Glossary of Terms
Understand the impact investing conversation by knowing these frequently used terms.
The right of the lender, in the case of borrower default, to declare all of the borrower’s debt due and payable immediately.
A business accelerator is intended to promote rapid growth of a startup company. An accelerator is typically utilized after the initial stages of startup incubation. The time frame is usually three to six months to address operational, strategic, and organizational challenges that a young business may face in transitioning to a mature company.
Access to clean water and sanitation
Enabling overall access to water for underserved populations through investments in water storage, irrigation, and job creation for production; the production of clean and affordable water, including enhancing portability; water cleaning and irrigation treatment.
Access to education
Enabling overall access for underserved populations through investments in teacher education; investing in the development of physical infrastructure, including construction of schools; overall improvements to education systems; providing access to new students and families; improvements in teacher training and student attendance; reduction or mitigation of fees; textbook distribution; school provided meals, etc.
Access to energy
Enabling overall access for underserved populations in energy purchase, consumption, and storage; development of cost effective energy production and storage related products; certification and licensure of new efficient products and practices; energy generated for large scale sale, including underserved markets; savings from smart technology sold or used, etc.
Access to financial services
Enabling overall access for underserved populations through investments in new businesses, small enterprises, and microenterprises; supporting and promoting business and household savings; creating access to new loans; building credit; creating jobs by directly supporting new enterprises; provision of insurance or insurance related products to the underserved, including new small business owners; and development of microfinance related products, etc.
Access to information
Primarily access to information that includes online or network competencies; creation and scale of affordable online marketplaces; development and support of platforms that connect supply and demand actors within a given industry, across peers, and/or mentors; providing access to technical guides and training, along with additional resources, etc.
Amounts owed to creditors for goods and services.
A term used by the Securities and Exchange Commission (SEC) under Regulation D to refer to investors who are financially sophisticated and have a reduced need for the protection provided by certain government filings. Accredited investors include individuals, banks, insurance companies, employee benefit plans, and trusts. In order for an individual to qualify as an accredited investor, he or she must accomplish at least one of the following: (1) earn an individual income of more than $200,000 per year, or a joint income of $300,000, in each of the last two years and expect to reasonably maintain the same level of income; (2) have a net worth exceeding $1 million, either individually or jointly with his or her spouse; (3) be a general partner, executive officer, director, or a related combination thereof for the issuer of a security being offered.
An obligation resulting from the recognition of an expense prior to the payment of cash.
Low income housing development; financing of new affordable housing units; developing and investing in housing units for individuals in transition, including the formerly incarcerated or those living with mental disabilities; improvements to existing affordable housing infrastructure; new business created in low income areas due to housing development management, etc.
Support of smallholder farming and cooperatives development; production explicitly for consumption by underserved communities; efficient development of products; sustainably managed land and development of sustainable farming practices; improvement of product certifications and practices, etc.
Amortization is an accounting technique used to lower the cost value of a finite life or intangible asset incrementally through scheduled charges to income. Amortization is the paying off of debt with a fixed repayment schedule in regular installments over time, such as a mortgage or car loan. It also refers to the spreading out of capital expenses for intangible assets over a specific duration – usually over the asset’s useful life – for accounting and tax purposes.
Angel investors invest in small startups or entrepreneurs. Often, angel investors are among an entrepreneur’s family and friends. The capital angel investors provide may be a one time investment to help the business propel or an ongoing injection of money to support and carry the company through its early stages.
An anti dilution provision is a clause in an option, security, or merger agreement that gives the investor the right to maintain his or her percentage ownership of a company by buying a proportionate number of shares of any future issue of the security.
Appreciation is an increase in the value of an asset over time. The increase can occur for a number of reasons, including increased demand or weakening supply, or as a result of changes in inflation or interest rates. This is the opposite of depreciation, which is a decrease over time.
Profiting from differences in price when the same asset (including a commodity or security) is traded on two or more markets, taking advantage of disparities in prices between markets.
Asset allocation is an investment strategy determined by an investment advisor that works to balance a client’s tolerance for risk with their investment goals. An asset allocation strategy usually involves diversification between different asset classes and is periodically rebalanced to ensure investment goals are met.
Within traditional investing, asset class refers to the different categories of investment options such as equities (stocks), fixed income (bonds), cash (money market funds) and real estate. Within impact investing, it can also refer to private equity or venture capital.
Asset fund manager
An individual who is involved in overseeing the management and investment strategy of an investment fund (such as a mutual, pension, trust, or hedge fund). Fund managers are paid a percentage of the fund’s average assets under management (AUM) as a fee.
An asset, as defined within the investment community, is a monetary investment that is purchased for a client with the intent that it will appreciate in value and eventually be sold at a higher price.
Assets under management (AUM)
The market value of the total financial assets that an investment company manages on behalf of its clients and is often looked at as a measure of success against competition.
Available unrestricted net assets
The part of the net assets of an organization that is neither permanently restricted nor temporarily restricted by donor imposed stipulations and that is available for use, e.g. not tied up in fixed assets.
Certified B Corporations are a new kind of business that balances purpose and profit. They are legally required to consider the impact of their decisions on their workers, customers, suppliers, community, and the environment.
A balance sheet reports a company’s assets, liabilities, and shareholders’ equity at a specific point in time, and provides a basis for computing rates of return and evaluating its capital structure. It is a financial statement that provides a snapshot of what a company owns and owes, as well as the amount invested by shareholders.
The final payment of a loan that is much larger than the preceding payments. This larger installment is agreed upon in advance by all parties as terms in the original loan documents.
Below market-rate of return/Concessionary return
An investment made with an agreed upon rate of return that is less than the current market rate and sacrifices some financial gain to achieve a social benefit. Program related investments (PRIs) are often referred to as below market or concessionary investments given the IRS requirement that no significant purpose of the investment can be the production of income or appreciation of property.
A benefit corporation is a new class of for profit corporation that voluntarily meets specified standards of corporate purpose, accountability, and transparency. A benefit corporation has a corporate purpose to create a material positive impact on society and the environment; to consider the impact of its decisions, not only on shareholders but also on workers, community, and the environment; and to report annually on its overall social and environmental performance against a third party standard. Benefit corporation language has been passed in at least 33 states.
Biodiversity/Natural resource conservation
Engagement in biodiversity assessment and benchmarking; design and implementation of biodiversity policies, both for organizations and investments; policies and programs around the protection of threatened species; creation and implementation of conservation policies and/or practices, etc.
A term coined by Jed Emerson at Stanford University to describe social, financial, and environmental value created by all organizations’ activities (whether non profit or for profit). When investors acknowledge these value components, they can be more focused about their investments in organizations that create the mix and amount of value that matches their own values.
A debt investment in which an investor loans money to an entity (typically corporate or governmental) which borrows the funds for a defined period of time at a variable or fixed interest rate. Bonds are used by companies, municipalities, states, and sovereign governments to raise money and finance a variety of projects and activities. Owners of bonds are debt holders, or creditors, of the issuer.
A company’s common stock equity as it appears on a balance sheet, equal to total assets minus liabilities, preferred stock, and intangible assets such as goodwill. This is how much the company would have left over in assets if it went out of business immediately. Since companies are usually expected to grow and generate more profits in the future, market capitalization is higher than book value for most companies. Since book value is a more accurate measure of valuation for companies that are not growing quickly, book value is of more interest to value investors than growth investors.
Bottom of the pyramid (BOP)
A socio-economic concept that allows us to group that vast segment – in excess of about four billion – of the world’s poorest citizens constituting an invisible and unserved market blocked by challenging barriers that prevent them from realizing their human potential for their own benefit, those of their families, and that of society’s at large. Technically, a member of the BOP is part of the largest but poorest groups of the world’s population, who live with less than $2.50 a day and are excluded from the modernity of our globalized civilized societies, including consumption and choice as well as access to organized financial services.
An investment approach that focuses on the analysis of individual stocks and de-emphasizes the significance of macroeconomic cycles and market cycles.
A short-term loan used until a person or company secures permanent financing or removes an existing obligation. This type of financing allows the user to meet current obligations by providing immediate cash flow. The loans are short term, up to one year, with relatively high interest rates and are usually backed by some form of collateral such as real estate or inventory.
Used to describe the rate at which a new company is spending its venture capital to finance overhead before generating positive cash flow from operations; it is a measure of negative cash flow. Burn rate is usually quoted in terms of cash spent per month.
A company’s plan for how it will generate revenues and make a profit. It explains what products or services the business plans to manufacture and market, and how it plans to do so, including what expenses it will incur.
A document that describes an organization’s current status and plans for several years into the future. The plan projects opportunities and maps financial, operational, marketing, and organizational strategies that will enable the organization to achieve its goals.
Business to business (B2B)
A form of transaction between businesses, such as one involving a manufacturer and wholesaler or a wholesaler and a retailer. B2B refers to business that is conducted between companies, rather than between a company and individual consumers (B2C).
Business to consumer (B2C)
Refers to the transactions conducted directly between a company and consumers who are the end-users of its products or services. B2C as a business model differs significantly from the business-to-business (B2B) model, which refers to commerce between two or more businesses.
Call options are an agreement that give the option buyer the right, but not the obligation, to buy a stock, bond, commodity, or other instrument at a specified price within a specific time period.
Individuals and organizations that provide third party technical assistance to nonprofit and for-profit social enterprise stakeholders, inclusive of pro bono provisions of services, etc.
A description of the totality of capital invested in a project, including pure debt, hybrid debt, and equity. The stack is described as containing the most risk at the top, traveling down the stack to the position with the least risk. Higher positions in the stack expect higher returns for their capital because of the higher risk. Lenders and equity stakeholders are highly sensitive to their position in the stack.
Carried interest, or carry, is a share of any profits that the general partners of private equity and hedge funds receive as compensation, regardless of whether they contributed any initial funds. This method of compensation seeks to motivate the general partner (fund manager) to work toward improving the fund’s performance.
Cash and cash equivalents ratio
Cash plus cash equivalents divided by current liabilities. A measure of short-term liquidity.
Investing cash through community-based finance in community financial institutions, credit unions, or regional banks; often FDIC insured, with competitive rates of return. These deposits offer alternative secured financing to communities, increasing access to capital for low-income borrowers and businesses.
A security investment that is readily converted to cash, such as money market funds.
Cash flow statement
A statement that reports the cash receipts and cash payments of an entity during a particular period. Complete financial statements are required to include a cash flow statement.
