screening is the most widely used process of identifying targeted investments for a reason; it’s incredibly inclusive.

Investors hesitant to adopt SRI may consider negative screening as it does not require companies to go above and beyond to be included in an investment portfolio. It weeds out the worst of the worst based on the particular screening criteria used and determines the rest of the companies to be acceptable. This can be beneficial to investors who are worried that SRI may be too exclusive.

Negative screens can also prevent investments into specific countries. Many exclusionary funds will exclude government bonds from countries that are known as human rights abusers. This not only prevents you from supporting practices that you find unacceptable, but it can also prevent you from investing in governments that are particularly egregious.

Drawbacks

One of the largest criticisms of negative screening is that it doesn’t work to support investments that align with an investor’s values. Negative screens work solely on eliminating investments that go against investor values. They do not place companies that support investor values at any particular advantage. By simply avoiding companies who actively work against investor values, negative screens do little to elevate the companies that actively do good. It is widely thought to have no tangible impact, as another investor (that is not focused on SRI) will likely invest in those stocks.

Examples

The most basic form of a negative screen is to avoid investments in ‘sin’ industries. This is also one of the earliest forms of negative screening. In the 1700’s, religious investors in the U.S. refused to place investments in tobacco, alcohol or gambling ventures. Even today, there are funds that screen based on specific religious doctrines.

Another example of a negative screen would be to screen for companies that have had any sexual harassment allegations in the past six years. Assuming that the fund is regularly rebalanced, any company that has not had a sexual harassment allegation in the past six years would be included or remain in the fund. A company that has had a sexual harassment allegation would be eliminated from the fund entirely.

What is Positive Screening?

Sometimes a fund manager may find that negative screening tactics may leave quite a few investments to choose from. This is where positive screening can be helpful.

Positive screening, or as it is sometimes referred to, ‘best-in-class screening’, is a process that identifies companies that are actively making contributions to social or environmental change. This enables investors to screen for and support practices that they find impactful.

Positive screening techniques work to identify and highlight organizations that are actively functioning to further environmentally sustainable and positive social practices, rather than simply avoiding bad behavior. Companies shown to have a positive impact are supported, while those who simply meet the status quo may fail the screen.

Advantages

Positive screening often looks to include only the best companies in a given impact category in the fund or portfolio. 

Best-in-class screening also encourages companies to compete with each other for investment dollars. When investment funds are based on the environmental, social or governance performance of companies, this incentivizes companies to compete with one another to create more impactful change. Positive screening not only rewards companies that do well, but it encourages industry peers to further advance their positively impactful corporate practices as well.

Drawbacks

The one major downside of positive screening is that it can be too exclusive. Investors interested in diversifying their portfolio may have trouble doing so through a positive screen. Depending on how rigorous their screening process is, it can sometimes lead to just a few companies making the cut. However, if the screen is too lenient, it can allow for companies that aren’t necessarily committed to the given cause squeaking through. This can make the positive screen feel like a moot point altogether.

Examples

Many investors are indicating that it is not enough to simply avoid harmful investments. They are interested in investing in companies that actively support their values. A common positive investment screen is for companies that create a certain amount of clean revenue. For a screen that required at least 75% clean revenue production, then only companies that met that hurdle would make the cut.

How Does a Fund Manager Screen Investments?

Because screening is subjective to the investor’s values, finding a fund or portfolio that closely matches your values is essential. But how does a fund manager actually screen its investments?

The screening process is usually implemented in one of two ways: a third-party investment manager or the use of standard restriction screens from a third-party data vendor. In essence, a firm will either outsource the screening process or they will do it themselves based on third-party data.

A firm will audit funds or portfolios at specific intervals, often quarterly or annually. Investments that do not meet the screening criteria at the time of the audit are removed from the fund or portfolio altogether.

Investors must be careful to review the screening criteria closely. A fund may say that they use environmental, social or corporate governance screens, but they may not be as rigorous as an investor would like. Understanding which causes are important to the investor and how restrictive the investments should be is important when considering a firm’s screening methods.

Is One Form of Screening Better Than the Other?

There is no one form of screening that is inherently better than the other. Because positive and negative screening works in two different ways, it is widely agreed that a combination of both methods will lend itself to the most well-rounded screening process.

It is important that the investor has a clear idea of their SRI goals and personal delineations for success to be sure that the chosen investments align well with those ideals.

When Screens Get It Wrong

Just because a company passes a screen doesn’t mean they are perfect.

Screens are merely tools that are used to help a fund manager or research department quantify what it means to be a socially responsible investment. This does not always mean that the screens are particularly rigorous, or that the company being screened is entirely ethical. A company could pass on one screen but fail another.

For example, consider a fund manager that is tasked with identifying companies that are considered low waste by environmental criteria. A company may meet the low waste requirement but also be in the midst of a sexual harassment scandal. This company would pass the positive screen. If the fund manager also had a negative screen to exclude companies based on sexual harassment claims, this company would fail. It all depends on what the investment opportunities are being screened for.

Final Thoughts

Socially responsible investing attracts investors that are not only interested in turning a profit; They are also looking to support their community, the environment, and causes that they are passionate about to thrive. Investment screens help analysts identify which companies will gain investor’s support. They offer a standard by which investors can judge companies and hold companies accountable for their values and actions. Understanding screens can help you identify investments and help you feel confident that you are supporting a good cause.