Clarifying terminology in the world of impact investing & sustainable finance
The terminology in impact investing and sustainable finance can often be confusing and overwhelming. This glossary aims to clarify key terms frequently used in these fields. It serves as a dynamic resource, with ongoing updates to reflect evolving language and emerging concepts.
| Letter | Term | Definition |
|---|---|---|
| A | Active ownership | In active ownership, an investor actively engages with a company they own in order to influence its strategy and actions. This typically includes voting on important issues, talking with the company's management and board of directors, and promoting specific initiatives. Active ownership stands in contrast to passive ownership which involves minimal direct efforts to influence the behavior of portfolio assets after acquisition. Active ownership requires long-term investor commitment which makes it a more comprehensive approach than shareholder engagement which focuses on engaging with a company on a particular issue or concern. |
| B | Best-in-class | In a financial context, best-in-class refers to an investment approach that identifies companies that are ESG leaders within a specific industry or sector. When relying on external ESG ratings, investors favor companies with leading or improving ESG scores or rations. It is important to note, that ESG ratings tend to differ across providers due to variations in methodology and ESG factors prioritization. Therefore, a successful "best-in-class strategy" should be based on a rigorous assessment of a company's ESG performance, which may include evaluating the company's environmental impact, labor practices, product safety, community engagement, and governance structure. Financial considerations are also taken into account. This strategy aims to promote positive ESG performance and encourage companies to improve their sustainability practices. |
| C | CSR | Corporate Social Responsibility (CSR) is a management practice that seeks a balance between economic, environmental, and social impacts. CSR can involve a broad range of voluntary actions, such as charitable donations, volunteering, environmental initiatives, ethical labor practices, and supporting local community development. While CSR aims to create a positive impact on society and the environment, it is also a strategic business concept that goes beyond sponsorship, philanthropy, and charity. Most companies routinely consider non-financial factors in business decision-making as they contribute to the company's long-term success. |
| D | Divestment | Divestment refers to the act of selling or disposing of assets, investments, or interests held by an individual, organization, or entity. It typically involves the intentional decision to remove financial or other forms of support from a particular company, industry, or sector. Divestment is often driven by ethical, social, or political motivations. It is commonly used as a strategy by individuals, organizations, institutions, and even governments to distance themselves from activities or industries that are deemed harmful or inconsistent with their values or objectives. This can include divesting from companies involved in controversial practices such as tobacco production, fossil fuel extraction, firearms manufacturing, or human rights abuses. |
| D | Double materiality | Double materiality is a concept that expands the traditional understanding of materiality in the context of ESG. It recognizes that both financial materiality and sustainability materiality are relevant factors in assessing the risks and opportunities for businesses and their stakeholders. Financial materiality refers to the impact of environmental, social, and governance factors on a company's financial performance. Sustainability materiality refers to the impact of a company's activities on the environment, society, and governance aspects. The concept of double materiality suggests that companies should consider both financial and sustainability materiality in their decision-making processes and disclosure practices. It highlights the interconnectedness between financial performance and sustainable practices, recognizing that ESG factors can have a material impact on a company's financial success and its relationships with stakeholders. |
| E | ESG | ESG stands for Environmental, Social, and Governance. It is a framework used to evaluate and measure the sustainability and societal impact of a company or investment. ESG factors are used to assess the non-financial performance of an organization and provide insights into its environmental practices, social responsibility, and corporate governance. The environmental pillar of ESG includes factors such as carbon emissions, energy efficiency, waste management, water usage, pollution prevention, biodiversity, and environmental reporting. The social pillar encompasses factors such as labor practices, employee diversity and inclusion, human rights, community engagement, product safety, customer satisfaction, data privacy, and social impact initiatives. The governance pillar assesses the company's leadership, board structure, executive compensation, shareholder rights, transparency, risk management, ethics, and compliance with laws and regulations. These three non-financial factors form the basis of all sustainable or responsible investing approaches, although the degree to which each factor is considered varies, as does the balance struck between the three factors and traditional financial factors. |
| E | ESG scores | ESG scores are numerical or qualitative assessments that measure the environmental, social, and governance (ESG) performance of a company or investment. ESG scores are typically assigned by rating agencies, research organizations, or index providers that specialize in ESG analysis. These entities gather data from various sources, including company disclosures, public records, and third-party assessments. ESG scores can take different forms, including numerical ratings, letter grades, percentile rankings, or descriptive categories. It is important to note that ESG scores are not absolute measures of performance and can vary depending on the methodology and data sources used. Depending on the provider, ESG scores can range considerably in terms of credibility and verifiability. |
| E | Economic reconciliation | Economic reconciliation describes a process or framework aimed at addressing economic disparities, inequalities, and injustices among different groups or communities within a society. It focuses on promoting equitable economic opportunities, access to resources, and wealth distribution to rectify historical, systemic, or structural economic imbalances. The goal of economic reconciliation is to create a more inclusive and just economic system that provides equal opportunities for all individuals and communities to thrive. Economic reconciliation initiatives can take various forms, including economic development programs, education and skills training, financial inclusion, employment equity, and wealth redistribution. In the context of finance, the inclusion of Indigenous people, businesses, and communities as major investors and beneficiaries to projects affecting their communities is crucial to incorporating Indigenous values and a holistic, multi-generation perspective. |
| E | Ethical investing | Ethical investing is an approach where the investor’s ethical principles act as an organizing framework for their investment strategy. Potential investments are screened and monitored for compliance with the investor’s chosen ethical principles in mind. As such, ethical investing is a more subjective strategy than norms-based investing, which attempts to evaluate investments against explicit social norms. |
| E | Exclusion investing / Negative screening | Exclusion investing or negative screening is an investing approach that excludes companies, issuers, or regions based on activities that are deemed unacceptable or immoral. Negative screening typically involves setting predefined exclusion criteria, which can vary based on individual or institutional preferences. The criteria may be related to environmental, social, or governance (ESG) factors, and they often reflect values such as avoiding harm, promoting sustainability, or adhering to certain ethical guidelines. Some common examples of negative screening criteria include controversial industries, negative environmental impact, human rights controversies, and governance concerns. Exclusion criteria can be applied to product categories (e.g., weapons, tobacco), activities (e.g., animal testing), or business practices (e.g., violation of human rights, corruption). |
| F | Fiduciary duty | Financial fiduciary duty refers to the legal and ethical obligation of financial professionals, such as financial advisors, investment managers, or trustees, to act in the best interests of their clients or beneficiaries when providing financial advice or managing assets. Financial fiduciaries have a responsibility to act with care, loyalty, and integrity, placing the interests of their clients or beneficiaries above their own. They are expected to provide advice and make investment decisions that are suitable for the individual circumstances and goals of their clients, while avoiding conflicts of interest that could compromise the client's financial well-being. Increasingly, fiduciary duty is being expanded to include obligations to stakeholders who are materially impacted by the investment assets that are managed. |
| F | Financial materiality | Financial materiality, also known as financial significance or financial relevance, refers to the concept that information or events are considered material if they have the potential to influence the economic or financial decisions of users of financial statements. In the context of financial reporting, an item or piece of information is considered material if its omission, misstatement, or disclosure could impact the judgment or decision-making of users of financial statements. Materiality is subjective and requires judgment based on the specific circumstances and the perspective of the intended users. |
| G | Greenwashing | Financial greenwashing refers to the misleading or deceptive practice of presenting financial products, investments, or services as environmentally friendly or sustainable when they do not genuinely meet recognized environmental standards or contribute to positive environmental outcomes. It involves exaggerating or misrepresenting the environmental benefits or impacts of financial products in order to attract investors who prioritize sustainability or to capitalize on the growing demand for environmentally responsible investments. Greenwashing is suspected when the proponent spends more time and money marketing sustainability claims than actually driving sustainable improvements. For instance, so-called “green funds” may cherrypick companies with strong ESG scores that have little direct impact (e.g., financial service companies). Moreover, since much of the data for ESG scoring is self-reported by the underlying companies, investment funds or asset managers may inadvertently perpetuate misleading or fraudulent sustainability claims if they fail to conduct proper due diligence on the validity of the ESG scores. |
| I | Internal Carbon Pricing | Currently, many companies are not required to pay for carbon emissions or, if they are, the current prices do not reflect the true costs of carbon emissions. Internal carbon pricing – also referred to as shadow carbon pricing – is an accounting mechanism whereby companies set an accurate price for carbon emissions for internal financial and investment analysis and decision-making. The purpose is to understand the impact that true-cost carbon pricing might have on the profitability of projects, business models, or investments. It can also serve to drive innovations that reduce energy usage and harmful emissions, helping a company in the transition to a low-carbon economy. |
| I | Impact Measurement and Management | Impact measurement and management (IMM) is a process and set of practices used to assess and manage the social, environmental, and economic impacts of organizations, projects, programs, or investments. It involves systematically tracking, analyzing, and understanding the positive and negative effects of activities, initiatives, or investments on various stakeholders and the broader society, and then taking actions to reduce negative and improve positive impacts. IMM typically includes four distinct actions: 1) setting goals and expectations; 2) defining management strategies; 3) selecting metrics and setting targets; and 4) managing impact performance. |
| I | Impact investing | Impact investing refers to the practice of making investments with the intention of generating positive social or environmental impacts alongside financial returns. Typically, impact investors are focused on “fair” rather than maximal returns, thus demonstrating a willingness to exchange some profit potential for social or environmental outcomes. The key elements of impact investing include: intentionality, measurable outcomes, additionality, and financial viability. Overall, impact investing aims to harness the power of capital to address societal and environmental challenges effectively. By combining financial discipline with a commitment to measurable impact, impact investors aim to create positive change and contribute to a more sustainable and equitable world. |
| I | Inclusive finance | Inclusive finance, also known as inclusive financial services or inclusive banking, refers to the provision of affordable and accessible financial products, services, and tools to individuals and communities who have historically been underserved or excluded from the formal financial system. It aims to promote financial inclusion, which is the access and usage of a range of financial services by all members of society, regardless of their income level, gender, age, geographic location, or other characteristics. This is particularly true in developing economies, where the socioeconomic benefits of widespread access to financial services can be significant. An important part of inclusive finance is developing sound and sustainable institutions to deliver financial services. |
| N | Net-zero | Net zero is a concept that is used for many sectors where negative emissions or wastes are generated to establish reasonable sustainability goals. Net zero refers to achieving a balance between the amount of greenhouse gas (GHG) emissions produced and the amount of GHG emissions removed from the atmosphere. Currently, "net zero carbon emissions" is at the top of the agenda, as a result of the call by the Intergovernmental Panel on Climate Change (IPCC) to limit global warming to 1.5 degrees above pre-industrial levels. It is widely accepted that by 2050, all global carbon emissions must be offset by carbon capture and storage, meaning that there will be no net new carbon emissions. To reach net zero emissions, it is necessary to significantly reduce human-caused GHG emissions and implement measures to remove or offset the remaining emissions. |