Change in unrestricted net assets
The difference in unrestricted net assets from one accounting period to the next. Formerly called net income.
All section 501(c)(3) organizations must be organized and operated for one or more charitable purposes. The Internal Revenue Code defines charitable purposes as religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and the prevention of cruelty to children or animals. In the PRI context, typical charitable purposes include providing relief to the poor and distressed, revitalization of distressed communities, conducting educational activities/promoting education, protecting and preserving the natural environment, supporting scientific research, promotion of health, and lessening the burdens of government.
The culmination of a business transaction. Documents may be signed either before closing (in which case they contain conditions precedent to closing) or at the closing. In a loan, the closing is when the lender typically transfers at least some portion of funds to the borrower. In an equity transaction, it is when the investor pays over funds and becomes a shareholder or member in the entity.
A property or other asset that a borrower offers as a way for a lender to secure the loan. If the borrower stops making the promised loan payments, the lender can seize the collateral to recoup its losses.
The commitment of a group of actors from different sectors to a common agenda for solving a complex social problem.
An investment in a business enterprise that buys and/or sells goods and/or services with the expectation of profit.
An agreement by the lender to make loans to the borrower on specified terms, subject to the satisfaction of stated conditions and the completion of satisfactory loan documentation.
Community development is a practice-based profession and an academic discipline that promotes participative democracy, sustainable development, rights, equality, economic opportunity, and social justice, through the organization, education, and empowerment of people within their communities, whether these be of locality, identity or interest, in urban and rural settings.
Community development banking institutions (CDBIs)
Banks and thrifts that have a mission of economic and community development. They have a substantial presence in low- and moderate- income communities and/or are focused on serving low- and moderate-income people. CDBIs provide both credit and non-credit financial products and services tailored to the needs of the communities they serve. CDBIs are federally insured depositories required to adhere to safe and sound banking practices. Types of CDBIs include banks certified by the U.S. Department of Treasury as Community Development Financial Institutions (CDFIs), Minority Depository Institutions (MDIs) working for underserved minority populations, and other banks that have a mission of serving underserved markets but which do not have any formal certification as a CDFI.
Community development credit unions (CDCUs)
Organizations specialized in serving populations generally considered the hardest to serve, including low-income wage earners, recent immigrants, and people with disabilities. CDCUs are nonprofit and tax-exempt (but not a charity), cooperatively owned and governed, and government-regulated, fully insured financial institutions.
Community development finance institution (CDFIs)
Financial institutions such as a community development corporation, bank, credit union, or loan or venture capital fund, that has as its primary mission to provide credit and financial services to underserved markets and economically disadvantaged populations.
Private financial institutions that are 100% dedicated to delivering affordable lending to help low-income, low-wealth, and other disadvantaged people and communities join the economic mainstream. They aim to be profitable but not profit-maximizing.
Method of analysis that utilizes the comparison of an organization to industry standards or similar organizations to identify questions or determine which logical conclusions a data set supports.
Conditional promise to give
A promise to give that depends on the occurrence of a specified future and uncertain event to bind the promisor.
Improve basic welfare for people in need due to conflict – political or otherwise; support for conflict resolution programs and services; supporting entrepreneurs focused on promoting peace; investments in high impact conflict markets; conciliation and arbitration services etc.
A loan to the developer of a project which covers the construction costs. Typically, these loans are short-term (i.e., one to three years). At the time of occupancy, the developer uses a long-term loan, known as permanent financing, to pay off the construction loan.
The difference between the price of convertible stock and the ordinary shares into which they are to be converted.
The ratio between two currencies which shows how much of one money exchanges for another. A conversion rate is also known as foreign exchange rates. Because most currencies trade widely on global financial markets, conversion rates fluctuate regularly. This constant change can impact stock markets, interest rates, and economic activity worldwide.
A convertible note is a debt security that contains an option in which the note will be converted into a predefined amount of the issuer’s shares. Convertible notes are often issued by angel or seed investors looking to fund an early stage startup which has not been valued explicitly. After more information becomes available to establish a reasonable value for the company, convertible note investors can convert the note into equity. The firm valuation will usually be determined during Series A financing round. So instead of a return in the form of principal plus interest, the investor would receive equity in the company. If the company fails after issuing a convertible note and defaults on its obligations, its note holders will probably be unable to get their initial seed or investment back. If there’s anything to be gotten, convertible note holders will fall in line after secured debt holders and before shareholders.
Convertible preferred stock
Preferred stock that includes an option for the holder to convert the preferred shares into a fixed number of common shares, usually any time after a predetermined date. Most convertible preferred stock is exchanged at the request of the shareholder, but sometimes there is a provision that allows the company, or issuer, to force conversion. The value of convertible preferred stock is ultimately based on the performance, or lack thereof, of the common stock.
The system of rules, practices and processes by which a firm is directed and controlled. Corporate governance essentially involves balancing the interests of a company’s many stakeholders, such as shareholders, management, customers, suppliers, financiers, government and the community. Since corporate governance also provides the framework for attaining a company’s objectives, it encompasses practically every sphere of management, from action plans and internal controls to performance measurement and corporate disclosure.
Corporate social responsibility (CSR)
Also called corporate conscience, corporate citizenship, social performance, or sustainable responsible business/responsible business. CSR is a form of corporate self-regulation integrated into a business model. CSR policy functions as a built-in, self-regulating mechanism whereby a business monitors and ensures its active compliance with the spirit of the law, ethical standards, and international norms, and sometimes goes beyond to support or achieve social good.
In the loan context, a clause in a loan agreement in which a party promises to do, or to refrain from doing, certain things while the loan is outstanding. Covenants that require a party to do something are called “affirmative covenants.” Those that prohibit certain actions are called “negative covenants.” Covenants are designed to protect the lender’s interest.
An agreement governing the relationship of the lender and the borrower.
Credit enhancement is a method whereby a company attempts to improve its debt or credit worthiness. In securitization, credit enhancement refers to a risk-reduction technique that increases the credit profile of structured financial products or transactions.
Formal evaluation of an organization’s credit history and capability to repay obligations.
The collective effort of individuals who network and pool their money, usually via the internet, to support efforts initiated by other people or organizations. Crowd funding is used in support of a wide variety of activities, including disaster relief, startup company funding, inventions development, scientific research, and civic projects.
Cash, accounts receivable, inventory, and other assets that are likely to be converted into cash, sold, exchanged, or expensed in the normal course of business, usually within a year.
Debt or other obligations due to be paid within the current period, usually a year.
Current assets divided by current liabilities. The ratio shows a company’s ability to pay its current obligations from its current assets.
An amount owed for funds borrowed. Generally, debt is evidenced by a note, bond, mortgage or other instruments that states the repayment and interest provisions.
Debt coverage ratio
Change in unrestricted net assets plus interest plus non-cash depreciation divided by current notes payable. Measures an organization’s ability to pay its current debt obligations.
The amount of payment due at regular intervals (usually monthly, quarterly, or annually) to meet a mortgage or debt agreement.
Debt to equity (D/E) ratio
Calculated by dividing a company’s total liabilities by its shareholder equity. These numbers are available on the balance sheet of a company’s financial statements. The ratio is used to evaluate a company’s financial leverage. The debt/equity ratio is also referred to as a risk or gearing ratio.
Deed of trust
The equivalent of a mortgage in some jurisdictions. The borrower conveys title to the property to be held as security to a trustee, who holds the title as security for the benefit of the lender. The transfer is accompanied by a trust agreement setting forth the terms of the security arrangement.
The failure to pay interest or principal on a loan or security when due. Default occurs when a debtor is unable to meet the legal obligation of debt repayment, and it also refers to cases in which one party fails to perform on a futures contract as required by an exchange.
Delayed draw loan
A specific type of term loan that permits the borrower to make several borrowings over a set period of time to utilize the full amount of the loan.
Cash or certificate of deposit in a bank or other financial institution.
An agreement outlining the terms of a transaction that transfers funds to another party for safekeeping as security or collateral.
An accounting method of allocating the cost of a tangible asset over its useful life and is used to account for declines in value. Businesses depreciate long-term assets for both tax and accounting purposes. For tax purposes, businesses can deduct the cost of the tangible assets they purchase as business expenses; however, businesses must depreciate these assets according to IRS rules about how and when the company can take the deduction.
A deliberate downward adjustment of the value of a country’s currency relative to another currency, group of currencies or standard. Countries that have a fixed exchange rate or semi-fixed exchange rate use this monetary policy tool. It is often confused with depreciation and is the opposite of revaluation.
Development finance institution (DFI)
National and international development finance institutions (DFIs) are specialized development banks or subsidiaries set up to support private sector development in developing countries. They are usually majority-owned by national governments and source their capital from national or international development funds or benefit from government guarantees. This ensures their creditworthiness, which enables them to raise large amounts of money on international capital markets and provide financing on very competitive terms.
Development impact bond (DIB)
Provides upfront funding for development programs by private investors, who are remunerated by donors or host-country governments – and earn a return – if evidence shows that programs achieve pre-agreed outcomes.
Dilution is a result of a reduction in the ownership percentage of a company, or shares of stock, due to the issuance of new equity shares by the company. Dilution can also occur when holders of stock options, such as company employees, or holders of other optionable securities exercise their options. When the number of shares outstanding increases, each existing stockholder owns a smaller, or diluted, percentage of the company, making each share less valuable.
An investment, typically an equity investment, made directly into a singular company.
Disease-specific prevention and mitigation
Addressing specific diseases; providing direct treatment or investment into mitigation or prevention of disease; medicinal or drug provisions for a specific disease, including: epidemic and/or pandemic; education and training on family management of disease; investment in programs that help inform proper disease management, etc.
A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique contends that a portfolio constructed of different kinds of investments will, on average, yield higher returns and pose a lower risk than any individual investment found within the portfolio.
Divestment, also known as divestiture, is the opposite of an investment, and it is the process of selling an asset for either financial, social or political goals. Assets that can be divested include a subsidiary, business department, real estate, equipment and other property. Divestment can be part of following either a corporate optimization strategy or political agenda, when investments are reduced and firms withdraw from a particular geographic region or industry due to political or social pressure.
A pro rata distribution of a company’s earnings, with amounts determined by the terms associated with the particular class of the investor.
