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.