| N | Norms-based screening | Norms-based screening is a method used in investment analysis and portfolio management to assess companies' or investments' performance against minimum standards of business practice based on international norms, such as the UN Human Rights Declaration, the UN Global Compact, and the UN Declaration on the Rights of Indigenous Peoples. |
| P | Phase-down finance | Phase-down finance refers to the process of gradually reducing or scaling back financial support or investment in activities or industries that are deemed harmful to the environment or inconsistent with sustainability goals. Phase-down financing represents an alternative to full divestment. Although well-intentioned, divestment can have undesirable consequences when there are no scalable or economical alternatives to the divested assets. For example, divesting from fossil fuel-based electricity generation can lead to significant price spikes in electricity that unduly affect lower-income populations. Alternatively, these assets can be acquired by managers that lack concern for climate change. Recognizing these unintended consequences, phase-down financing calls for investors to remain invested but use their leverage as owners to drive progress toward climate goals. |
| P | Physical risk | In the context of finance, physical risk refers to the direct or indirect effects of chronic or acute events triggered by climate change that impact the operations of a company’s value chain or portfolio of assets. Chronic events include drought, sea level rise, and extreme heat. Acute events include flooding, wildfires, and hurricanes. |
| R | Responsible investment | Responsible investment (RI) refers to an investment approach that considers environmental, social, and governance (ESG) factors in investment decisions and ownership practices in order to better manage risk and generate sustainable, long-term returns. The rise of responsible investing, which emphasizes the importance of considering non-financial factors in investment decisions, stems from a recognition, supported by empirical evidence, that companies' ESG practices can have a significant impact on their financial performance over the long term. In practice, RI can take many forms, such as negative or positive screening, best-in-class investing, ESG integration, thematic investing, impact investing, engagement, or active ownership. Responsible investors can also use a combination of all these approaches to account for ESG considerations in investment decision-making. They may also choose to focus on different ESG factors, use different screening methods, or prioritize different sustainability themes based on their own goals and values. The concept of RI has evolved over time and is sometimes used interchangeably with sustainable investing or Socially Responsible Investing (SRI), although the latter has lost popularity in recent years. |
| S | Science-Based Targets | Science-based targets are GHG emission reduction targets set by companies and asset managers that align with the scientific consensus on the pathways required to meet the Paris Accord goal to limit global warming to well below 2°C above pre-industrial levels. In addition to aligning with scientific consensus, SBTs are established using a rigorous process that involves public commitments, validation of credible targets and pathways, and regular disclosure of progress toward the targets. |
| S | Sustainable Responsible Investing | Socially responsible investing (SRI) includes all forms of investing that take account of the broader social impacts resulting from the operations of portfolio companies. Socially responsible investors often forego some financial returns in exchange for generating positive social and environmental change, although the degree of trade-off between financial returns and positive impacts varies with different forms of SRI. For example, impact investing puts a high priority on generating positive social impacts while generating a fair return. Sustainable investing, in contrast, is focused on minimizing negative social impacts while maximizing returns. |
| S | Shareholder Engagement | Shareholder engagement is a specific form of active ownership whereby an investor, individually or collaboratively, engages with a company they own to shift corporate behavior on a particular issue or concern. Engaged shareholders leverage their ownership status to influence corporate decision-making, through persuasive, collaborative, or coercive actions, often for the purpose of driving environmental, social, and governance outcomes. Shareholder engagement can include meeting with company executives or board members to discuss a particular issue, submitting a shareholder proposal for consideration at the company's annual meeting, or engaging in a public campaign to raise awareness about a specific issue such as reducing climate impacts or improving employee treatment. |
| S | Stewardship | From the perspective of institutional investors, stewardship is the use of shareholder influence over portfolio companies to maximize long-term value for fund beneficiaries, including the value of common economic, environmental, and social assets. Stewardship can include direct engagement with portfolio companies through voting, active engagement, or litigation. It can also include engagement with policy-makers and standard-setters, supply chain partners, or other external stakeholders. From the perspective of portfolio companies, stewardship is the responsible use of natural and social assets in a way that avoids unduly detrimental impacts. |
| S | SDGs | Established by UN member states in 2015, the Sustainable Development Goals (SDGs) are a set of 17 aspirational social, environmental, and economic goals that are intended to provide a conceptual map of the main issues facing people and the planet. The SDGs serve as a universal call to action to end poverty, protect the planet, and ensure all people enjoy peace and prosperity by 2030. There are specific targets and indicators associated with each of the 17 goals. The SDGs are by far the most widely used set of goals and metrics driving social and environmental sustainability. |
| T | Taxonomy | A sustainable finance taxonomy refers to a classification system or framework that categorizes economic activities, assets, or projects based on their environmental sustainability and contribution to specific sustainability objectives. It provides a standardized framework for identifying and classifying sustainable investments, projects, or financial products. For example, the EU Sustainable Finance taxonomy classifies economic activities that it deems to be sustainable according to specified environmental, low-carbon criteria. |
| T | Thematic investing | Thematic investing is an investment strategy that identifies investment opportunities based on long-term macroeconomic, environmental, geopolitical, or technological factors as opposed to the characteristics of individual assets. In sustainable investing, key themes include climate change, water and waste management, and inclusive finance. One or more of these themes can be used as organizing principles for sustainable investment funds. |
| T | Transition risk | Transition risks are faced by companies, industries, or sectors as a result of the shift towards a low-carbon economy. These risks include regulatory compliance costs, litigation costs, retooling costs, asset stranding, shifting of consumer preferences, reputational damage, and competition from emerging technologies. Some industries and sectors are well-positioned to adapt to decarbonization and face lower transition risks (e.g., financial sector) while other sectors are deeply dependent on carbon-intensive practices and have higher transition risks (e.g., electricity generation). Moreover, other sectors face existential transition risk because of their foundational role in a carbon-based economy (e.g., fossil fuel exploration). |
| T | Triple bottom line | The triple bottom line (TBL) is a framework that measures an organization's performance and impact in three dimensions: economic, social, and environmental. It takes into account the organization's financial profitability, social responsibility, and environmental sustainability. The term "triple bottom line" was first coined by John Elkington in 1994 and has since gained prominence as a concept in sustainable business practices and corporate social responsibility. This approach recognizes that organizations have a responsibility to balance their economic goals with social and environmental considerations. It advocates for a broader definition of business success that goes beyond financial performance alone, emphasizing the importance of sustainable and responsible business practices. |
| E | ESG integration | ESG integration refers to the systematic inclusion and consideration of environmental, social, and governance (ESG) factors in investment analysis, decision-making, and portfolio construction. It involves integrating ESG considerations alongside traditional financial analysis to gain a more comprehensive understanding of the risks and opportunities associated with an investment. |
| E | Environmental Management System | An environmental management system (EMS) is a systematic approach implemented by organizations to manage and continuously improve their environmental performance. It provides a framework for identifying, assessing, and managing environmental aspects and impacts associated with an organization's activities, products, and services. The purpose of an EMS is to minimize negative environmental impacts, comply with applicable environmental regulations, and promote sustainable practices. |
| S | Scope 1 emissions | Scope 1 emissions, also known as direct emissions, refer to greenhouse gas (GHG) emissions that occur from sources that are owned or controlled by an organization. These emissions are a result of activities or processes that take place within the organization's operational boundaries. |
| S | Scope 2 emissions | Scope 2 emissions refer to indirect greenhouse gas (GHG) emissions associated with the consumption of purchased or acquired electricity, heat, or steam by an organization. These emissions occur outside the organization's operational boundaries but are a result of the organization's activities. Scope 2 emissions are categorized as indirect because they are not emitted directly by the organization but are produced by external entities that generate and supply the purchased energy. The emissions are attributed to the organization based on its energy consumption. |
| S | Scope 3 emissions | Scope 3 emissions refer to all indirect greenhouse gas (GHG) emissions that occur as a result of an organization's activities but are outside the organization's operational boundaries. These emissions include both upstream and downstream emissions associated with the organization's value chain, including suppliers, customers, and other stakeholders. Scope 3 emissions are typically the most extensive and complex category of emissions, as they encompass a wide range of activities and sources that are indirectly influenced by the organization. These emissions are often more challenging to measure and control compared to Scope 1 and Scope 2 emissions. |
| S | Scenario analysis and planning | Scenario analysis and planning refer to a strategic planning process that involves exploring and evaluating different possible future scenarios to assess their potential impact on an organization. It is a tool used to anticipate and prepare for various uncertainties, risks, and opportunities that may arise in the future. This approach is commonly used in the context of climate change. Scenario analysis and planning enable organizations to be more proactive, strategic, and resilient in their decision-making processes. By considering multiple future scenarios, organizations can anticipate and respond to potential disruptions, seize emerging opportunities, and make informed choices in an uncertain and dynamic business environment. It helps organizations move beyond traditional forecasting approaches and fosters a more robust and forward-looking approach to strategy development and risk management. |
| S | Sustainability-linked bond | A sustainability-linked bond (SLB) is a type of debt instrument issued by a company or organization that is tied to specific sustainability performance targets or goals. Unlike traditional bonds, where the interest payments are typically fixed, SLBs are designed to incentivize and reward the issuer for achieving predetermined sustainability objectives. Sustainability-linked bonds are part of the broader sustainable finance landscape and serve as a mechanism to incentivize and align issuers' sustainability performance with their financial obligations. By linking financial incentives to sustainability targets, SLBs encourage issuers to improve their ESG performance and contribute to a more sustainable and responsible economy. |
| S | System-level investing | System-level investing refers to an investment approach that seeks to address complex social and environmental challenges by considering the interconnectedness of various sectors, stakeholders, and systemic factors. Instead of focusing solely on individual investments or specific outcomes, system-level investing aims to drive broader systemic change and create positive impact at a larger scale. System-level investing aligns with the recognition that many of the world's most pressing challenges, such as climate change, inequality, and social injustice, cannot be adequately addressed through isolated or fragmented actions. By considering the broader systems and engaging multiple stakeholders, system-level investing aims to catalyze transformative change and create sustainable and inclusive outcomes at a systemic level. |
| W | Weighted average carbon intensity | Weighted average carbon intensity refers to a measure that calculates the average greenhouse gas (GHG) emissions intensity of a portfolio, investment, or other entity based on the emissions generated by each constituent or component, weighted by their respective contributions. This measure can be useful for evaluating the carbon footprint of investment portfolios, assessing the sustainability performance of companies or funds, and informing decision-making related to carbon emissions reduction strategies. |
| A | Avoided emissions | Avoided emissions, also known as avoided greenhouse gas (GHG) emissions, refer to the reduction or prevention of emissions that would have occurred under a different scenario or baseline. They represent the emissions that are avoided or not released into the atmosphere due to specific actions, practices, technologies, or policies. Avoided emissions play a significant role in climate change mitigation efforts. By identifying and implementing actions that result in emissions reductions compared to a baseline scenario, organizations, governments, and individuals can contribute to global emission reduction targets and help mitigate the impacts of climate change. |