Donor-advised fund (DAF)
A pool of charitable resources that donors deposit for management in community foundations, corporate-originated charitable funds, or other nonprofit institutions, for which the donors receive the full value of their charitable deduction at the time of deposit and out of which they make charitable contributions to eligible nonprofit organizations over a period of years. DAF capital in now also able to be invested in for-profit impact investments, with any returns cycling back into the DAF account for further investment or charitable giving.
A donor stipulation that specifies a future and uncertain event whose occurrence or failure to occur gives the promisor a right of return of the assets it has transferred or releases the promisor from its obligation to transfer its assets.
A donor stipulation that specifies a use for the contributed asset that is more specific than broad limits resulting from the nature of the organization, the environment in which it operates, and the purposes specified in its articles of incorporation or bylaws or comparable documents for an unincorporated association. A restriction on an organization’s use of the asset contributed may be temporary or permanent. The Uniform Prudent Management of Institutional Funds Act of most states governs compliance with donor-imposed restrictions. Note that donor-imposed restrictions may affect donor’s deductibility of the gift.
Double bottom line
The simultaneous pursuit of financial and social returns on investment – the ultimate benchmark for a social enterprise or a social sector business.
Investigation of a business or person prior to signing a contract, or general standards of care. It may be legally required, but commonly refers to an independent evaluation of a company one seeks to acquire. Investment brokers must be able to demonstrate due diligence in investigating a company whose equity they sell.
Financing provided by a venture capital firm to a company after it has received its initial, or seed, financing. At this early stage, the company has a product or service that it is testing or still developing, but it isn’t completely ready to go to market. In some cases, the product may be commercially available in a limited manner but not yet generating revenue. Typically, a company that receives early stage financing has been in business for less than three years.
Revenue that an organization generates through fees, interest and/or sales of products or services.
EBITDA (Earnings before interest, taxes, depreciation, and amortization)
Accounting technique that is an important standard measure of profitability. EBITDA gained popularity in the 1980s, at the height of the leverage buyout era. What makes EBITDA valuable is that unlike standard net income calculations that use a simple formula of revenue minus expenses, EBITDA factors in other expenses, like taxes and interest. EBITDA allows analysts to generate useful comparisons between companies and project long-term profitability and the ability to pay off future financing.
Economically-targeted investments (ETIs)
Term used since the 1960s to apply to investments by institutional investors, typically pension funds, to assist in the economic stimulation and improvement of specific geographies. Economically targeted investments are different from standard investments in that they provide capital to under-financed regions of the economy, thus filling “capital gaps.” The Department of Labor clarified the proper use of ETIs under ERISA pension fund regulations in 2015.
A nation’s economy that is progressing toward becoming advanced, as shown by some liquidity in local debt and equity markets and the existence of some form of market exchange and regulatory body.
Increases in job training and/or vocational services; efforts to increase job placement rates; developing alternatives for individuals currently in the informal work sector; investment in skills training and job up-training programs, etc.
An endowment fund is an investment fund established by a foundation that makes consistent withdrawals from invested capital. The capital in endowment funds, often used by universities, nonprofit organizations, churches and hospitals, is generally utilized for specific needs or to further a company’s operating process. Endowment funds are typically funded entirely by donations that are deductible for the donors.
Energy and fuel efficiency
Development and implementation of energy conservation strategies; tracking and reporting on energy saved, including cost implications; strategies developed to conserve fuel consumption and/or pursue alternative energy strategies, etc.
The value of an asset less the amount of all liabilities on that asset. It can be represented with the accounting equation: Assets – Liabilities = Equity.
Equity equivalent investment (EQ2)
An unsecured investment in a CDFI that is fully-subordinated to all other investments, which means it would be the last investment to be repaid in the event of liquidation. An investment must meet a total of six tests to qualify as EQ2 for Community Reinvestment Act (CRA) and accounting purposes, including a rolling term and an interest rate that is not tied to income, usually well below market. EQ2 acts like permanent capital by enabling a CDFI to innovate and/or increase lending, leverage new debt, and reduce risk to other investors. However, an EQ2 does require interest payments and eventually must be repaid, unlike permanent capital. As a result, it cannot be viewed as a permanent source of financial strength or self-sufficiency.
Typically takes the form of an owner’s share in a for-profit business, and return on equity involves a share in the profits. An equity investment typically takes the form of ownership of a business entity, such as shares of stock, membership interest in an LLC, or a partnership interest in a limited partnership.
Environmental, social, and governance (ESG) criteria are a set of standards for a company’s operations that socially conscious investors use to screen potential investments. Environmental criteria look at how a company performs as a steward of nature. Social criteria examine how a company manages relationships with its employees, suppliers, customers and the communities where it operates. Governance deals with a company’s leadership, executive pay, audits, internal controls and shareholder rights.
Using one’s ethical principles as the main filter for securities selection. Ethical investing depends on an investor’s views; some may choose to eliminate certain industries entirely (such as gambling, alcohol, or firearms, also known as sin stocks) or to over-allocate to industries that meet the individual’s ethical guidelines.
The systematic and objective assessment of an ongoing or completed project, program, or policy and its design, implementation, and results. The aim is to determine the relevance and fulfillment of objectives, efficiency, effectiveness, impact, and sustainability. An evaluation should provide information that is credible and useful, enabling the incorporation of lessons learned into the decision-making process of both recipients and donors. Evaluation also refers to the process of determining the worth or significance of an activity, policy or program. An assessment, as systematic and objective as possible, of a planned, ongoing, or completed intervention. Evaluation in some instances involves the definition of appropriate standards, the examination of performance against those standards, an assessment of actual and expected results and the identification of relevant lessons.
Internal Revenue Code section 4940 imposes an excise tax of 1-2 percent on the net investment income of some private foundations. PRIs are excluded from being treated as business holdings for the purpose of calculating excess business holdings subject to excise tax.
Confidentiality agreements (also called “non-disclosure agreements” or “NDAs”) are undertakings signed by bidders in the initial stages of exploring a potential deal. Their purpose is to protect the confidentiality of any commercially sensitive information about a company being sold that is disclosed to bidders during deal negotiations.
The requirements that a private foundation must establish procedures to: (1) see that a grant to an organization that is not a Section 501(c)(3) public charity or the foreign equivalent thereof is used only for the purpose for which it is made; (2) obtain full and complete reports from the grantee organizations on how the funds are spent; and (3) to make full and detailed reports on the expenditure to the IRS. Grants or PRIs for which expenditure responsibility must be exercised are disclosed on a private foundation’s Form 990PF.
A term referring to a relationship in which one person owes a fiduciary duty, a high standard of care, to the beneficiary. The primary duties are the duty of care and the duty of loyalty. Directors, trustees, managers and certain other advisors of nonprofit organizations owe fiduciary duties to the organizations they oversee, similar to the duties of directors at for-profit companies. However, unlike fiduciaries of for-profit companies or pension trusts, fiduciaries of foundations and endowments owe legal duties of obedience to the organization’s charitable mission and to the observation of the social purposes required of nonprofits. The fiduciaries of charitable organizations must approach investment and program-related investment decisions with these duties in mind.
Finance first investors
Investors who prioritize the financial return objective over the social or environmental objectives of an investment. This group tends to include commercial investors seeking investments that offer market-rate returns and also yield social or environmental good. Also included in this group are investors that are required to uphold a fiduciary standard and are therefore unable to make investments that lack the potential to yield market rate returns
The pursuit of making financial services accessible at affordable costs to all individuals and businesses, irrespective of net worth and size, respectively. Financial inclusion strives to address and proffer solutions to the constraints that exclude people from participating in the financial sector.
Financial sustainability for a social enterprise is the degree to which it collects sufficient revenues from the sale of its services to cover the full costs of its activities. For charities, it involves achieving adequate and reliable financial resources, normally through a mix of income types.
First-loss capital refers to socially- and environmentally-driven credit enhancement provided by an investor or grantmaker who agrees to bear first losses in an investment in order to catalyze the participation of co-investors that otherwise would not have entered the deal. First-loss capital has gained recent prominence in impact investing dialogue as more investors look to enter the market.
Tangible property used in the operations of an organization, but not expected to be consumed or converted into cash in the ordinary course of events, e.g. facility, equipment, furniture, etc.
A type of investment whose return is usually fixed or predictable and is paid at a regular frequency like annually, semi-annually, quarterly or monthly. Along with equities, fixed income forms an important part of the investment market and is used for raising capital by the companies and governments. Compared to the uncertain returns from equities, commodities and other investment classes, the predictable and regular returns from fixed-income investments can be used to efficiently diversify one’s portfolio.
Efforts to stabilize volatile agriculture and foodstuffs prices; enabling access to sustainable and affordable food suppliers; improving both economic and physical access to safe and nutritious food; transforming unusable food and water to viable assets, etc.
The procedure whereby a lender takes possession of collateral that has been pledged under a loan upon a default.
An emerging sector of the economy which consists of “for-benefit” organizations that combine market-based approaches of the private sector with the social and environmental aims of the public and non-profit sectors.
Functional expense classification
A method of grouping expenses according to the purpose for which costs are incurred, such as program expenses, general and administrative expenses, cost of goods sold, and financing expenses.
The person or company responsible for making investments on behalf of, and/or providing advice to, investors. In the context of the mutual fund business, an advisor, also known as an investment advisor, is an organization employed by an investment company to manage a particular fund’s portfolio. A fund’s advisor assigns a manager(s) to make the day-to-day decisions involved in the purchase and sale of a fund’s securities according to stated strategies and investment objectives.
Responsible for implementing a fund’s investing strategy and managing its portfolio trading activities. A fund can be managed by one person, by two people as co-managers, or by a team of three or more people. Fund managers are paid a fee for their work, which is a percentage of the fund’s average assets under management (AUM).
General and administrative (G&A) expenses
Operating expenses that are not directly related to programs or the production of goods or services, including rent, utilities, insurance, and managerial salaries.
General partner (GP)
One of the co-owners of an unincorporated business (organized as a general partnership) who has control of the firm and, unlike limited or nominal partner, has unlimited personal liability for the firm’s debts. Actions taken by one general partner are binding upon the other general partners.
Governance and ownership
Enhancements to board and staff diversity, across gender and race; efforts to strengthen disclosure and transparency of senior level decision-making; improvements to proxy engagement and activism; mitigation of staff turnover and increased positive employee engagement; additional training and qualification services provided; efforts to verifiably mitigate litigation and corruption risk, etc.