| I | Implied temperature rise | Implied temperature rise refers to the projected increase in global average temperature resulting from cumulative greenhouse gas (GHG) emissions over time. It is a concept used to estimate the potential warming effect of GHG emissions based on climate models and scientific understanding of the relationship between emissions and temperature. It's important to note that implied temperature rise is an estimate based on current scientific knowledge and climate models. Uncertainties exist due to complex interactions within the climate system, natural variability, and future socio-economic factors. However, it serves as a useful tool for understanding the relationship between emissions and temperature and informing climate change mitigation strategies. |
| D | Due diligence | Due diligence is a comprehensive and systematic investigation or review process undertaken to gather relevant information, assess risks, and evaluate the viability, integrity, and compliance of a person, organization, or investment opportunity. It is a critical step in decision-making processes, such as mergers and acquisitions, investments, partnerships, and contractual agreements, to ensure informed and responsible decision-making. Due diligence in sustainable investing aims to ensure that investments align with environmental and social objectives, contribute to sustainable development, and generate long-term value for investors. |
| R | Risk management | Risk management refers to the process of identifying, assessing, and mitigating risks in order to minimize potential harm or negative impacts and maximize opportunities for achieving objectives. It involves systematically identifying and evaluating potential risks, developing strategies to address them, and implementing measures to monitor and control risk exposure. Risk management in the context of climate change refers to the process of identifying, assessing, and responding to the risks and opportunities associated with climate change impacts. It involves understanding the potential consequences of climate change for businesses, organizations, communities, and individuals and developing strategies to adapt to and mitigate these risks. |
| S | Strategic asset allocation | Strategic asset allocation is a long-term investment strategy that involves determining the target allocation of investment assets across different asset classes to achieve specific investment objectives. It is a fundamental decision-making process that sets the framework for constructing an investment portfolio. Strategic asset allocation in the context of climate change recognizes the need to align investment portfolios with the goals of mitigating climate change, adapting to its impacts, and capitalizing on related investment opportunities. It aims to integrate climate-related risks and opportunities into the investment decision-making process, promoting the long-term sustainability and resilience of investment portfolios in a changing climate. |
| S | Social purpose organization (SPO) | A social purpose organization (SPO) refers to a type of organization that operates with the primary objective of creating positive social or environmental impact. SPOs are driven by a mission to address specific social or environmental challenges and aim to make a meaningful difference in the communities they serve. SPOs play a crucial role in addressing social and environmental issues, often operating at the intersection of business, nonprofit, and public sectors. They contribute to building a more equitable, sustainable, and inclusive society by mobilizing resources and expertise towards achieving positive social outcomes. |
| G | Green bond | A green bond is a type of debt instrument issued by governments, municipalities, corporations, or financial institutions with the specific purpose of raising funds for environmentally sustainable projects or initiatives. Green bonds are designed to finance projects that have positive environmental benefits, such as renewable energy, energy efficiency, climate change adaptation, sustainable agriculture, or pollution prevention. Green bonds play a crucial role in mobilizing capital towards environmentally sustainable projects and driving the transition to a low-carbon and sustainable economy. They provide investors with an opportunity to align their investment portfolios with climate and environmental objectives while contributing to positive environmental outcomes. Additionally, green bonds contribute to raising awareness about environmental issues and promoting sustainable finance practices within the global capital markets. |
| S | Social bond | A social bond is a type of debt instrument issued by governments, municipalities, corporations, or financial institutions with the specific purpose of raising funds to finance social projects or initiatives that have a positive social impact. Social bonds are designed to address social challenges and promote social well-being by funding projects related to areas such as healthcare, education, affordable housing, employment generation, poverty alleviation, or access to essential services. Social bonds play a crucial role in mobilizing capital towards social causes and addressing pressing social issues. They provide investors with an avenue to align their investment portfolios with social objectives while contributing to positive social outcomes. Social bonds also promote transparency, accountability, and impact measurement in social finance, fostering increased awareness and action on critical social challenges. |
| S | Sustainability bond | A sustainability bond is a type of debt instrument issued by governments, municipalities, corporations, or financial institutions with the specific purpose of raising funds to finance projects or initiatives that have both environmental and social benefits. Sustainability bonds combine the objectives of green bonds (environmental focus) and social bonds (social focus) to address a broader spectrum of sustainable development goals. Sustainability bonds contribute to mobilizing capital for projects that address both environmental and social challenges, fostering sustainable development and resilience. |
| G | Green lease | A green lease, also known as an environmentally friendly lease or sustainable lease, refers to a lease agreement between a landlord and a tenant that incorporates environmentally conscious and sustainable practices into the management and operation of a building or space. The purpose of a green lease is to promote energy efficiency, sustainability, and environmentally responsible behavior in the use and maintenance of the leased premises. By incorporating environmentally friendly practices and requirements into lease agreements, green leases contribute to reducing the environmental impact of buildings, improving energy efficiency, and promoting sustainable behavior among landlords and tenants. |
| A | Asset classes | Asset classes refer to different categories or types of investment instruments or assets that share similar characteristics and behave in a similar way within the financial markets. Asset classes are used by investors to diversify their portfolios and allocate their investments across different types of assets to achieve their investment goals. The most common asset classes are public equity, private equity, fixed income, infrastructure, real estate, and venture capital. |
| P | Passive investing | Passive investing, also known as passive management or index investing, refers to an investment strategy that aims to replicate the performance of a specific market index or benchmark. In passive investing, investors seek to achieve returns that closely mirror the performance of the overall market rather than trying to outperform it through active stock selection or market timing. In recent years, the number of benchmarks and ETFs focusing on ESG and impact investing has significantly increased. This trend shows that investing space is evolving to allow ESG and impact objectives to co-exist with a passive approach. |
| A | Active investing | Active investing refers to an investment strategy in which investors actively manage their portfolios by making buying and selling decisions based on their analysis of individual securities, market trends, and other relevant factors such as ESG ratings and sustainability assessments. Active investors aim to outperform the overall market or a specific benchmark by actively selecting investments they believe will generate higher returns or by timing their buying and selling decisions strategically. Active investing is based on the belief that diligent research, analysis, and active decision-making can lead to superior investment returns. It requires active monitoring of investments and adjustments to portfolios based on changing market conditions and investment opportunities. |
| T | The tragedy of the commons | The tragedy of the commons is a concept in economics and environmental science that refers to a situation where individuals, acting in their self-interest, deplete or degrade a shared resource, leading to negative consequences for everyone involved. It highlights the conflict between individual interests and collective well-being when managing common-pool resources. The tragedy of the commons often occurs when there is a lack of regulation or cooperation among individuals using the resource. Overcoming the tragedy of the commons requires collective action and the implementation of measures to regulate and manage the shared resource effectively. Climate change is a clear example of the tragedy of the commons where individual self-interest and a lack of regulation have led to shared resources depletion. |
| C | Climate scenarios | Climate scenarios refer to hypothetical future trajectories of greenhouse gas emissions, atmospheric concentrations, and resulting climate changes. They are used to explore and understand potential climate outcomes based on different socioeconomic development pathways and policy decisions. There are different types of climate scenarios including socioeconomic scenarios; emissions, concentration, and climate forcing scenarios; climate change scenarios; climate impact scenarios; mitigation scenarios; adaptation scenarios; and integrated scenarios. Climate scenarios serve as valuable tools for scientists, policymakers, businesses, and communities to assess the range of possible climate outcomes and make informed decisions to address the challenges posed by climate change. |
| S | Systems thinking | Systems thinking is an approach to problem-solving and analysis that emphasizes understanding and evaluating complex systems as a whole, rather than focusing on isolated components or individual parts. It involves considering the interactions, relationships, and feedback loops within a system to gain insights into its behavior and dynamics. By adopting a systems thinking approach, individuals and organizations can develop a deeper understanding of complex systems, anticipate unintended consequences, and devise more effective strategies for problem-solving, decision-making, and sustainable change. It encourages a shift from linear thinking to a more interconnected and holistic perspective, enabling more informed and impactful actions. |
| B | Baseline scenario | A baseline scenario refers to a fundamental or reference projection of future events or conditions that is used as a starting point for analysis or comparison in various fields. It is a hypothetical or assumed path that represents what could happen in the absence of specific interventions, policy changes, or external factors. |
| B | Bounded flexibility | Bounded flexibility refers to a concept that combines two seemingly contradictory elements: flexibility and limitations. It denotes a level of adaptability or freedom to make choices and changes within certain predefined boundaries or constraints. The term is commonly used in various contexts, such as management, decision-making, and system design, to strike a balance between innovation and stability. |
| D | Data taxonomy | A data taxonomy is a hierarchical classification system used to organize and categorize data into logical and meaningful groups based on their characteristics, attributes, or relationships. It provides a standardized framework for structuring data elements, ensuring consistency and facilitating data management, analysis, and retrieval. |
| D | Dependencies | Dependencies refer to the relationships or connections between different elements or components in a system, where the behavior or state of one element influences or relies on the behavior or state of another element. In various fields and contexts, dependencies play a critical role in understanding how things interact and affect each other. In the context of impact investing, it is important to consider social, environmental, and financial dependencies. |
| D | Doughnut economics | Doughnut economics is a concept and economic framework proposed by British economist Kate Raworth. It offers an alternative vision for economic development and sustainability that aims to balance human needs and planetary boundaries. The term "doughnut" refers to the shape of the economic model, which resembles a doughnut with an inner and outer ring. The overarching goal of doughnut economics is to achieve sustainable development by bringing humanity into the safe and just space. This means addressing social inequalities and ensuring that all people have access to the resources and opportunities they need for a good quality of life while respecting the Earth's ecological limits. |
| E | Externalities | Externalities are the unintended and often unaccounted-for effects that the production or consumption of goods and services have on third parties who are not directly involved in the transaction or activity. These effects can be positive or negative and are not reflected in the market price of the goods or services being exchanged. A positive externality occurs when the production or consumption of a good or service benefits third parties who are not directly involved in the transaction. A negative externality occurs when the production or consumption of a good or service imposes costs or harms on third parties who are not directly involved in the transaction. Externalities can lead to market failures, as the market does not account for the full social costs or benefits of certain economic activities. When externalities are present, the private market may not reach an efficient outcome, and there is a role for government intervention or other policy measures to address and internalize these external costs or benefits. |
| F | Feedback loop | is a fundamental concept in various disciplines, including science, engineering, systems thinking, and psychology. It refers to a process in which the output or effects of a system or action are fed back as input, influencing subsequent iterations of the system, often leading to self-reinforcing or self-correcting behavior. In a positive feedback loop, the output or effects of a system amplify or reinforce the initial action, leading to exponential growth or divergence. This can result in either beneficial or detrimental outcomes. In a negative feedback loop, the output or effects of a system act to counterbalance or regulate the initial action, leading to stabilization or convergence. This type of feedback helps maintain equilibrium or control within a system. |