A grant is a payment to an organization for general operating support, or a specific project or purpose. Grants can include payments to exempt organizations to further their exempt purpose. A grant can be made for any charitable purpose. Any private foundation grant to a non-501(c)(3) public charity must be made subject to expenditure responsibility. In the context of a program-related investment (PRI), private foundation funders will often make technical assistance grants to support other charitable activities related to the PRI.
A type of tax-exempt bond issued to promote environmental sustainability and the development of brownfield sites (areas of land that are unused and under-developed and may contain low levels of industrial pollution). Green bonds are generally issued by federal, state or local municipalities. Additionally, the World Bank has issued green bonds in order to support large scale projects that address climate change. The proceeds from the purchase of green bonds either fund ‘green’ projects directly or are earmarked for green projects. The bonds are generally backed by renewable energy assets and carry the same credit rating as normal municipal bonds.
Green tech (cleantech, clean technology)
Alternatively referred to as environmental technology or cleantech, this term is used to describe a collection of modern technologies and approaches that maximize human, environmental, and economic benefits. Specifically, green tech utilizes advancements of modern environmental science, biotechnology and engineering to provide products and services in a way that least degrades natural resources, and in some cases, regenerates them. Common examples of green tech include: materials recycling; utilization of solar, wind and other renewable energy sources for power; biological water treatment and grey water recycling; biofuels; and energy-conserving electronics.
An enforceable assurance making one party responsible for the payment or debt of another. Guarantees are binding, however, only if made on top of legally valid contracts.
In a development budget, costs associated directly with construction. In contrast, soft costs include fees, taxes, insurance, and other items above the actual construction costs.
High net worth individual (HNWI)
A classification used by the financial services industry to denote an individual or a family with high net worth. Although there is no precise definition of how rich somebody must be to fit into this category, high net worth is generally quoted in terms of liquid assets over a certain figure. The exact amount differs by financial institution and region, but the most commonly quoted figure for membership in the high net worth club is $1 million in liquid financial assets.
In capital budgeting, hurdle rate is the minimum rate that a company expects to earn when investing in a project. Hence the hurdle rate is also referred to as the company’s required rate of return or target rate. In order for a project to be accepted, its internal rate of return must equal or exceed the hurdle rate. The hurdle rate is also used to discount a project’s cash flows in the calculation of net present value. The minimum hurdle rate is usually the company’s cost of capital (a blend of the cost of debt and the cost of equity). However, the hurdle rate will be increased for projects with greater risk and when the company has an abundance of investment opportunities.
A financially-sustainable enterprise that operates with a social and/or environmental mission.
The impact chain represents how a social purpose organization achieves its impact by linking the organization to its activities, and the activities to outputs, outcomes and impact. The impact chain forms the central line running through the impact plan.
the Global Impact Investing Network defines impact investing as investments made into companies, organizations, and funds with the intention to generate measurable social and environmental impact alongside a financial return. Impact investments can be made in both emerging and developed markets, and target a range of returns from below market to market rate, depending upon the circumstances. Impact investors actively seek to place capital in businesses and funds that can harness the positive power of enterprise.
Measuring and managing the process of creating social and environmental impact in order to maximize and optimize it.
Seek to optimize social or environmental returns with a financial floor. These investors use social/environmental good as a primary objective and may accept a range of returns, from return of principal to market rate. This group of investors is willing to accept a lower than market rate of return in investments that may be perceived as higher risk in order to help reach social/environmental goals that cannot be achieved in combination with market rates of financial return.
A document generated monthly and/or annually that reports the earnings of a company by stating all relevant income and all expenses that have been incurred to generate that income. Also referred to as a profit and loss statement. The income statement is a simple and straightforward report on a business’ cash-generating ability. It’s a scorecard on the financial performance of your business that reflects when sales are made and expenses are incurred. It draws information from the various financial models such as revenue, expenses, capital (in the form of depreciation) and cost of goods.
Measurable variable used as a representation of an associated (but non-measured or non-measurable) factor or quantity. For example, consumer price index (CPI) serves as an indicator of general cost of living which consists of many factors some of which are not included in computing CPI. Indicators are common statistical devices employed in economics.
Sector which encompasses all jobs which are not recognized as normal income sources, and on which taxes are not paid. The term is sometimes used to refer to illegal activity, such as an individual who earns wages but does not claim them on his or her income taxes. However, the informal sector could also be interpreted to include legal activities, such as jobs that are performed in exchange for something other than money.
Information rights are rights (usually a clause in a venture capital investment agreement) that an investor has to demand to receive regular updates from the private company about its financials and operations.
A nonbank person or organization that trades securities in large enough share quantities or dollar amounts that it qualifies for preferential treatment and lower commissions. Institutional investors face fewer protective regulations because it is assumed they are more knowledgeable and better able to protect themselves. There are generally six types of institutional investors: endowment funds, commercial banks, mutual funds, hedge funds, pension funds and insurance companies.
Interest is the charge for the privilege of borrowing money, typically expressed as annual percentage rate (APR). Interest can also refer to the amount of ownership a stockholder has in a company, usually expressed as a percentage.
An organization that raises funds from depositors or investors, including individuals and organizations, and re-lends these funds to other individuals and organizations. Non-profit financial intermediaries raise funds through grants, program-related investments, and social investments and re-lend to non-profit or other organizations that will undertake projects such as affordable housing development or targeted business assistance.
Internal rate of return (IRR)
A rate of return is measure of profit as a percentage of investment. Rates of return often involve incorporating other factors, including the bites that inflation and taxes take out of profits, the length of time involved, and any additional capital an investor makes in the venture. If the investment is foreign, then changes in exchange rates will also affect the rate of return.
A company or entity in which an investor makes a direct investment. More commonly used in the venture capital vernacular to describe a company in which a controlling interest is held by a venture capitalist firm.
A consultant assists clients in making financial decisions based on their financial and social/environmental goals. They should have experience in portfolio allocation, tax planning, retirement planning and estate planning. However, although many investment consultants are certified financial planners (a designation that they need to pass a national test to receive), there is no national certification requirement to be called an investment consultant.
An entity that acts as a middleman in a financial transaction between two parties. In the context of impact investing, it refers to a firm that takes larger sums of money and re-distributes it to multiple borrowers. An intermediary can be a nonprofit or for-profit institution that accepts grants or PRI dollars and re-grants them to support impact investing projects or to underwrite below market rate investments.
The beliefs that investors decide to use when determining what investments to purchase or sell, when to take an action and why. An investment thesis helps investors establish goals for their investments, and measures whether they have been achieved, either in written form or simply as an idea. A sound investment thesis can be a foundation for a profitable portfolio. On the other hand, an incorrect investment thesis can result in sub-par returns or losses.
Any person or organization who commits capital with the expectation of financial returns. Investors utilize investments in order to grow their money and/or provide an income during retirement (for individuals), such as with an annuity. Investors typically perform technical and/or fundamental analysis to determine favorable investment opportunities, and generally prefer to minimize risk while maximizing returns
Section 4944 of the Code provides that a jeopardizing investment is an investment that shows a lack of reasonable business care and prudence in providing for the long- and short-term financial needs of the foundation for it to carry out its exempt function. The Code provides for an excise tax in the event this section is violated. Program-related investments (PRIs) are exempted from these rules.
Joint venture (JV)
A business arrangement in which two or more parties agree to pool their resources for the purpose of accomplishing a specific task. This task can be a new project or any other business activity. In a joint venture (JV), each of the participants is responsible for profits, losses and costs associated with it. However, the venture is its own entity, separate from the participants’ other business interests.
Key performance indicators (KPIs)
A set of quantifiable measures that a company uses to gauge its performance over time. These metrics are used to determine a company’s progress in achieving its strategic and operational goals, and also to compare a company’s finances and performance against other businesses within its industry.
The level of debt in a project. “Highly leveraged” projects have a high level of debt compared to equity as a source of funds. For a CDFI, to borrow money in order to multiply outputs (loans or investments) and outcomes (results, including income and community development impacts). A CDFI that does not produce more outputs and outcomes as a result of taking on new debt would not be leveraging these funds wisely.
A liability is defined as a company’s legal financial debts or obligations that arise during the course of business operations. Liabilities are settled over time through the transfer of economic benefits including money, goods or services. Recorded on the right side of the balance sheet, liabilities include loans, accounts payable, mortgages, deferred revenues, and accrued expenses.
A legal right to have a debt repaid out of specifically identified property of the debtor.
Limited liability corporation (LLC)
A corporate structure whereby the members of the company are not personally liable for the company’s debts or liabilities. Limited liability companies are hybrid entities that combine the characteristics of a corporation and a partnership or sole proprietorship. While the limited liability feature is similar to that of a corporation, the availability of flow-through taxation to the members of an LLC is a feature of partnerships.
Limited partner (LP)
One of the co-owners of a business organized as limited partnership who (unlike a general partner) does not participate in the management of the firm and has limited personal liability for the firm’s debts. Also called nominal partner.
Deposits of funds in banks to support lending efforts for a charitable outcome, including to historically underserved businesses, geographies, and women-owned or minority enterprises.
Describes the degree to which an asset or security can be quickly bought or sold in the market without affecting the asset’s price. Market liquidity refers to the extent to which a market, such as a country’s stock market or a city’s real estate market, allows assets to be bought and sold at stable prices. Cash is considered the most liquid asset, while real estate, fine art and collectibles are all relatively illiquid. Accounting liquidity measures the ease with which an individual or company can meet their financial obligations with the liquid assets available to them. There are several ratios that express accounting liquidity highlighted below.
Funds provided to an organization with a commitment to repay the principal. Loans can have senior or subordinate status, affecting the lender’s priority of repayment over other creditors.
The documents executed in connection with a loan. Typically, they include the loan or credit agreement, one or more promissory notes, officer’s certificates, and opinions from counsel. May also include an intercreditor or subordination agreement, guarantee, pledge agreement or mortgage, all dependent upon the terms and conditions of the loan.
Loan loss reserve
An expense set aside as an allowance for uncollected loans and loan payments. This provision is used to cover a number of factors associated with potential loan losses including bad loans, customer defaults and renegotiated terms of a loan that incur lower than previously estimated payments. Loan loss provisions are an adjustment to loan loss reserves and can also be known as valuation allowances.
The process of collecting information on the financial and programmatic performance of a loan during repayment.
The order or preference with which lenders get repaid. When a project has multiple lenders, loan positions are negotiated along with other terms of the loan, such as interest rate and term.
The process of communicating with a borrower and collecting payments during the term of a loan.
Total amount of loans owed to creditors by an organization.
Total amount of loans that an organization has lent out.
An asset not expected to be converted into cash, sold, or exchanged within the normal operating cycle of the organization; an asset whose benefits are expected to be received over several years. Usually including investments, plant assets, and intangibles, such as patents or goodwill.
A liability due in more than one year. Normally interest is paid periodically over the term.
Low-profit limited liability company (L3C)
A legal form of business entity created to bridge the gap between nonprofit and for profit investing by providing a structure that allows for investments in philanthropic ventures designed to provide a social benefit. Unlike a standard LLC, an L3C has an explicit primary charitable mission and only a secondary profit concern. But unlike a charity, the L3C is free to distribute the profits, after taxes, to owners and investors.
Margin (net interest margin)
The difference between the interest earned on loans and investments and the interest paid on borrowings and/or deposits (or cost of funds), divided by average earning assets. For example, if in a year a CDFI earns $6,000 on loans, pays out $3,000 in interest to investors, and has average loans outstanding of $100,000, the calculation would be: ($6,000- $3,000)/$100,000, or 3% net interest margin.
Market rate of return
Calculated as the average rate of return for a particular market. This is calculated by averaging a set of representative portfolios in an index, such as the Dow Jones Industrial Average or Standard and Poor’s 500.
The time when the issuer of a bond or other debt security must repay the principal or when a borrower must repay a loan in full. For example, if a company issues $1 million in bonds with a maturity of 10 years, the company must repay $1 million to bondholders 10 years after the issue. The amount owed at maturity is usually the same as the debt or loan’s face value. After maturity, the loan or debt ceases to exist, assuming all parties have fulfilled their obligations.
Parameters or measures of quantitative assessment used for measurement, comparison or to track performance or production. Analysts use metrics to compare the performance of different companies, despite the many variations between firms.
Mezzanine debt occurs when a hybrid debt issue is subordinated to another debt issue from the same issuer. Mezzanine debt has embedded equity instruments attached, often known as warrants, which increase the value of the subordinated debt and allow greater flexibility when dealing with bondholders. Mezzanine debt is frequently associated with acquisitions and buyouts, for which it may be used to prioritize new owners ahead of existing owners in case of bankruptcy.
Microcredit programmes extend small loans to very poor people for self-employment projects that generate income, allowing them to care for themselves and their families. Definitions differ, of course, from country to country. Some of the defining criteria used include- size – loans are micro, or very small in size target users – micro-entrepreneurs and low-income households utilization – the use of funds – for income generation, and enterprise development, but also for community use (health/education) etc. terms and conditions – most terms and conditions for microcredit loans are flexible and easy to understand, and suited to the local conditions of the community.
The provision of financial services to micro-entrepreneurs and small business owners, who lack access to banking and related services due to the high transaction costs associated with serving these client categories. The two main mechanisms for the delivery of financial services to such clients are (1) relationship- based banking for individual entrepreneurs and small businesses; and (2) group-based models, where several entrepreneurs come together to apply for loans and other services as a group. Funds that specialize in microfinance are a popular investment vehicle for impact investors because it gives low-income individuals or groups access to capital that they would otherwise be denied, which can support them in becoming more self-sufficient.
Microfinance institution (MFI)
A financial institution specializing in banking services for low-income groups or individuals. A microfinance institution provides account services to small-balance accounts that would not normally be accepted by traditional banks, and offers transaction services for amounts that may be smaller than the average transaction fees charged by mainstream financial institutions.
A mission investment can be either a program-related investment (PRI) or mission-related investment (MRI). Mission investing is the practice of foundations who invest to advance their missions and programmatic goals. Private foundations make PRIs as part of their annual distribution strategy. MRIs are risk-adjusted, market-rate investments made from the foundation’s assets.
Mission related investing (MRI)
The practice of aligning a philanthropic organization’s management of assets with its charitable purposes while sustaining long-term financial return.
Multi-family office (MFO)
Private wealth management advisory firms that provide their clients, typically families with a net worth in excess of $50 million, with services such as investment advice, estate planning, risk management, foundation management and tax services. A family office can also make arrangements for non-financial issues such as private schooling, travel arrangements and other miscellaneous household arrangements.
The base amount repaid from a PRI that has previously been counted toward a private foundation’s 5% payout requirement. The amount recovered is added to the foundation’s payout requirement during the period received, unless renewed or recycled to another investee during the period determined by the IRS.
Removing from investment consideration companies and industries deemed objectionable for ethical or moral reasons.
The difference between an organization’s total assets and total liabilities. Formerly called fund balance or net worth.
New markets tax credit (NMTC)
A program administered by the U.S. Treasury’s CDFI Fund designed to incentivize equity investments in low-income communities. Investments in designated Community Development Entities (CDE), including certified CDFIs, receive a 39% federal tax credit over seven years. The CDE must in turn deploy the investment in qualified low-income communities for such purposes as loans or equity investments in small businesses, mortgages, or real estate development.
Non-governmental organization (NGO)
A nonprofit, citizen-based group that functions independently of government. NGOs, sometimes called civil societies, are organized on community, national and international levels to serve specific social or political purposes, and are cooperative, rather than commercial, in nature. As nonprofits, NGOs rely on a variety of sources for funding, including membership dues, private donations, the sale of goods and services, and grants. Despite their independence from government, some NGOs rely significantly on government funding.
A financial security that generally has a longer term than a bill but a shorter term than a bond. U.S. Treasury notes, for example, are sold in $100 increments, pay interest in six-month intervals and pay investors face value upon maturity. There are numerous types of notes, including mortgage-backed notes, unsecured notes, municipal notes, bank notes, euro notes, promissory notes, demand notes and structured notes.
A loan or other financial resource available to a CDFI through a third party, but which have not been “drawn down,” or used. Perhaps the most common off-balance sheet resource is a line of credit. Only that portion of a line of credit that is drawn down, and thus is repayable, is reflected on a CDFI balance sheet. Undisbursed grants or multi-year contributions are not considered off-balance sheet resources.
A document, signed by an authorized officer of an entity, which confirms certain facts to the counterparty of a transaction, often that no “event of default” exists under the agreement and that all warranties and representations in the agreement continue to be true and correct as of the closing date.
Operating income is an accounting figure that measures the amount of profit realized from a business’s operations, after deducting operating expenses such as wages, depreciation, and cost of goods sold (COGS). Operating income takes a company’s gross income, which is equivalent to total revenue minus COGS, and subtracts all operating expenses. A business’s operating expenses are costs incurred from normal operating activities and include items such as office supplies and utilities.
That part of an audit in which the accountant gives his/her opinion as to whether or not the financial statements are in accordance with generally accepted accounting principles and whether or not the financial statements represent fairly the financial position and change in financial position of the organization.
This form of evaluation assesses the extent to which a program achieves its outcome-oriented objectives. It focuses on outputs and outcomes (including unintended effects) to judge program effectiveness but may also assess program processes to understand how outcomes are produced.
A result or effect that is caused by or attributable to the project, program or policy. Outcome is often used to refer to more immediate and intended effects.
The products, capital goods, and services which result from a development intervention; may also include changes resulting from the intervention which are relevant to the achievement of outcomes.
An arrangement whereby two or more lenders pool their resources to provide a loan to a single borrower. Participation loans enable lenders to share risk (and profits) and to make loans in amounts that are higher than their limitations as individual lenders. Participation loans are particularly useful in advancing CDFI commercial or small business lending, and in attracting mainstream financial institutions into a deal.
Pay for performance (P4P)/Pay for success (PFS)/Payment by results (PBR)
A term that describes payment systems that offer financial rewards to providers who achieve, improve, or exceed their performance on specified quality and cost measures, as well as other benchmarks. Social Impact Bonds (SIB) are also known as pay for performance bonds.
The payback period is the length of time required to recover the cost of an investment. The payback period of a given investment or project is an important determinant of whether to undertake the position or project, as longer payback periods are typically not desirable for investment positions. The payback period ignores the time value of money, unlike other methods of capital budgeting, such as net present value, internal rate of return or discounted cash flow.
Refers to the 5% that private foundations are required by the IRS to expend on program (grants) and program-related administrative expenses. PRIs and related expenses are eligible to be counted in the 5% payout.
Works to create economic and social outcomes through investing in a specific region or community, particularly those experiencing decline or disadvantage. Such investments create sustained, positive cycles of economic development and regeneration by providing local businesses with access to capital, markets, and growth opportunities, as well as fostering job creation, and spending power in the community.
Pollution prevention and waste management
Efforts to reduce waste; design and implementation of organizational policies on waste reduction and recycling; efforts to reduce and mitigate greenhouse gas and carbon emissions; real-estate recycling and efficient physical asset use; wastewater treatment, etc.
A pooled fund is an investment vehicle that allows many individual investors to combine their assets for a specific purpose, such as in the case with a mutual fund or ETF (Exchange Traded Fund). There are several advantages to investing in pooled funds for investors, such as lower costs, greater ability to diversify a portfolio and the ability to access professional money management services for smaller accounts that may not meet a minimum account size.
A range of investments held by a person or organization.
The valuation of a company immediately after the most recent round of financing. For example, a venture capitalist may invest $3.5 million in a company valued at $2 million “pre-money” (before the investment was made). As a result, the startup will have a post-money valuation of $5.5 million.
Refers to the value of a company’s stock before it goes public or receives other investments.
Preferred stock is one of the two types of stock issued by corporations seeking to bring in capital. As with common stocks or bonds, the money that is received from the sale of these shares goes into the company coffers in return for the issuance of the shares to the shareholders. Although preferred stock does share similarities with common stock, its basic characteristics make it a fundamentally different security. Preferred stock is designed to function primarily as a fixed-income security, whereas common stock is usually considered to be a vehicle for long-term growth that often does not deliver a regular income stream. The nature and purpose of preferred stocks offers shareholders several unique advantages when compared to other investments.
The interest rate banks charge to their most creditworthy corporate customers.
The stated amount of a loan, notwithstanding interest or other premiums.