| F | Five dimensions of impact | The five dimensions of impact were developed through the Impact Management Project. They are used in impact investing and social entrepreneurship to assess and measure the social and environmental impact of an organization or project. The 5 Dimensions of Impact are as follows: What: This dimension focuses on defining the specific social or environmental outcomes that an organization or project aims to achieve. It involves identifying the target beneficiaries and the positive changes that are intended to occur in their lives or the environment. Who: The "Who" dimension involves determining which stakeholders are affected by the organization or project and understanding their roles and relationships. It considers not only the primary beneficiaries but also any unintended or secondary beneficiaries and stakeholders. How much: This dimension is concerned with measuring the scale and depth of the impact. It involves quantifying the extent to which the intended outcomes have been achieved and assessing the significance of the changes for the beneficiaries and the broader community or environment. Contribution: The "Contribution" dimension refers to the attribution of the impact to the actions of the organization or project. It seeks to understand the causal link between the organization's activities and the observed outcomes, taking into account other contributing factors. Risk: The "Risk" dimension addresses the potential negative or unintended consequences of the organization or project's activities. It involves identifying and assessing the risks associated with the impact, such as possible harm to beneficiaries or adverse environmental effects. |
| H | Human capital | Human capital refers to the collective skills, knowledge, experience, and abilities possessed by individuals within a workforce or population. It represents the intangible assets and qualities that people bring to economic and social activities, making them valuable contributors to a country's or organization's productivity, innovation, and overall development. Human capital encompasses a wide range of factors that individuals acquire through education, training, work experience, and personal development. It includes both technical skills (such as expertise in a particular field or profession) and soft skills (such as communication, problem-solving, and leadership abilities) that enable individuals to perform effectively in various roles. |
| I | Impact | In the context of impact investing, "impact" refers to the measurable and intentional positive social or environmental outcomes that result from an investment. Impact investors seek to generate both financial returns and measurable, beneficial effects on society and the environment. |
| I | Impact assessment | Impact assessment is a systematic and comprehensive process of evaluating the social, economic, environmental, and often unintended consequences of a specific policy, project, program, or intervention. The purpose of impact assessment is to understand and measure the effects, both positive and negative, that a particular action has on various stakeholders and the broader society. |
| I | Impact evaluation | Impact evaluation is a rigorous and systematic process of assessing the actual and measurable effects of a particular program, policy, intervention, or project. It aims to determine whether the intended outcomes or impacts have been achieved and to what extent. Impact evaluations go beyond merely describing changes and focus on establishing a cause-and-effect relationship between the intervention and the observed results. They are an essential tool for evidence-based decision-making and accountability, helping stakeholders understand the effectiveness and efficiency of interventions and investments in achieving desired outcomes. |
| I | Impact goals | Impact goals refer to specific and measurable objectives that organizations, businesses, or initiatives set to achieve meaningful and positive social or environmental outcomes. These goals are typically designed to address specific challenges or contribute to broader social and environmental objectives. Impact goals are an integral part of impact-driven strategies and are used to guide decision-making, resource allocation, and performance assessment. |
| I | Impact integrity | refer to the commitment of ensuring that the positive social or environmental outcomes claimed or expected from a particular initiative, investment, or program are accurate, transparent, and aligned with the intended objectives. It involves maintaining a high standard of honesty, accuracy, and accountability in assessing and reporting the impact achieved. It helps build trust among stakeholders and ensures that efforts to create positive impact are genuine and impactful. |
| I | Impact plan | An impact plan is a strategic and structured document that outlines the specific objectives, activities, and measures for achieving positive social or environmental outcomes within an organization, project, or initiative. It serves as a roadmap for maximizing the intended impact and aligning efforts with the organization's mission and values. Key components of an impact plan include: impact goals, theory of change, activities and interventions, resource allocation, monitoring and evaluation, stakeholder engagement, risk assessment and mitigation, and communication and reporting. Impact plans are commonly used in impact investing, social entrepreneurship, non-profit organizations, and corporate social responsibility initiatives. They guide organizations in their efforts to create positive change and measure the effectiveness of their interventions in contributing to broader social and environmental objectives. |
| I | Impact risk | Impact risk refers to the potential threats or challenges that could undermine or hinder the achievement of positive social or environmental outcomes in an organization, project, or initiative focused on creating impact. Impact risk is specific to initiatives that aim to address social or environmental challenges and deliver measurable positive change. Key aspects of impact risk include: unintended consequences, external factors, measurement and attribution, scaling challenges, dependency on funding, operational risks, and complexity of impact. By proactively identifying and managing impact risks, organizations and initiatives can enhance the likelihood of successfully achieving their social and environmental objectives and maintaining long-term sustainability. |
| I | Impact washing | Impact washing is a term used to describe a deceptive practice in which an organization, company, or individual falsely presents itself as being committed to creating positive social or environmental impact without genuinely delivering on those claims. The term is derived from "greenwashing," which refers to misleading environmental claims. Impact washing can erode trust and credibility, particularly when organizations or individuals make grandiose claims without genuine efforts to create positive change. Stakeholders, including consumers, investors, and the public, are increasingly demanding transparency and accountability in impact reporting to ensure that impact claims are backed by tangible actions and results. |
| I | Integrative thinking | Integrative thinking is a cognitive process that involves synthesizing diverse and conflicting ideas, perspectives, or concepts to develop innovative and creative solutions to complex problems. It is a form of critical thinking that goes beyond conventional "either/or" approaches and seeks to find novel and inclusive ways to reconcile seemingly opposing viewpoints. Integrative thinking is particularly valuable in situations where conventional solutions are insufficient or where there are competing interests and diverse stakeholders with varying perspectives. |
| M | Metric set | Metric set refers to a collection or group of related metrics or indicators used to measure specific aspects of a phenomenon, project, or system. These metrics are chosen and organized based on their relevance to the objectives and goals of the assessment or analysis. A metric set is a valuable tool for gauging progress, identifying areas for improvement, and making informed decisions. The specific metrics and indicators chosen for a metric set depend on the specific goals and objectives of the evaluation and the nature of the subject being measured. |
| N | Natural capital | Natural capital refers to the stock of renewable and non-renewable natural resources and ecosystems that provide valuable goods and services to humans and other living organisms. It represents the natural assets and resources that support life, economic activities, and the overall well-being of societies. Recognizing and valuing natural capital is important for sustainable development and responsible resource management. It involves considering the economic, social, and environmental consequences of human activities that impact natural resources. Sustainable practices seek to preserve and enhance natural capital to ensure that future generations can continue to benefit from the essential services provided by the natural environment. Valuing natural capital also helps foster a deeper understanding of the interdependence between human well-being and the health of the planet's ecosystems. |
| O | Outcome | In the context of impact investing, an "outcome" refers to a specific and measurable change or result that occurs as a direct or indirect effect of an investment or intervention. Outcomes represent the intended and observable impacts on social, environmental, or other targeted aspects resulting from an impact investment. By focusing on outcomes, impact investors can track and evaluate the real-world effects of their investments on the targeted social and environmental issues. This emphasis on measurable outcomes distinguishes impact investing from traditional investment approaches, as it prioritizes the creation of positive change alongside financial returns. |
| O | Outputs | Outputs refers to the specific and tangible products, services, or deliverables that result directly from the activities or interventions of a program, project, or initiative. Outputs are the immediate and observable results of the actions undertaken to achieve the intended outcomes and impact described in the theory of change. Understanding and measuring outputs is essential for monitoring and evaluating the progress of an initiative and assessing whether it is on track to achieve its intended outcomes and impact. |
| N | Net positive impact | Net positive impact refers to the condition where an organization, project, or initiative creates outcomes that result in a quantifiable and meaningful positive contribution to society, the environment, or other relevant stakeholders beyond offsetting any negative impacts. It is a concept used in the context of sustainability and responsible business practices, emphasizing the importance of generating more positive benefits than negative consequences. The concept of net positive impact reflects a growing emphasis on sustainability and social responsibility in various sectors. Organizations and initiatives that strive for net positive impact seek to be proactive in addressing global challenges and making a meaningful contribution to a more sustainable and equitable future. |
| P | Planetary boundaries | Planetary boundaries refer to the limits within which humanity can safely operate to maintain a stable and resilient Earth system. These boundaries are critical thresholds for various environmental processes that, if crossed, could lead to abrupt and irreversible changes in the global environment, potentially jeopardizing human well-being and the stability of the planet. The concept of planetary boundaries was introduced in 2009 by a group of Earth system scientists led by Johan Rockström and Will Steffen. They identified nine key planetary boundaries that are essential for maintaining the Earth's stability: climate change biosphere integrity, stratospheric ozone depletion, ocean acidification, biochemical flows, land system change, freshwater use, atmospheric aerosol loading, and chemical pollution. Staying within these planetary boundaries is crucial to ensure a safe operating space for humanity and maintain the Earth's ability to support life as we know it. Crossing these boundaries could trigger abrupt and irreversible changes, threatening human well-being, food security, and the stability of ecosystems. |
| P | Proxy | In the context of impact investing, a "proxy" refers to a measurable or observable indicator that is used as a substitute or stand-in for a specific social or environmental impact metric. Proxies are often employed when direct measurement of certain impacts is challenging, time-consuming, or costly. They provide a practical way to assess or estimate the impact achieved by an investment, project, or initiative. It is essential to recognize the limitations of proxies and their potential for inaccuracies. As impact measurement and reporting in impact investing continue to evolve, efforts are being made to develop more accurate and comprehensive methods for directly measuring impact. However, proxies remain valuable tools for assessing impact, especially when direct measurement is challenging or impractical. |
| R | Risk appetite | In the context of impact investing, "risk appetite" refers to the level of risk that impact investors are willing to accept or tolerate while pursuing investments that aim to generate positive social or environmental impact alongside financial returns. It represents the willingness of impact investors to take on varying degrees of uncertainty and potential financial risks to achieve their impact objectives. |
| R | Risk tolerance | In the context of impact investing, "risk tolerance" refers to an individual or organization's willingness and capacity to accept varying levels of financial risk while pursuing investments that aim to generate positive social or environmental impact alongside financial returns. It is the extent to which impact investors are comfortable with the uncertainty and potential financial risks associated with impact-driven investments. |
| S | Social capital | Social capital is a sociological concept that refers to the value and benefits that individuals, groups, or communities derive from their social networks, relationships, and connections. It represents the resources, trust, and cooperation that arise from social interactions and can lead to various positive outcomes for individuals and societies. Investing in social capital-building activities, such as community engagement, networking events, and social programs, can contribute to the overall well-being and success of individuals and societies. |
| S | Stakeholder involvement | Stakeholder investment in the context of investing refers to the active participation, engagement, and consideration of various stakeholders in the investment process and decision-making. Stakeholders are individuals, groups, or entities that have a vested interest in the investment, either directly or indirectly, and can be impacted by the investment outcomes. Stakeholder involvement goes beyond a one-time consultation; it involves ongoing engagement and consideration of stakeholder interests throughout the investment lifecycle. By involving stakeholders, investors can better align their strategies with societal needs, promote sustainable development, and achieve positive outcomes for both financial returns and broader social and environmental goals. |