A private equity investment is a direct investment into a private company, often used as a tool to give a company access to greater capital to expand or strengthen a business. Most private equity is done by institutional or accredited investors and is generally considered a long-term investment. Within impact investing, most private equity investments are typically made by mission-driven angel investors, venture capital funds, high net worth individuals, etc. Private equity funds typically target a very specific investment opportunity; clean-tech, for example.
A nongovernmental, nonprofit organization with funds (usually from a single source, such as an individual, family, or corporation) and program managed by its own trustees or directors, established to maintain or aid social, educational, religious, or other charitable activities serving the common welfare, primarily through grantmaking. U.S. private foundations are tax-exempt under Section 501(c)(3) of the Internal Revenue Code and are classified by the IRS as a private foundation as defined in the code.
Private letter ruling (PLR)
A ruling by the IRS as to treatment of the particular set of facts presented in the ruling request by a taxpayer. PLRs may not be used as binding precedent by anyone other than the recipient of the PLR, but they do provide guidance as to how the IRS might be likely to treat similar situations.
Private placement memorandum (PPM)
A legal document stating the objectives, risks and terms of investment involved with a private placement. This includes items such as the financial statements, management biographies, detailed description of the business, etc. An offering memorandum serves to provide buyers with information on the offering and to protect the sellers from the liability associated with selling unregistered securities.
Pro rata rights
Give investors the right to invest in a startup’s future fund-raising rounds and maintain their ownership percentage in the company as the company grows and raises more capital.
Program related investment (PRI)
The IRS defines program-related investments as those in which (i) the primary purpose is to accomplish one or more of the foundation’s exempt purposes, (ii) the production of income or appreciation of property is not a significant purpose, and (iii) influencing legislation or taking part in political campaigns on behalf of candidates is not a purpose. A program-related investment (PRI) can take the form of equity, debt, guarantees, linked deposits, etc., and must be charitable in nature. PRIs are counted toward part of a private foundation’s annual distribution requirement (a 5% minimum). In the event repaid, investment returns are treated as PRIs, but the corpus is added back to the qualifying distribution requirement. Because PRIs are generally expected to be repaid, they can then be recycled into new charitable investments, increasing the leverage of the foundation’s distributions.
A document that evidences the funds that have been borrowed under the credit agreement.
A document required by the Securities and Exchange Commission that companies must provide to all shareholders before their annual meeting. It includes proposals for new additions to the board of directors, information on directors’ salaries, any declarations by company management as well as any shareholder resolutions filed by shareholders.
Any shareholder of a publicly traded company has the opportunity to vote their proxy statement, which is a document required by the SEC that companies must provide to all shareholders before their annual meeting and lists any shareholder resolutions filed with the company. Within the context of impact investing, it is important that shareholders of publicly traded companies understand and exercise their right to vote in favor of shareholder resolutions that align with their social mission. Shareholders are encouraged to ask their investment advisor or asset manager about how to vote their proxy statements.
Public charities include a wide variety of charitable organizations, including hospitals, schools, churches, and organizations that make grants to others. Charities that primarily make grants are commonly referred to as public foundations. Most of these foundations are publicly supported charities, meaning they receive their funds from multiple sources, which may include private foundations, individuals, government agencies, and fees they charge for charitable services they provide. Some foundations are public charities because they meet at least one of the US Internal Revenue Service (IRS) tests for qualifying as a public charity. One kind of public charity, known as a supporting organization, is recognized by the IRS as charitable simply because of its legal relationship to one or more other public charities. A community foundation is yet another kind of public charity. In some cases, corporate foundations are set up as public, rather than private, foundations.
Public equity investments (those traded on a public exchange) are typically made by mission driven investors into stocks or bonds with positive or negative screens. Common negative industry screens may exclude tobacco, firearms, nuclear power, gambling, defense/ weaponry, and carbon emissions, coal production, etc. Common positive industry screens may include clean technologies, CSR reporting, etc.
An amount, including program-related investments and reasonable and necessary grant administration costs, a private foundation pays to accomplish religious, charitable, scientific, literary, or other public purposes. It is as defined in Section 4942(g) of the Code. Private foundations must distribute annually as a minimum qualifying distribution 5% of the average fair market value for the preceding year of all foundation assets that are not directly used for charitable purposes.
Data that approximates or characterizes but does not measure the attributes, characteristics, properties, etc., of a thing or phenomenon. Qualitative data describes whereas quantitative data defines.
Refers to a category of debt that has equity-like qualities without conferring ownership rights to the investors. Quasi-like qualities without conferring ownership rights to the investors. Quasi-equity can refer to an unsecured loan, a loan with a flexible repayment schedule, a repayable grant, or a royalty share financing vehicle.
Quick ratio (acid test)
Cash, marketable securities, and accounts receivable divided by current liabilities. This ratio focuses on an organization’s more liquid assets, and answers the question “if revenue stopped coming in, could this organization meet its current obligations?” Sometimes called Acid Test.
Rate of return
Measure of profit as a percentage of investment. Rates of return often involve incorporating other factors, including the amount that inflation and taxes take out of profits, the length of time involved, and any additional capital an investor makes in the venture. If the investment is foreign, then changes in exchange rates will also affect the rate of return.
A bond that is rated as creditworthy by one of the quasi-official bond rating agencies, such as Standard and Poor’s.
Method of analysis that utilizes the relationship of numbers found in the financial statements to determine values and evaluate risks. Comparing such ratios to those of prior periods and/or other organizations reveals trends and identifies eccentricities.
An asset class that derives its value from tangible assets such as precious metals, commodities, real estate, agricultural land and oil, can be made through either public or private equity markets and are often considered to be less liquid than other asset classes. Within the context of impact investing, real assets can include green buildings timberlands, sustainable agriculture etc. MRI investments into real assets can be made through public or private equity markets. REITS (real estate investment trusts) are a common structure for investing in real assets. In the field of impact investing real assets can be green buildings, timberlands, sustainable agriculture, etc.
Gain or loss resulting from the sale or other disposal of an asset.
Any collectible (other than loans, which are listed separately) owed or promised to an organization.
The right to demand payment from the borrower. In a recourse loan, the lender’s rights are not limited to any particular asset. In a non-recourse loan, the lender’s rights are limited to the particular asset financed by the loan.
An agreement under which a grantee commits to repay a grant under certain circumstances, generally, if the project financed by the grant is financially successful. If the conditions that trigger the repayment obligation are not met, the grantee is under no obligation to repay and no default is triggered.
The right of redemption is the legal right of any mortgagor or borrower who owns real estate to reclaim his or her property. The right of redemption gives property owners who pay off the back taxes or liens on their property the ability to prevent foreclosure or the auctioning off of their property, sometimes even after the auction or sale has occurred. The amount paid generally must include the costs incurred in the foreclosure process, plus the entire amount of the mortgage if the payoff comes after foreclosure or auction.
Registered investment advisor (RIA)
An investment advisor is hired to guide a client’s investment decision process. A RIA has a fiduciary duty to their client and must act in their best interest, rather than their firms. They will take the important step of figuring out a client’s financial and social/environmental goals and translate that into an investment strategy that allocates their assets appropriately. Depending on a client’s level of commitment to impact and risk tolerance, an investment advisor will tailor a portfolio allocation strategy to reflect the overall financial and social mission.
Representations and warranties
A term used to describe the assertions that a buyer and/or seller makes in a purchase and sale agreement. Both parties are relying on each other to provide a true account of all information and supporting documents to close the transaction.The seller’s representations usually relate to the information that the buyer is relying on to value the company. Therefore, the seller ends up not only stating that all financial information provided is true and accurate, but also having to deliver information to support this statement such as financial statements, customer and supplier listings, copies of all major contracts, equipment listings, etc. This information all forms part of the schedules to the purchase and sale agreement, and may be referred back to post transaction to ensure that what was effectively purchased truly does exist. The buyer’s representations usually relate to the form of consideration being used to complete the transaction. If the buyer’s stock is part of the transaction consideration, then the buyer must represent that it is legally able to offer this stock. In addition, the buyer must provide a shareholder agreement for the seller to review and state that the stock is being offered free and clear of any encumbrances.
Donor-restricted revenues or gains from contributions that increase either temporarily restricted net assets or permanently restricted net assets.
The logic that explains how the objective of the program is to be achieved, including causal relationships and underlying assumptions.
Results-based management (RBM)
A management strategy focusing on performance and achievement of outputs, outcomes and impacts.
Return on investment (ROI)
A performance measure used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments. ROI measures the amount of return on an investment relative to the investment’s cost. To calculate ROI, the benefit (or return) of an investment is divided by the cost of the investment, and the result is expressed as a percentage or a ratio.
For a company, this is the total amount of money received by the company for goods sold or services provided during a certain time period. It also includes all net sales, exchange of assets; interest and any other increase in owner’s equity and is calculated before any expenses are subtracted.
Revolving loan fund (RLF)
A gap financing measure primarily used for development and expansion of small businesses. It is a self-replenishing pool of money, utilizing interest and principal payments on old loans to issue new ones. While the majority of RLFs support local businesses, some target specific areas such as healthcare, minority business development, and environmental cleanup.
Right of first offer (ROFO)
A selling situation where one party has the right to decide whether or not to purchase an asset before anyone else. Should that person decide not to purchase that asset, then the asset may be sold to any other party.
Right of first refusal (ROFR)
A contractual right of an entity to be given the opportunity to enter into a business transaction with a person or company before anyone else can. Since an entity with the right of first refusal has the right, but not the obligation, to enter into a transaction that generally involves an asset, it is akin to a having a call option on the asset. If the entity with the right of first refusal declines to enter into a transaction, the owner of the asset is free to open the bidding up to other interested parties.
The process of assessing the likelihood of an adverse event occurring within the corporate, government, or environmental sector. Risk analysis is the study of the underlying uncertainty of a given course of action and refers to the uncertainty of forecasted cash flow streams, variance of portfolio/stock returns, the probability of a project’s success or failure, and possible future economic states. Risk analysts often work in tandem with forecasting professionals to minimize future negative unforeseen effects.
Investment funds allocated to speculative activity and refers to the funds used for high-risk, high-reward investments such as junior mining or emerging biotechnology stocks. Such capital can either earn spectacular returns over a period of time, or it may dwindle to a fraction of the initial amount invested if several ventures prove unsuccessful, so diversification is key for successful investment of risk capital. In the context of venture capital, risk capital may also refer to funds invested in a promising startup.