| S | Sustainable development | Sustainable development is a concept that refers to a balanced and holistic approach to meeting the needs of the present generation without compromising the ability of future generations to meet their own needs. It is an integrated framework that seeks to achieve economic prosperity, social inclusion, and environmental protection simultaneously, recognizing the interdependence of these three dimensions. Sustainable development gained prominence after the publication of the Brundtland Report (Our Common Future) by the United Nations World Commission on Environment and Development in 1987. The report defined sustainable development as "development that meets the needs of the present without compromising the ability of future generations to meet their own needs." The United Nations' 2030 Agenda for Sustainable Development, adopted in 2015, sets out 17 Sustainable Development Goals (SDGs) to address global challenges, including poverty, inequality, climate change, environmental degradation, and social injustice. |
| T | Threshold | Threshold refers to a specific point, level, or boundary at which a particular action, effect, or change is triggered or occurs. It is a critical value or limit that, when reached or crossed, results in a significant and often noticeable impact or consequence. Understanding thresholds is essential in various fields as they help identify points of concern, predict potential outcomes, and make informed decisions based on the likelihood of specific events or changes occurring. They provide valuable information for setting guidelines, policies, and safety measures to manage risks and maintain system stability. |
| T | Trade off | In the context of impact investing, a "trade-off" refers to the balancing act between achieving positive social or environmental impact and generating financial returns. It recognizes that some impact investments may involve a trade-off between maximizing financial profits and maximizing the desired social or environmental outcomes. Managing trade-offs is an essential consideration for impact investors, as it involves aligning their investment strategies with their desired impact objectives while still aiming for sustainable financial performance. Balancing trade-offs requires thoughtful decision-making, impact measurement, and a commitment to both financial and impact goals in the pursuit of sustainable and meaningful change. |
| U | Unintended consequences | Unintended consequences refer to the unexpected and often undesired outcomes or effects that arise as a result of a decision, action, policy, or intervention. These consequences were not foreseen or intended when the initial action was taken, and they may have positive, negative, or mixed impacts on individuals, communities, or systems. Addressing unintended consequences often requires ongoing monitoring, evaluation, and adjustments to policies, interventions, or strategies. It highlights the importance of considering potential risks and trade-offs before making decisions, especially in complex systems with interconnected variables. |
| V | Value creation | Value creation refers to the process of generating economic, social, or environmental benefits that enhance the overall well-being and prosperity of individuals, organizations, communities, or society as a whole. It involves utilizing resources, capabilities, and innovations to produce positive outcomes and solutions that are valued by stakeholders. Value creation is a fundamental concept in business, social initiatives, and impact investing. It emphasizes the importance of purpose-driven activities that contribute positively to the economy, society, and the environment. |
| A | Adaptation finance | Public and private capital directed at helping people, ecosystems, and infrastructure cope with the physical impacts of climate change that can no longer be avoided-sea-level rise, heat, drought, flooding, storms. Typical uses include climate-resilient agriculture, coastal defences, water management, resilient housing, and early-warning systems. Adaptation finance is chronically undersupplied relative to mitigation finance because it tends to lack a straightforward revenue model, so it relies heavily on multilateral development banks, dedicated climate funds such as the Green Climate Fund and the Adaptation Fund, and blended structures. |
| A | Additionality | Additionality asks whether an outcome-emissions reduced, a job created, a company financed-would have happened anyway without the specific intervention. In impact investing it distinguishes capital that unlocks something new, such as a first-loss tranche that lets a fund reach an underserved market, from capital that simply substitutes for another investor. In the voluntary carbon market it is the acid test for credit integrity: a project is only 'additional' if the revenue from selling credits was decisive in getting it built. Weak additionality is one of the most common sources of impact-washing accusations, so serious impact investors document a clear counterfactual before claiming credit for an outcome. |
| A | Alpha / ESG Alpha | The portion of a portfolio's return that is not explained by exposure to systematic market risk-in effect, the value the manager added through skill after adjusting for the risk taken. Positive alpha means outperformance versus a risk-appropriate benchmark; negative alpha means underperformance. Active managers charge for the prospect of alpha; index funds explicitly disclaim it. In sustainable investing, ESG-alpha claims should be tested against a matched non-ESG benchmark and adjusted for common factor exposures such as quality, size, and low volatility that often drive apparent outperformance. |
| A | Article 6 of the Paris Agreement | The mechanism under the Paris Agreement that outlines how countries and entities can trade carbon credits globally, governing international carbon markets and cooperation. |
| A | Article 8 & Article 9 funds | Fund categories under the EU's Sustainable Finance Disclosure Regulation. Article 8 funds promote environmental or social characteristics alongside financial objectives; Article 9 funds have sustainable investment as their explicit objective and must meet stricter tests including Do No Significant Harm. Article 6 covers funds without a sustainability focus. The regulation was created by the European Commission for investors and end-clients to combat greenwashing and standardise sustainability disclosures across the EU. |
| A | Attribution vs. Contribution | The distinction between an investor being solely responsible for an outcome, which is attribution, versus playing a part alongside other actors or factors in achieving it, which is contribution. Rigorous impact accounting favours contribution language because in most real-world settings multiple parties, policies, and market forces jointly produce the change; claiming pure attribution overstates the investor's role. |
| A | Assets Under Management (AUM) | The total market value of investments a fund, asset manager, or wealth-management firm oversees on behalf of clients. AUM is the standard scaling metric for the industry and drives fee revenue for most asset managers, which typically charge a percentage of AUM. In sustainable finance, headline 'sustainable AUM' figures are treated cautiously because definitions vary across regulators, industry bodies, and marketing,hence tighter rules like SFDR fund categorisation. |
| B | B Corporation (B Corp) | A certification, granted by the non-profit B Lab, for for-profit companies that meet verified standards of social and environmental performance, transparency, and legal accountability to all stakeholders. Under the long-standing standard, companies complete the B Impact Assessment and must score at least 80 out of 200, undergo verification, and re-certify every three years. B Lab is rolling out a new standard in 2025–2026 that replaces the single 80-point score with mandatory topic-level requirements across climate, human rights, DEI, and governance. B Corps span consumer brands, banks, and asset managers; investors treat certification as a directional signal of impact intent, not a substitute for their own due diligence. |
| B | Beta | A measure of an asset's or portfolio's sensitivity to movements in a broad market benchmark. A beta of 1 moves in line with the market; above 1 amplifies market moves; below 1 dampens them; a negative beta moves opposite the market. Beta is the primary input for the CAPM cost-of-equity calculation and separates market-driven return from manager skill, which is captured by alpha. |
| B | Biodiversity Credits | Tradable instruments representing a unit of restored or preserved biodiversity. Like carbon credits, they allow organizations to invest in nature positive outcomes to meet environmental targets. |
| B | Blended finance | The strategic use of concessional, below-market public or philanthropic capital to make otherwise-uninvestable projects attractive to commercial investors-typically in emerging markets or in sectors like climate adaptation and biodiversity. Structures include first-loss tranches, guarantees, and technical-assistance grants alongside a commercial fund. The term was formalised by Convergence, the OECD DAC, and the World Economic Forum, and is used by development finance institutions such as the IFC, FMO, and BII, foundations, and impact-focused asset managers to mobilise multiples of private capital toward the SDGs. |
| B | Blue bond | A use-of-proceeds bond that raises capital specifically for ocean- and freshwater-related projects,sustainable fisheries, marine protected areas, water-quality improvements, plastic reduction, and coastal resilience. The Seychelles issued the world's first sovereign blue bond in 2018 with World Bank support; ICMA and IFC have since published guidance to standardise the label. A small but growing subset of the labelled bond market, used by governments, DFIs, and corporates in the blue economy. |
| B | Base of the Pyramid | Refers to the poorest socioeconomic tier of the global population. Impact strategies targeting the BOP focus on providing affordable access to essential services and products. |
| C | Carbon credit / Carbon offset | A tradable certificate representing one tonne of CO₂-equivalent either reduced, avoided, or removed by a project-reforestation, methane capture, cookstoves, direct-air capture, and so on. Credits trade in either compliance markets, which are regulated cap-and-trade systems such as the EU ETS, or the voluntary carbon market. Credit quality varies widely; integrity bodies such as the ICVCM on the supply side and VCMI on the demand side have emerged to set quality thresholds. Serious sustainable investors treat offsets as a residual tool after reduction, not a substitute for it. |
| C | Carbon Disclosure Project | A UK-based non-profit that runs the world's most-used voluntary environmental-disclosure system. Companies, cities, states, and regions respond to CDP questionnaires on climate change, water security, and forests, and responses are scored A through D–. Founded in 2000, CDP is used by around 740 investors representing over $136 trillion in assets, regulators, and procurement teams as a standardised source of environmental data, and by companies as an on-ramp to TCFD-aligned reporting. |
| C | Carbon Insetting | Investing in emissions reduction or carbon sequestration projects directly within a company's own value chain or supply chain, rather than buying offsets from external projects. |
| C | Carried interest (carry) | The share of a private fund's profits paid to the GP after LPs receive their invested capital and preferred return,typically 20%), sometimes with a super-carry above higher hurdles. Structure and vesting are set in the LPA and its distribution waterfall. In impact investing, some funds link carry to impact performance to sharpen accountability for outcomes as well as returns. |
| C | Catalytic capital | Investment capital that accepts disproportionate risk, concessional returns, or unusual patience so that other capital can flow into opportunities the market would otherwise pass over. It is the raw material of blended-finance structures and is typically provided by foundations, DFIs, and public-sector programmes. The Catalytic Capital Consortium, a joint effort of the MacArthur Foundation, Rockefeller Foundation, and Omidyar Network, formalised the definition and champions its role in reaching first-time fund managers, frontier geographies, and pre-commercial climate solutions. |
| C | Carbon Border Adjustment Mechanism | An EU regulation placing a price on the carbon emitted during the production of carbon-intensive goods entering the EU, preventing carbon leakage. |
| C | Circular economy | An economic model that decouples growth from primary-resource consumption by keeping products and materials in use for as long as possible through design for durability, repair, reuse, remanufacturing, and recycling,closing the loop instead of the 'take-make-waste' linear pattern. The Ellen MacArthur Foundation popularised the framework, and it now anchors the EU Circular Economy Action Plan. For investors, it opens themes in industrial repair, packaging redesign, textiles recycling, and reverse logistics. |
| C | Climate Action 100+ | An investor-led engagement initiative launched in 2017 that targets ~170 companies responsible for the majority of global industrial greenhouse-gas emissions, pressing them to strengthen climate governance, reduce emissions in line with Paris, and improve disclosure. It is coordinated by five investor networks-AIGCC, Ceres, IIGCC, IGCC, and PRI-on behalf of 700+ signatory investors managing over $60 trillion. Used by asset owners and managers as a collective-action vehicle for pooled dialogue and voting escalations. |
| C | Climate justice | The recognition that climate change disproportionately harms people who did least to cause it,low-income communities, Indigenous peoples, small-island states, and future generations,and the ethical claim that responsibility for solutions should be allocated accordingly. In finance it informs just-transition strategies, community-benefit agreements, and the design of climate funds for developing countries. |
| C | Community Land Trust | A non-profit, community-governed structure that owns land in perpetuity and leases it to homeowners, tenants, farmers, or businesses at below-market rates to secure long-term affordability and prevent displacement. CLTs decouple the value of the land from the value of the buildings on it, keeping housing permanently affordable while allowing occupants to build equity in the structures. Pioneered by the Institute for Community Economics and Grounded Solutions Network in the US, CLTs are financed by CDFIs, impact debt funds, philanthropic PRIs, and municipal grants, and are one of the most durable place-based housing impact structures. |