In the financial world, risk management is the process of identification, analysis and acceptance or mitigation of uncertainty in investment decisions. Essentially, risk management occurs when an investor or fund manager analyzes and attempts to quantify the potential for losses in an investment and then takes the appropriate action (or inaction) given his investment objectives and risk tolerance.
A term used by the SRI (Socially Responsible Investing) community to refer to the practice of removing publicly traded stocks from an individual or fund’s portfolio when the stock does not meet the environmental, social or governance (ESG) goals of the client or fund. For example, an investor may choose to have their account screened for gun manufacturing companies, and therefore would have any company that derives income from the manufacturing of guns removed from their portfolio.
Subordinated and uninsured investments in community development credit unions (CDCUs). The term of the investment must be five years or more. Investments are held in, and interest accumulated in, a designated secondary capital deposit account. In the event of operating losses that exceed available reserves and undivided earnings, funds in the secondary capital account can be used to cover the losses. Viewed as capital by regulators, secondary capital functions similarly to equity equivalent investments (EQ2), boosting a CDCU’s ability to take on new deposits and increase lending without jeopardizing safety and soundness. However, as there is a cost to the funds, and as the proportion of the investment that is considered capital depreciates in equal increments over time, secondary capital is best used as a bridge for growth, not as a means of permanent sustainability.
A financial institution that raises capital through the issuance of bonds and uses it to purchase the loans originated by primary lenders, refreshing the capital available to these lenders so they can make additional primary loans.
A loan in which the borrower pledges an asset (such as property) as collateral. If the borrower defaults, the lender takes possession of the asset used as collateral and has the optional remedy to sell it to regain some or the entire amount originally loaned to the borrower.
A financial process that involves assembling the bundles of loans (e.g., mortgage loans) into packages and using them as collateral against which to issue bonds on the capital markets, with the proceeds of the bond sales going to pay for the purchase of the bundles of loans.
A pledge of assets to assure the performance of an obligation or the repayment of a debt. Security on a loan can include real estate, personal property, stocks, and mortgages.
Initial capital sought or raised when starting a business. Often includes slightly smaller amounts of capital from within personal assets, personal networks or specialty investors.
An alternative structure for seed funding involves the creation and issuances of Preferred Stock. By purchasing Preferred Stock, investors become owners of the company and a valuation for the company is set. Ownership entitles the investors to voting and other rights, and although the NVCA and other organizations have created templates to lower the cost of structuring and papering these transactions, they remain complex and more expensive than seed loans. However, due to the benefits described in this paragraph, it is not uncommon to structure seed funding in excess of $1.0 million as a seed equity financing.
In context of private equity, the state of a company when it has just been incorporated and its founders are developing their product or service.
The ratio of earned income to total operating expenses. A CDFI with a self-sufficiency ratio of less than 1.0 is not covering its costs with income from its own activities and requires operational subsidy.
A loan or other debt that has a first call on payment or collateral in the event a borrower is unable to pay its debt obligations.
Analysis of the effects on an appraisal of varying the projected values of important variables.
Vested shares mean shares that you own, even if you’re fired or quit. They’re a form of compensation. You most often hear about them as part of the reward for employees at hip startups, but that’s not the only type of company that offers them. Vested shares can also be part of an overall compensation package at an established and publicly traded company, or part of your retirement package.
Voting proxies and engaging management of generally traded companies to change corporate behavior.
A term used to describe the efforts made by a company’s management to communicate with their shareholders on a wide range of topics. Within the context of SRI, this often refers to engagement around the filing (or threat of filing) of a shareholder resolution by registered shareholders. Please see “shareholder resolution” definition for more information.
A proposal submitted by a shareholder of a publicly traded company for a vote at the company’s annual meeting or in the company’s proxy statement. Any shareholder owning over $2000 in a company’s stock for over a year can file a shareholder resolution. Typically corporate management opposes resolutions. They are non-binding, but have been used as an effective tool to gain the attention of management, which can often lead to a dialogue resulting in a change in corporate practices. Some of the common issues addressed by shareholder resolutions are: corporate governance, executive compensation, global warming, labor relations, tobacco smoking, human rights and animal welfare. The Securities and Exchange Commission regulates shareholder resolutions.
An agreement that is not part of the core documents in a deal. Sets out terms that supplement or sometimes modify the terms of existing agreements; often grants special rights or privileges to important investors. A side letter is often used in the context of equity PRIs to include necessary language to qualify the investment as a PRI and to allow the foundation to exercise expenditure responsibility over the investment.
Single family office
A family office or single family office is a private company that manages investments and trusts for a single family. The company’s financial capital is the family’s own wealth, often accumulated over many family generations. More recently the term “family office” or multi family office is used to refer primarily to financial services for relatively wealthy families.
Small and growing business (SGB)
Small and Growing Businesses (SGBs) are defined by ANDE as commercially viable businesses with five to 250 employees that have significant potential, and ambition, for growth. Typically, SGBs seek growth capital from $20,000 to $2 million. SGBs differ from the more traditional characterization of small and medium enterprises (SMEs) in two fundamental ways. First, SGBs are different from livelihood-sustaining small businesses, which start small and are designed to stay that way. Second, unlike many medium-sized companies, SGBs often lack access to the financial and knowledge resources required for growth.
Small and medium enterprise (SME)
Small and mid-size enterprises are businesses that maintain revenues, assets or a number of employees below a certain threshold. Every country or economic organization has its own definition of what is considered a small and medium-sized enterprise. In the United States, there is no distinct way to identify SMEs, but in the European Union, a small-sized enterprise is a company with fewer than 50 employees, while a medium-sized enterprise is one with fewer than 250 employees. In addition to small and mid-size companies, there are micro-companies, which employ up to 10 employees. Small and mid-size enterprises (SMEs) play a significant role in emerging economies. SMEs create 80% of the new jobs in emerging economies. Also, most people with formal jobs in these emerging economies find work in an SME. Over half of SMEs do not have access to capital to fuel growth. They typically rely on personal funds and loans from friends or families, known as angel investors, rather than traditional loans.
A term coined by Nobel prize winner Mohammad Yunus, social business refers to a company that, unlike a traditional business, focuses on addressing a social problem rather than maximizing profit. A social business is financially self-sustaining and reinvests all its profits either into the business itself or to start other social businesses.
The segment of the economy is composed of entities that aim to increase social inclusion and reduce inequalities, while simultaneously creating economic value. Social economy organizations include different types of cooperatives, associations, foundations, mutual and social enterprises (which are businesses of various legal forms using an entrepreneurial approach in order to respond to an increasing number of social and environmental challenges. While measuring them remains challenging both at national and international levels, existing evidence suggests that they are vibrant agents assisting local and national economic development and contributing to inclusive growth and shared prosperity through job creation, re-integration of vulnerable individuals to society and the labor market, and environmental sustainability.
Social enterprise/Social venture
A social enterprise is an organization that applies commercial strategies to maximize improvements in human and environmental well-being, rather than maximizing profits for external shareholders. Social enterprises can be structured as a for-profit or non-profit, and may take the form of a co-operative, mutual organization, a social business, or a charity organization. Many commercial enterprises would consider themselves to have social objectives, but commitment to these objectives is motivated by the perception that such commitment will ultimately make the enterprise more financially valuable. Social enterprises differ in that, inversely, they do not aim to offer any benefit to their investors, except where they believe that doing so will ultimately further their capacity to realize their social and environmental goals.
The pursuit of sustainable solutions to problems in society. Social entrepreneurship is a process that can take place in different organizational contexts: a charity, a commercial organization, a government organization, a community organization, or through a new social venture. It is characterized by a set of principles that are typically present: focus on value creation not capture, focus on innovation not the status quo, focus on sustainable solution not sustainable organizations, and focus on empowerment of participants not control.
Social finance is an approach to managing investments that generate financial returns while including measurable positive social and environmental impact. Social finance includes a full range of investment strategies and solutions across asset classes that can provide an array of risk-adjusted returns tailored to investor intent.
The effect of an activity on the social fabric of the community and well-being of the individuals and families.
Social impact assessment
Analyzing, monitoring and managing the social consequences of development.
Social Impact Bond (SIB)
Social Impact Bonds (SIB) are also known as Pay for Performance (P4P) Bonds or Pay for Success (PFS) Bonds. A social impact bond is a new type of financing that includes a contract where payment from a government agency is tied solely to outcomes. Generally the public agency has few other controls or restrictions on the provider. As currently deployed and designed, SIBs or PFS projects typically involve three parties: the public agency payer contracting with a third party intermediary for payment based on outcomes. The intermediary contracts with a nonprofit service provider to deliver services and raises funds from investors. The intermediary contracts with the service provider with payment upfront for delivery of services and pays an incentive or bonus payment based on outcomes. The use of the word “bond” is actually a misnomer in this structure. The investment has more in common with venture capital that has a social value.
Social Return on Investment (SROI)
SROI is an approach to understanding and managing the social impacts of a project, organization or policy. SROI seeks to provide a fuller picture of how value is created or diminished through incorporating social, environmental and economic costs and benefits into the decision making process. SROI provides a specific measure of the effectiveness in allocating resources in the social sector and allows for comparability of performance across similar sets of activities.
A method for measuring values that are not traditionally reflected in financial statements, including social, economic and environmental factors, which can identify how effectively an organization uses its capital and other resources to create value for the community. While a traditional cost-benefit analysis is used to compare different investments or projects, SROI is used more to evaluate the general progress of certain developments, showing both the financial and social impact of the corporation.
Social venture capital
Social venture capital differs from traditional venture capital in that investors look beyond financial return and risk-reward models when deciding where to place their money. Rather than placing utmost importance on return on investment (ROI), social venture capitalists seek to invest in ventures that offer profit potential and make the world a better place through their products and services.
Socially Responsible Investing (SRI)
Socially responsible investing typically refers to a subset of the field of investing where publicly traded stocks are removed from a portfolio (see “screening”) when they do not meet environmental, social or governance (ESG) goals of the client. Conversely, equities can be sought out for inclusion in the portfolio that supports the client’s social or environmental mission. For example, a client that feels strongly about the environment sustainability may choose to “screen” oil companies out of their portfolio that they feel are actively contributing to climate change. The client may also want to seek out clean energy stocks to include in their portfolio to help further their environmental mission. Clients can practice a SRI strategy within their own individually managed portfolio, or participate in a SRI mutual fund that has a predefined social screen.