| C | Concessionary Capital | Funding that accepts below-market-rate financial returns in order to support or subsidize specific social or environmental impact objectives. |
| C | Concessionary vs. Non-Concessionary Returns | Differentiates investments based on financial expectations: concessionary implies a deliberate trade-off of financial return for impact, whereas non-concessionary seeks market-rate returns alongside impact objectives. This is the same distinction that impact investors more often express as 'impact-first' vs. 'finance-first'; the concessionary/non-concessionary framing is more common in DFI and blended-finance contexts, while impact-first/finance-first is more common in private-fund LP conversations. |
| C | Conference of the Parties | The supreme decision-making body of the United Nations Framework Convention on Climate Change, holding annual global summits to negotiate and assess climate action. |
| C | Corporate Sustainability Reporting Directive | A major expansion of EU corporate sustainability disclosure, adopted in 2022 and replacing the earlier Non-Financial Reporting Directive. CSRD requires roughly 50,000 large and listed EU companies-and non-EU companies with significant EU activity-to report against the European Sustainability Reporting Standards under a double-materiality lens, with third-party assurance and machine-readable digital tagging. Created by the European Commission for use by investors, regulators, employees, consumers, and civil society. |
| C | Cost of capital | The blended rate of return an investor demands to fund a business, given the risk of its cash flows. It aggregates the cost of equity and cost of debt weighted by their proportions in the capital structure. Sustainability considerations increasingly enter cost of capital: firms with weak transition plans, contested social licence, or heavy stranded-asset exposure now face higher spreads and higher required equity returns from an expanding set of investors. |
| C | Cost of debt | The effective interest rate a company pays on borrowed funds, adjusted for the tax deductibility of interest in most jurisdictions. Cost of debt is one of the two building blocks of WACC and is influenced by base rates, credit spreads, covenants, and,increasingly,sustainability performance via sustainability-linked loans and green premiums. |
| C | Cost of equity | The return equity investors require to hold a company's shares, given the risk of its cash flows. Most commonly estimated using the Capital Asset Pricing Model. Climate-transition risk and governance quality are increasingly reflected in cost-of-equity assumptions, especially in scenario-based valuations. |
| D | Discounted Cash Flow (DCF) | The intrinsic-valuation method: forecast future free cash flows, discount them back to today at the appropriate cost of capital, add a terminal value, and subtract net debt to arrive at equity value. DCFs are the natural home for climate-scenario analysis in valuation: the analyst can flex revenue, margins, capex, useful lives, and discount rates under different transition and physical-risk pathways. |
| D | Diversity, Equity, and Inclusion | Policies and practices designed to ensure fair representation and treatment of diverse individuals across gender, race, ethnicity, and other backgrounds within an organization. |
| D | Development Impact Bond | A pay-for-success financing structure used in international development in which private or philanthropic investors provide upfront capital to a service provider, and outcome payers-typically donors or DFIs-repay them with a return only if verified outcomes are achieved, such as girls' school attendance or employment for refugees. The Educate Girls DIB in Rajasthan, launched in 2015, is the archetypal case. DIBs shift performance risk from the donor to private capital. |
| D | Development Finance Institutions / Multilateral Development Banks (DFI / MDB) | National and international financial institutions such as the World Bank and IFC that provide critical capital, blended finance, and guarantees to stimulate development in emerging markets. |
| D | Discount rate | The rate used to convert future cash flows into a present value in a DCF or NPV calculation, reflecting both the time value of money and the risk of the cash flows. For enterprise-level valuation the discount rate is typically WACC; for equity valuation, cost of equity; for project appraisal, a hurdle rate. Small changes in discount rate produce large changes in valuation, especially for long-duration cash flows like renewable-energy and infrastructure assets. |
| D | Do No Significant Harm (DNSH) | The principle-codified in the EU Taxonomy and SFDR-that an activity claimed to contribute substantially to one environmental or social objective must not significantly harm any of the others: climate mitigation, adaptation, water, circular economy, pollution, and biodiversity, plus social minimum safeguards. DNSH is what prevents a solar-panel producer from claiming Taxonomy alignment while dumping toxic waste, or a green fund from investing in a project that helps decarbonise but violates labour rights. |
| D | Dry powder | Committed but not yet invested capital available to a private-equity, venture, or credit fund. It is a headline health-metric for private markets: high dry-powder levels indicate future deployment pressure and can compress entry multiples. In impact-investing markets it also signals demand-side capacity to absorb pipeline as sustainable-investment strategies scale. |
| D | Dynamic Materiality | The concept that ESG issues can shift in importance over time; a topic that today only reaches stakeholders through impact materiality may later affect a company's financial value through financial materiality. |
| E | Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) | A widely-used proxy for operating cash generation: net income plus interest, taxes, depreciation, and amortization. EBITDA smooths out capital-structure and accounting-policy differences, making it useful for cross-company and cross-country comparisons and central to multiples-based valuation such as EV/EBITDA and to leveraged-finance covenants. Critics note it can flatter capital-intensive and high-goodwill businesses; Charlie Munger called it 'bullshit earnings' for that reason. Adjusted EBITDA often adds back one-off or non-cash items and should be read carefully. |
| D | Depreciation | In impact finance, depreciation functions as a standard non-cash accounting charge that spreads the cost of tangible assets (like solar panels or green machinery) over time. While it lowers net income and tax liabilities, it plays a distinct role in balancing financial returns with social and environmental tracking |
| E | Environmental Management System | A structured framework that an organisation uses to identify, assess, control, and continuously improve the environmental impact of its operations. The dominant international standard is ISO 14001, published by the International Organization for Standardization, which sets requirements for scoping, targets, monitoring, corrective action, and management review; other frameworks include the EU's EMAS. Certification is used by procurement teams, regulators, and investors as a baseline signal of environmental governance-especially in manufacturing, construction, and heavy industry. Note that the original glossary listed the acronym as 'EMT'; the correct acronym is EMS. |
| E | Enterprise value materiality | The materiality perspective focused on sustainability issues reasonably expected to affect the enterprise value of the company,cash flows, cost of capital, and access to finance,over the short, medium, and long term. |
| E | Equator Principles | A risk-management framework, adopted by 140+ financial institutions in 40 countries, for identifying, assessing, and managing environmental and social risk in project finance and related lending. Modelled on the IFC Performance Standards and the World Bank Group EHS Guidelines, they classify projects by risk tier and require assessment, stakeholder engagement, grievance mechanisms, and independent review. Created in 2003 by a group of banks with IFC support. |
| E | European Sustainability Reporting Standards | The mandatory reporting standards that companies in scope of the EU's CSRD must use, covering cross-cutting requirements plus topical standards on climate, pollution, water, biodiversity, circular economy, own workforce, workers in the value chain, affected communities, consumers, and business conduct. Drafted by EFRAG at the European Commission's request and adopted through delegated acts, built on double materiality and including over a thousand disclosure data points. |
| E | EU Taxonomy for Sustainable Activities | The EU's classification system that defines which economic activities can be considered environmentally sustainable. Activities qualify if they substantially contribute to at least one of six objectives-climate mitigation, climate adaptation, water, circular economy, pollution prevention, and biodiversity-do no significant harm to the others, and meet minimum social safeguards. Created by the European Commission for use by investors, corporates, banks, and regulators, it underpins Article 8/9 fund disclosures, CSRD reporting, and green-bond alignment. |
| F | Financed emissions | The greenhouse-gas emissions attributed to a financial institution through its lending, investing, and underwriting activities-Scope 3 Category 15 of the GHG Protocol. Financed emissions are usually many multiples of a bank or asset manager's operational Scope 1 and 2 emissions and are the meaningful measure of a financial institution's climate footprint. Standardised computation follows the Partnership for Carbon Accounting Financials methodology. Reported to regulators such as the ECB and Bank of England, to investors through CDP and TCFD/ISSB, and to coalitions such as the Net-Zero Banking Alliance. |
| F | First-loss capital | Capital positioned to absorb the first losses in a fund or transaction, protecting more senior investors and lowering their effective risk. Typically provided by philanthropic or public-sector investors in blended-finance structures to crowd in commercial capital that could not otherwise underwrite the deal. Also referred to as catalytic first-loss capital when its explicit purpose is to attract other investors rather than earn a return. |
| F | Free, Prior and Informed Consent | A specific right recognizing Indigenous peoples' authority to give or withhold consent for projects impacting their lands, resources, or territories, serving as a critical social safeguard. |
| F | Free Cash Flow (FCF) | Cash generated by a business after covering the investment needed to maintain and grow its operations. Two common variants: FCF to the firm, which is operating cash flow minus capex, and FCF to equity, which is FCF to the firm minus net debt service. FCF is the input to DCF valuation and the ultimate source of returns to capital providers. Sustainable-investing analysts often adjust FCF for underinvestment in transition capex or under-recognised environmental liabilities. |
| G | Gender Lens Investing | An investment approach that applies a gender-analytic lens to allocation and decision-making-investing in women-led enterprises, businesses with strong gender-equity practices, or products and services that improve outcomes for women and girls. Popularised by the Criterion Institute and 2X Global, whose 2X Criteria are the leading assessment standard. Used by DFIs including US IDFC, BII, and FMO, by fund-of-funds, and by specialised GPs. A prominent example of 'lens' investing, alongside racial-equity, refugee, and disability-inclusion lenses. |
| G | Glasgow Financial Alliance for Net Zero | A cross-sector coalition of financial institutions committed to accelerating the transition to net-zero emissions by 2050. Launched at COP26 by Mark Carney and the UNFCCC High-Level Climate Champions, it umbrellas the Net-Zero Asset Owner Alliance, Net Zero Asset Managers initiative, Net-Zero Banking Alliance, and others. Works on transition-plan guidance, portfolio decarbonisation methodologies, and mobilisation of capital to emerging markets. |
| G | GIIN (Global Impact Investing Network) | The leading global membership organisation for impact investors, founded in 2009 with support from the Rockefeller Foundation. The GIIN develops industry infrastructure,the IRIS+ system for measurement, market-sizing research, and Impact Performance Benchmarks,runs the annual Impact Investing Survey, and convenes practitioners across asset owners, managers, DFIs, and foundations. |
| G | GIIRS Ratings | An impact-rating system, developed by B Lab, that assesses the social and environmental performance of impact funds and their portfolio companies against the same B Impact Assessment framework used for B Corp certification. GIIRS rates funds one through five stars across governance, workers, community, environment, and impact business models. It is used by LPs to compare impact managers, by GPs to benchmark portfolio companies, and by rating aggregators as a cross-check on self-reported impact claims. |
| G | Green Climate Fund | The largest dedicated multilateral climate fund, established under the UNFCCC in 2010 to help developing countries respond to climate change through mitigation and adaptation projects. Capitalised by pledges from developed-country governments and governed by a board representing donor and recipient countries in equal number. GCF works through accredited entities such as multilateral banks, national institutions, and private-sector funds, and is a central channel of Paris-aligned climate finance flows to the Global South, including a growing pipeline of blended structures and private-sector co-investments. |
| G | Greenhushing | The practice of deliberately under-communicating sustainability activities and targets to avoid regulatory, legal, or reputational scrutiny. Greenhushing has grown as a defensive response to anti-ESG political pressure in some markets and to tighter greenwashing enforcement in others. It undermines market transparency: if leaders go quiet, benchmarks collapse and laggards face less competitive pressure to improve. |
| G | Greenium (green premium) | The pricing differential between a green bond and an otherwise-identical conventional bond from the same issuer,usually expressed as basis points of yield give-up on the green bond, reflecting excess demand. The greenium has fluctuated in a range of roughly 1-8 bps in mature markets and is smaller or non-existent for new labels. Its persistence is a live debate: modest and issuer-specific rather than a system-wide subsidy for green issuance. |
| G | Global Reporting Initiative | The world's most widely-used sustainability-reporting framework, developed and maintained by an independent, multi-stakeholder standard-setter of the same name that was founded in 1997 in Boston and is now headquartered in Amsterdam. GRI Standards take an 'impact materiality' view-what matters to the company's stakeholders and the wider world-and cover economic, environmental, and social topics. Designed to be interoperable with ISSB and ESRS. |
| G | Green, Social, Sustainability, and Sustainability-linked Bonds | An umbrella term for the sustainable debt market comprising use-of-proceeds bonds for specific green/social projects, as well as bonds linked to achieving entity-level sustainability targets. |
| H | Human Capital Management | An organization's approach to hiring, training, managing, and retaining its workforce. In ESG, strong HCM is viewed as a driver of long-term corporate resilience and value. |
| H | HIPSO indicators | The Harmonised Indicators for Private Sector Operations-a common set of impact indicators used by DFIs including IFC, EIB, FMO, and BII to measure and report the development results of their private-sector investments in a comparable way. Developed by a working group of DFIs, HIPSO indicators cover access to finance, employment, energy, agriculture, health, and infrastructure, and are cross-mapped to IRIS+. |
| I | IFRS S1 & S2 | The first two sustainability-disclosure standards from the International Sustainability Standards Board, issued in 2023 under the IFRS Foundation and endorsed by IOSCO. S1 sets out general requirements for disclosing sustainability-related financial information; S2 covers climate-related disclosures and integrates and builds on TCFD, SASB, and CDSB. Both apply an enterprise-value / financial-materiality lens. Designed as a global baseline for capital-markets sustainability reporting. |
| I | Impact carried interest (impact carry) | A variant of GP carried interest in which some portion of the carry is contingent on the fund meeting pre-agreed impact performance targets, not just financial returns. Structures include gated carry, where no carry is paid until impact hurdles are met; stepped-up carry, where the carry rate rises if impact goals are exceeded; and clawback, where carry is returned if impact underperforms. Championed by Blue Haven Initiative, PGGM, and MacArthur Foundation as an accountability tool. |
| I | Impact Multiple of Money | A methodology for estimating the social or environmental value created per dollar invested, developed by The Rise Fund at TPG and the Bridgespan Group. IMM projects the expected impact of a business, translates it into monetary terms using academic evidence, discounts for probability and attribution, and compares the result to invested capital. Distinct from the industry acronym IMM meaning Impact Measurement and Management. |
| I | Impact Value Chain | The canonical logic model that connects an intervention to its ultimate effects: inputs → activities → outputs → outcomes → impact. Inputs are the resources committed; activities are what the organisation does; outputs are the direct products of those activities; outcomes are the changes in stakeholders' condition; impact is the long-run change attributable to the intervention, net of what would have happened anyway. Every credible theory of change and IMM system sits on top of this chain, and clarity about which link a metric measures is what separates rigorous impact reporting from vanity dashboards. |
| I | Impact-first vs finance-first | A shorthand for how impact investors position themselves on the impact–return trade-off. Impact-first, sometimes called catalytic, investors accept below-market financial returns to unlock outcomes that commercial capital would not fund. Finance-first investors target risk-adjusted market returns and choose among those opportunities using impact criteria. This is the same distinction expressed elsewhere as concessionary vs. non-concessionary returns-see separate entry-with the finance-first vocabulary more common in private-fund LP conversations and the concessionary vocabulary more common in DFI and blended-finance contexts. The distinction is a spectrum, and blended-finance structures deliberately combine the two. |
| I | Impact-linked finance | Financing arrangements in which financial terms-interest rate, fees, dividend, or repayment-are tied to the achievement of pre-agreed, verified social or environmental outcomes. Examples include sustainability-linked loans, outcome-linked grants, and social outcomes contracts. The Impact-Linked Finance Fund, developed by Roots of Impact and iGravity, has helped systematise the concept, which shifts risk toward the borrower and rewards genuine outcome delivery. |
| I | Impact-Weighted Accounts | A research initiative launched at Harvard Business School under George Serafeim in 2019 to translate a company's positive and negative impacts on people and the environment into monetary terms and integrate them into financial statements-turning ESG from a separate report into a line item on the P&L and balance sheet. Now stewarded by the International Foundation for Valuing Impacts together with VBA. Used by academics, forward-leaning corporates-Kering's environmental P&L is a related precursor-and impact investors testing how to price externalities into investment decisions. |
| I | Inflation Reduction Act | A landmark 2022 US law dedicating hundreds of billions in tax credits and incentives toward clean energy transition, significantly catalyzing global climate tech investments. |
| I | IRIS+ | A free public system of impact metrics, categorised by SDG-aligned themes and strategic goals, that impact investors and enterprises use to define, measure, and manage impact consistently across portfolios. Developed and maintained by the GIIN, IRIS+ synthesises evidence, sector guidance, and aligned indicators drawing on GRI, SASB, HIPSO, and others, and is the closest thing the impact-investing industry has to a common data language. |
| J | J-curve | The characteristic shape of a private-equity fund's net returns to LPs over its life: negative in the early years, since fees are drawn before value is created, turning positive as portfolio companies mature and exits begin. Impact funds can have deeper or longer J-curves when investments require patient capital and long build-out, as in climate infrastructure and agricultural value chains. Understanding the J-curve is key to setting LP expectations and to any interim performance judgement. |
| J | Joint Impact Model | An open-source model that estimates the indirect and induced socio-economic impact of investments in emerging markets-jobs supported through supply chains, value added, tax contributions, GHG emissions. Developed and open-sourced by a consortium of DFIs including FMO, BII, Proparco, FinDev Canada, and AfDB, and used across the DFI community and by impact fund managers as a common estimation tool. |
| J | Just Transition | The principle,rooted in labour-movement work in the 1980s and now embedded in the Paris Agreement preamble and the ILO Guidelines,that the shift to a low-carbon economy must protect and create good jobs, respect workers' rights, support affected communities and regions, and avoid dumping the costs of the transition on those least able to bear them. In finance it drives investment in re-skilling, community benefits agreements, place-based decarbonisation strategies, and specific 'just transition' fund products. |
| L | Life Cycle Assessment | A standardized scientific methodology used to evaluate the comprehensive environmental impacts of a product, process, or service from raw material extraction to end-of-life disposal. |
| L | Living Wage | A wage high enough to maintain a normal standard of living in a specific geographical area, covering basic human needs,often distinct from, and higher than, a legal minimum wage. |
| L | Loss and damage | In UN climate negotiations, the residual harms from climate change that cannot be avoided by mitigation or adaptation-destroyed homes, lost livelihoods, submerged land, cultural heritage loss. COP27 in 2022 established a dedicated Loss and Damage Fund, formalised further at COP28, to help vulnerable developing countries respond. For investors and insurers, it frames questions about parametric insurance, disaster-risk finance, and liability exposure for high-emitting industries. |
| L | Limited Partner / General Partner (LP / GP) | The two roles in a private-fund limited partnership. LPs commit capital and have limited liability but no operational role, and typically include pension funds, endowments, family offices, and DFIs. The GP manages the fund, makes investment decisions, and is exposed to unlimited liability-typically capped in practice through a management-company structure. Together, the LP–GP relationship is the core governance mechanism of private markets. |
| M | Marginal Abatement Cost Curve | A chart visualizing the volume of potential emissions reductions from various technologies or actions against their associated costs, helping investors prioritize cost-effective climate solutions. |
| M | Management fee | The annual fee a fund manager charges LPs, typically 1.5–2.0% of committed capital during the investment period and a lower percentage of invested cost thereafter. Combined with carried interest, this is the '2 and 20' model. Impact funds sometimes discount management fees on smaller vehicles targeting underserved markets, and DFIs and foundations occasionally waive them entirely to demonstrate concessionary intent. |
| M | Materiality assessment | A structured process by which a company identifies the ESG topics most important to its business, stakeholders, and, in a double-materiality frame, the outside world. It typically combines desk research, sector benchmarking, and stakeholder engagement-with employees, investors, customers, NGOs, and communities-into a prioritised list that guides reporting scope, strategy, and target-setting. Under CSRD the process must follow a defined double-materiality methodology and be audit-ready. |
| M | Microfinance | The provision of small-scale financial services-loans, savings, insurance, payments-to low-income individuals, informal-sector workers, smallholder farmers, and micro-enterprises historically excluded from formal banking. Pioneered by Grameen Bank under Muhammad Yunus in 1976 and by BancoSol, the field has professionalised into a global industry of MFIs, microfinance investment vehicles, and digital lenders. Impact investors provide debt and equity via specialised managers such as responsAbility, Symbiotics, and BlueOrchard. |
| M | Microinsurance | Financial products designed for low-income populations, providing affordable coverage against specific risks-such as crop failure from extreme weather-to build resilience and economic stability. |
| M | Mission-Related Investment | Investment of a foundation's endowment-the corpus, not just the annual grant pool-into assets that both advance the foundation's mission and generate a market-rate financial return. MRIs sit alongside Program-Related Investments in the toolkit of mission-aligned foundations. The Ford Foundation's $1bn MRI commitment in 2017 and Heron Foundation's 100% mission-aligned endowment are influential examples. |
| M | Mitigation | In climate policy and finance, actions that reduce greenhouse-gas emissions or enhance carbon sinks,renewable-energy deployment, energy efficiency, electrified transport, methane abatement, reforestation, carbon capture. Mitigation is the counterpart to adaptation and dominates climate-finance flows globally. Investment products aligned to mitigation include green bonds, climate-solutions equity funds, and transition-finance instruments. |
| N | Nationally Determined Contributions | The national climate commitments that each Paris Agreement signatory submits to the UNFCCC-covering emissions targets, adaptation plans, and finance-and updates every five years, with each iteration expected to be more ambitious under what is known as the ratchet mechanism. NDCs shape the regulatory environment for issuers and investors in every jurisdiction; investors use NDC ambition and credibility in sovereign-risk analysis and bottom-up transition assessments. |
| N | Nature Action 100 | An investor-led collaborative engagement initiative launched in 2023 to press 100 companies with the largest nature-related dependencies and impacts-across sectors like food, agrochemicals, mining, forestry, and consumer goods-to strengthen governance of nature-related risks and take concrete steps to protect and restore ecosystems. The biodiversity counterpart to Climate Action 100+, backed by more than 200 investors and coordinated by AIGCC, Ceres, Finance for Biodiversity Foundation, IIGCC, and Planet Tracker. |
| N | Nature Positive | A global goal and overarching framework to halt and reverse nature loss by 2030, moving beyond simply reducing harm to actively restoring and enhancing biodiversity and ecosystems. |
| N | Nature-based solutions | Actions that protect, sustainably manage, or restore natural or modified ecosystems in ways that address societal challenges,climate change, water security, food security, disaster risk,while delivering biodiversity co-benefits. Examples include mangrove restoration, reforestation, wetlands for flood control, and regenerative agriculture. The IUCN Global Standard defines the concept, and finance flows via public funds, blue and green bonds, biodiversity credits, and impact funds targeting nature. |
| N | NGFS scenarios | A suite of climate scenarios produced by the Network for Greening the Financial System-a group of 130+ central banks and supervisors-for use by financial institutions and regulators in climate risk analysis. The scenarios span orderly transition, disorderly transition, hot-house world, and too-little-too-late, with detailed variables for GDP, emissions, energy mix, and carbon prices. Used in central-bank climate stress tests, including those from the ECB, Bank of England, and the Fed pilot, and by banks and asset managers for portfolio scenario analysis. |
| N | Net Present Value (NPV) | The sum of an investment's future cash flows discounted to today at the appropriate rate of return, minus the initial investment. NPV > 0 signals a value-creating investment; NPV < 0 signals value destruction. NPV is the theoretically 'right' capital-budgeting metric because it directly measures dollar value added, and pairs naturally with IRR. |
| O | Operating Principles for Impact Management | Nine principles covering strategy, origination and structuring, portfolio management, exits, and independent verification of impact management systems in impact-investing operations. Launched in 2019 by the IFC with a founding group of asset owners and managers, now hosted by the GIIN. Signatories publish annual disclosure statements and undergo periodic independent verification, giving LPs a structured way to test whether a manager's impact management is systematic or superficial. |
| P | Paris Agreement | The 2015 international treaty under the UNFCCC, adopted at COP21, in which nearly every country committed to hold the increase in global average temperature to well below 2°C above pre-industrial levels and pursue efforts to limit it to 1.5°C. The agreement operates through Nationally Determined Contributions, a global stocktake every five years, transparency requirements, and finance obligations from developed to developing countries. The anchor for corporate and investor net-zero commitments and the architecture of climate-aligned finance. |
| P | Patient capital | Long-duration, flexible capital that accepts extended timelines to financial return in exchange for the opportunity to build businesses in markets or business models that mainstream capital cannot serve. Popularised by Acumen founder Jacqueline Novogratz as the concept underpinning venture-style investing in low-income markets, and widely used to describe philanthropic and DFI capital deployed with lower return expectations and longer horizons. |
| P | Partnership for Carbon Accounting Financials | An industry-led initiative that develops and maintains a global standard for measuring and disclosing greenhouse-gas emissions associated with loans and investments,financed emissions, Scope 3 Category 15 for financial institutions. Founded in 2015 by Dutch banks and now signed by hundreds of banks, asset managers, insurers, and asset owners globally. The PCAF Global GHG Accounting and Reporting Standard covers listed equity, corporate bonds, business loans, project finance, real estate, mortgages, motor vehicle loans, and sovereign debt, and is the reference methodology behind Net-Zero Banking Alliance and TCFD/ISSB financial-sector disclosures. |
| P | Perverse Incentives | Investment structures or metrics that inadvertently encourage unintended negative outcomes by rewarding behaviors that contradict the original impact goal. |
| P | Place-based investing | An investment approach that concentrates capital in a specific geography-a neighbourhood, city, region, or economic zone-to strengthen local economies, create quality jobs, expand affordable housing, and address community-defined priorities. Common vehicles include CDFIs, local venture funds, and community investment notes. Practised by foundations such as Kresge, Ford, and Kellogg, by pension funds with local mandates, and by community-development finance networks. |
| P | Principles for Responsible Investment | A UN-supported international network of investors,around 5,300 signatories managing over $130 trillion in AUM,committed to incorporating ESG factors into investment decisions and ownership practices through six voluntary Principles. Launched in 2006 by UN Secretary-General Kofi Annan with a group of major asset owners, the PRI runs annual reporting, produces guidance across asset classes, coordinates policy engagement, and delists persistent non-reporters. |
| P | Program-Related Investment | A US tax concept-defined in IRC Section 4944-allowing private foundations to count below-market, mission-driven investments such as loans, equity, and guarantees toward their annual 5% qualifying-distribution requirement, provided the primary purpose is charitable and financial return is not a significant purpose. Foundations such as Ford, MacArthur, and Kresge deploy PRIs into affordable housing, community development, and climate solutions. Not to be confused with the Principles for Responsible Investment. |
| R | Racial equity lens investing | An investment approach that applies a racial-equity analytic lens to allocation and decision-making,investing in businesses led by or serving Black, Indigenous, Latino/a, Asian, and other historically excluded communities of colour; deploying capital into fund managers from these communities; and structuring deals to close persistent racial wealth and opportunity gaps. A prominent sibling to gender-lens investing in the growing family of 'lens' strategies. |
| R | Recoverable grant | A grant that a philanthropic funder expects to have partially or fully returned if the recipient reaches defined milestones or generates sufficient revenue, at which point the returned capital is recycled into further grant-making. Positioned between traditional grants, which are never returned, and PRIs, which are loans or equity, recoverable grants are used by foundations and donor-advised funds to test new interventions with less risk than a straight grant. |
| R | Refugee lens investing | An investment approach that intentionally deploys capital to businesses that employ, supply, distribute to, or otherwise create economic opportunity for refugees, internally displaced people, and their host communities. The Refugee Investment Network, co-founded with Tent Partnership for Refugees, developed the framework, evidence base, and pipeline. Used by DFIs such as IFC and EBRD, by foundations including the IKEA Foundation, and by specialised fund managers to channel capital into one of the world's most under-invested populations. |
| R | Regenerative finance | An emerging finance movement aimed at funding activities that actively restore ecosystems and social systems-regenerative agriculture, ecological restoration, indigenous stewardship, and community wealth-building-rather than merely reducing harm. Draws on regenerative-agriculture pioneers such as the Rodale Institute and Savory Institute and, on the crypto/Web3 side, on Gitcoin, KlimaDAO, and Toucan Protocol experiments. Distinct from the broader sustainable-finance label. |
| R | Revenue-based financing | A form of financing in which investors receive a fixed percentage of the borrower's ongoing revenue until a pre-agreed return cap is reached, aligning repayments with cash-flow reality. Common in impact investing for small and growing businesses in emerging markets that lack collateral for traditional debt and are the wrong shape for venture equity. Also used to finance climate solutions, subscription-revenue software, and creator businesses. |
| S | SASB Standards | Industry-specific sustainability accounting standards, originally developed by the US-based Sustainability Accounting Standards Board founded in 2011 and now maintained under the IFRS Foundation's ISSB. Covering 77 industries, SASB Standards identify the subset of ESG issues most likely to affect financial performance in each sector, with concise metrics designed for inclusion in mainstream financial reporting. Heavily referenced inside IFRS S1/S2. |
| S | Science Based Targets initiative | A partnership between CDP, UN Global Compact, WRI, and WWF that defines and validates corporate emissions-reduction targets aligned with the latest climate science, primarily 1.5°C pathways. SBTi provides sector-specific methodologies, a Net-Zero Standard, and a validation service; over 5,000 companies have set or committed to targets. Used by investors as a due-diligence marker and by NGOs to hold laggards to account. |
| S | Sustainable Finance Disclosure Regulation | The EU regulation, in force since 2021, that imposes standardised sustainability-related disclosures on financial market participants and financial products sold in the EU. Fund-level disclosures are structured through three categories: Article 6 for funds with no ESG focus, Article 8 for ESG-promoting funds, and Article 9 for funds with a sustainable objective. Entity-level disclosures require statements on principal adverse impacts. Created by the European Commission for investors and end-clients. |
| S | Social Cost of Carbon | An estimate of the quantifiable economic damage caused by emitting an additional ton of greenhouse gas into the atmosphere, often used in DCF models to price climate externalities. The US EPA's updated methodology released in 2023 puts the central estimate at approximately $190 per tonne of CO₂ in 2020 dollars at a 2% discount rate, a major upward revision from earlier US federal values around $51 that were widely cited in the 2010s. |
| S | Social Impact Bond | A pay-for-success contract in which private or philanthropic investors fund a preventive social programme-for example recidivism reduction, homelessness support, or early-childhood development-and an outcomes payer, typically a government agency, repays them with a return only if independently verified outcomes are met, with a service provider delivering the intervention. The first SIB, launched at HMP Peterborough in 2010, reduced reoffending among short-sentence prisoners. |
| S | Spatial Finance | The integration of geospatial data-such as satellite imagery and AI analysis-into financial decision-making, enabling independent verification of physical risks, land use, and asset vulnerabilities. |
| S | Spectrum of Capital | A widely-used typology, popularised by Bridges Fund Management, that arrays capital along a continuum from purely financial at the 'finance only' end to purely philanthropic at the 'impact only' end, with responsible, sustainable, and impact-driven investing in between. The Spectrum is the standard visual for LPs, foundations, and family offices trying to place their portfolio on the impact–return curve and identify where they are willing to concede return, where they are not, and where the two objectives align. |
| S | Social Return on Investment | A framework for measuring and accounting for a much broader concept of value, assigning monetized, financial proxies to the social and environmental outcomes created by an investment. |
| S | Stranded assets | Assets that suffer premature write-down, devaluation, or conversion to liabilities as a result of environmental change, technological disruption, policy shifts, or changing social norms. The clearest examples are fossil-fuel reserves, pipelines, and power stations that become uneconomic under a Paris-aligned transition. The Carbon Tracker Initiative popularised the concept in finance; a core lens in transition-risk analysis and priced into bond spreads for high-carbon sectors. |
| S | Sustainability-Linked Loan | A loan-either bilateral or syndicated-whose margin steps up or down based on the borrower's performance against ambitious, material, externally-verified sustainability performance targets. Governed by the LMA/APLMA/LSTA Sustainability-Linked Loan Principles. SLLs are the dominant sustainable-debt product in many bank markets, though they face target-quality critiques similar to sustainability-linked bonds. |
| T | Tax Equity Financing | A financial structure, highly prevalent in the US renewable energy sector, allowing project developers to monetize tax incentives by partnering with corporate investors seeking to offset tax liabilities. |
| T | Task Force on Climate-related Financial Disclosures | A framework of 11 recommended disclosures across four pillars,governance, strategy, risk management, and metrics & targets,that companies and financial institutions use to communicate climate-related financial risks and opportunities. Created in 2015 by the Financial Stability Board under Mark Carney's chairmanship, with a task force led by Michael Bloomberg. Published final recommendations in 2017 and disbanded in 2023 when the ISSB took over monitoring; its architecture is fully inherited by IFRS S2. |
| T | Theory of change | A structured narrative and diagram that explains how an intervention is expected to produce impact,linking inputs, activities, and outputs to short-term outcomes, longer-term outcomes, and ultimate impact, together with the assumptions and external conditions each step depends on. Origin in the 1990s evaluation community and popularised in impact investing by the Impact Management Project. Expected of impact funds, social enterprises, and outcomes-based contracts. |
| T | Tracking error | The standard deviation of the difference between a portfolio's returns and its benchmark's returns,a measure of how tightly the portfolio 'hugs' the index. Passive strategies target very low tracking error; active strategies expect wider bands. In sustainable investing, tracking error is a design constraint: an ESG-tilted or Paris-aligned strategy trades some tracking error for reduced transition risk or improved impact profile. |
| T | Transition bond | A use-of-proceeds bond that finances a heavy-emitting issuer's credible pathway toward lower emissions-activities that may not yet qualify as 'green' but are necessary for economy-wide decarbonisation, such as efficiency retrofits, low-carbon steel, cement, and aviation. ICMA published the Climate Transition Finance Handbook in 2020 and updated it in 2023 to guard against transition-washing. Japan pioneered sovereign transition-bond issuance in 2024. |
| T | Transition finance | Financing directed at reducing the emissions of high-carbon activities and companies as they move onto a credible decarbonisation pathway, rather than screening them out. Transition finance is central to real-economy climate strategy because pure green activities are only a fraction of GDP. Guidance is emerging from the OECD, GFANZ, and jurisdictional taxonomies in Japan and Singapore. |
| T | Transition Plan Taskforce | A UK-convened body launched in 2022 by HM Treasury to develop a gold-standard framework for credible corporate climate transition plans. The TPT Disclosure Framework covers strategic ambition, implementation, engagement, metrics and targets, and governance, and is designed to interoperate with ISSB standards and jurisdictional rules. Published its finalised framework in 2023 and disbanded in 2024, with its outputs absorbed by the IFRS Foundation to inform the ISSB's transition-plan guidance. Used by companies preparing transition plans and by investors assessing them. |
| U | UN Global Compact | The world's largest corporate sustainability initiative, launched in 2000 by then-UN Secretary-General Kofi Annan, calling on companies to align strategies and operations with ten principles on human rights, labour, environment, and anti-corruption, and to take action in support of the SDGs. More than 20,000 participants across 160+ countries file annual Communications on Progress. |
| U | Universal ownership | The observation-developed by James Hawley and Andrew Williams in 2000 and now embedded in the practice of the largest pension funds and sovereign wealth funds-that highly diversified, long-term investors effectively own a slice of the whole economy, and therefore have an economic interest in reducing the negative externalities their portfolio companies impose on each other and on the wider system. The analytical foundation for system-level investing. |
| V | Voluntary Carbon Market | The market for carbon credits used by companies, individuals, and investors to offset emissions outside any legal compliance obligation. Supply-side integrity is stewarded by the Integrity Council for the Voluntary Carbon Market via the Core Carbon Principles; demand-side integrity by the Voluntary Carbon Markets Integrity Initiative. Standards bodies including Verra/VCS, Gold Standard, ACR, and CAR certify projects; independent ratings agencies such as BeZero, Sylvera, and Calyx Global grade credit quality. |
| W | Weighted Average Cost of Capital (Wacc) | The blended cost of a company's financing, weighted by the market value of each source in its capital structure. WACC is the default discount rate for enterprise-value DCFs and the hurdle a company's ROIC must clear to create value. Sustainability inputs increasingly enter WACC via green premiums that lower the cost of green-labelled debt, sustainability-linked pricing, and re-rated cost of equity for issuers exposed to transition risk. |
| W | Worker Ownership / Employee Stock Ownership Plan | A corporate structure where employees own a significant portion of the company's shares. Used in impact investing to improve job quality, close wealth gaps, and align incentives. |