Special purpose vehicle (SPV)
A special purpose vehicle/entity is a “bankruptcy-remote entity” that a parent company uses to isolate or securitize assets and it often holds these off-balance sheet. Some also call this a “bankruptcy-remote entity” or “variable interest entities” since its operations are limited to the acquisition and financing of specific assets as a method of isolating risk. A special purpose vehicle/entity is a subsidiary company with an asset/liability structure and legal status that makes its obligations secure, even if the parent company goes bankrupt. An SPV/SPE is also a subsidiary corporation designed to serve as a counterparty for swaps and other credit-sensitive derivative instruments.
The difference between the interest rate charged for a loan and the lender’s cost of funds. For example, if a CDFI charges 10% for business loans that are funded with a 3% program related investment, the spread is 7%. However, because there also is a cost to underwriting and administering a loan, spread is not equivalent to profit.
A startup is a company that is in the first stage of its operations. These companies are often initially bankrolled by their entrepreneurial founders as they attempt to capitalize on developing a product or service for which they believe there is a demand. Due to limited revenue or high costs, most of these small-scale operations are not sustainable in the long term without additional funding from venture capitalists.
Statement of financial position
Statement showing the status of an organization’s assets, liabilities and net assets on a given date. Assets are equal to liabilities and net assets, and the statement of financial position is a listing of the items making up the two sides of the equation. Together with a statement of activities for the duration of the accounting period and a cash flow statement, it constitutes an organization’s financial statement.
Strategic asset allocation
The use of optimization tools to determine long-term asset allocation benchmarks to achieve long-term objectives. The objectives vary, depending on the type of asset owner and its obligations to beneficiaries or other stakeholders. It involves making decisions around allocation to high-level asset classes—that is, equity/fixed split, domestic/international/emerging equity split, duration of fixed income, and the split between nominal and inflation-adjusted fixed income, allocation to unlisted assets and sustainability-themed assets. This is distinct from other considerations such as portfolio structuring (including allocation to capital weightings, styles and sectors, and includes active/passive analysis) and manager selection (the evaluation of manager performance in order to select one suitable for a client’s requirements).
Subordinated debt is a loan or security that ranks below other loans or securities with regard to claims on assets or earnings. Subordinated debt is also known as a junior security or subordinated loan. In the case of borrower default, creditors who own subordinated debt won’t be paid out until after senior debt holders are paid in full.
A subsidy is a benefit given to an individual, business or institution, usually by the government. It is usually in the form of a cash payment or a tax reduction. The subsidy is typically given to remove some type of burden, and it is often considered to be in the overall interest of the public, given to promote a social good or an economic policy.
Sustainability focuses on meeting the needs of the present without compromising the ability of future generations to meet their needs. The concept of sustainability is composed of three pillars: economic, environmental, and social – also known informally as profits, planet, and people. Sustainability emerged as a component of corporate ethics in response to perceived public discontent over the long-term damage caused by a focus on short-term profits.
Development that meets the needs of the present without compromising the ability of future generations to meet their own needs.
Sustainable development goals (SDGs)
The Sustainable Development Goals (SDGs), otherwise known as the Global Goals, are a universal call to action to end poverty, protect the planet and ensure that all people enjoy peace and prosperity. These 17 Goals build on the successes of the Millennium Development Goals, while including new areas such as climate change, economic inequality, innovation, sustainable consumption, peace and justice, among other priorities. The goals are interconnected – often the key to success on one will involve tackling issues more commonly associated with another.
Sustainable land use
Management and development of land that incorporates biodiversity considerations; conservation efforts for existing assets; plans and policies for forest use and management; and assessment of environmental footprint of existing assets.
An intentional process designed to alter the status quo by shifting and realigning the form and function of a targeted system. Organizations, service delivery networks, poor neighborhoods, and even whole communities are often the systems targeted in these efforts.
Tax exempt purposes
The specific corporate purpose of an organization must allow it to qualify as a tax-exempt organization under the Internal Revenue Code. The Code Section 501 sets forth 29 types of nonprofit organizations that are exempt from at least some federal income taxes. See Charitable Purposes above for the requirements of a 501(c)(3) corporation to which contributions are deductible.
Temporarily restricted net assets
The part of the net assets of an organization resulting from contributions and other inflows of assets whose use by the organization is limited by donor-imposed stipulations that either expire by passage of time or can be fulfilled and removed by actions of the organization pursuant to those stipulations.
A donor-imposed restriction that permits the done organization to use up or expend the donated assets as specified and is satisfied either by the passage of time or by actions of the organization.
The length of time until a loan or other obligation is due.
A term sheet is a nonbinding agreement setting forth the basic terms and conditions under which an investment will be made. A term sheet serves as a template to develop more detailed legal documents. Once the parties involved reach an agreement on the details laid out in the term sheet, a binding agreement or contract that conforms to the term sheet details is then drawn up.
The 5% and 95%
Refers to the totality of a foundation’s assets and the portion that, to avoid excise tax, must be paid out in program expenditures (and administration in support of such) – the 5% payout; and the 95% that is typically referred to as the endowment, and is traditionally invested primarily for financial gain and preservation of the foundation’s corpus or whole.
Theory of change (TOC)
A comprehensive description and illustration of how and why a desired change is expected to happen in a particular context. It is focused in particular on mapping out or “filling in” what has been described as the “missing middle” between what a program or change initiative does (its activities or interventions) and how these lead to desired goals being achieved. It does this by first identifying the desired long-term goals and then works back from these to identify all the conditions (outcomes) that must be in place (and how these related to one another causally) for the goals to occur.
In the collateralized loan context, tranche relates to the slices of investments or different forms of capital that make up the larger pool of investments.
Triple bottom line
Triple bottom line is a phrase introduced in 1994 by John Elkington and later used in his 1997 book “Cannibals With Forks: The Triple Bottom Line Of 21st Century Business,” which seeks to broaden the focus on the financial bottom line by businesses to include social and environmental responsibilities. A triple bottom line measures a company’s degree of social responsibility, its economic value and its environmental impact. A key challenge with the triple bottom line, according to Elkington, is the difficulty of measuring the social and environmental bottom lines, which necessitates the three separate accounts being evaluated on their own merits.
Ultra-high-net-worth individuals (UHNWI)
Ultra high net worth individuals (UHNWI) are people with investable assets of at least $30 million, excluding personal assets and property such as a primary residence, collectibles and consumer durables. UHNWIs comprise the richest people in the world and control a disproportionate amount of global wealth. Ultra-high net worth is generally quoted in terms of liquid assets over a certain figure, but the exact amount differs by financial institution and region.
Potential consumers, particularly within the bottom of the pyramid (BoP), who lack access to mainstream suppliers of goods and services.
Gain or loss that has not become actual. It becomes actual when the asset in which there is a gain or loss is actually sold. Also called a paper gain or loss.
Unrelated business income tax (UBIT)
The tax on unrelated business taxable income (UBTI).
Unrelated business taxable income (UBTI)
Gross income from any unrelated trade or business, as defined in Section 512(a) of the Code.
Unrestricted net assets
The part of net assets of an organization that is neither permanently restricted nor temporarily restricted by donor-imposed stipulations.
A loan that is issued and supported only by the borrower’s creditworthiness, rather than by any type of collateral. Because unsecured loans, sometimes referred to as signature loans or personal loans, are obtained without the use of property as collateral, the terms of such loans, including approval and receipt, are most often contingent on the borrower’s credit score. Borrowers must generally have high credit ratings to be approved for certain unsecured loans.
The process of determining the current worth of an asset or a company. There are many techniques used for doing a valuation. An analyst placing a value on a company looks at the business’s management, the composition of its capital structure, the prospect of future earnings, and the market value of its assets.
A high-level model developed by Michael Porter used to describe the process by which businesses receive raw materials, add value to the raw materials through various processes to create a finished product, and then sell the finished product to customers. Companies conduct value-chain analysis by looking at every production step required to create a product and identifying ways to increase the efficiency of the chain. The overall goal is to deliver maximum value for the least possible total cost and create a competitive advantage.
Financing that investors provide to startup companies and small businesses that are believed to have long-term growth potential. Venture capital generally comes from well-off investors, investment banks and any other financial institutions. However, it does not always take just a monetary form; it can be provided in the form of technical or managerial expertise.
The application or redirection of principles of traditional venture capital financing to achieve philanthropic endeavors. Venture philanthropy applies most of the same principles of venture capital funding to invest in start-up, growth, or risk-taking social ventures. It is not explicitly interested in profit but rather in making investments which promote some sort of social good. Venture philanthropy ventures generally focuses on building capital and scale. It is an umbrella term that can be used to refer shorthand to many different kinds of philanthropic investing, but notably, it is distinct from impact investing, which places more emphasis on turning a profit while nevertheless investing in ventures that address social concerns.
Venture philanthropy is characterized by a high degree of investor oversight and engagement, in addition to financing plans which are tailored very specifically to a company or organization’s capacity
building needs. Oftentimes major donors will sit on the boards of organizations they support and they generally have intimate involvement in operational or managerial aspects of the business. They will also provide non-financial support, like offering executive advice, marketing the initiatives using their own platforms and measuring performance. Strategically, most of these practices are drawn from successful venture capital initiatives but judge the efficacy of the organization on standards like overall social impact which depart from usual standards of a successful venture capital investment.
Vesting is a legal term that means to give or earn a right to a present or future payment, asset or benefit. It is most commonly used in reference to retirement plan benefits when an employee accrues non-forfeitable rights over employer-provided stock incentives or employer contributions made to the employee’s qualified retirement plan account or pension plan. It is also commonly used in inheritance law and real estate.
A voting right is the right of shareholders to vote on matters of corporate policy, including decisions on the makeup of the board of directors, issuing securities, initiating corporate actions and making substantial changes in the corporation’s operations. It is common for shareholders to voice their vote by proxy by mailing in their response or by relinquishing their vote to a third party. Unlike the single vote right that individuals commonly possess in democratic governments, the number of votes a shareholder has corresponds to the number of shares he or she owns.
Voting shares are shares that give the stockholder the right to vote on matters of corporate policy making as well as who will compose the members of the board of directors.
Water resources management
A process which promotes the coordinated development and management of water, land, and related resources in order to maximize economic and social welfare in an equitable manner without compromising the sustainability of vital ecosystems and the environment.
A waterfall payment is a type of payment scheme in which higher-tiered creditors receive interest and principal payments first, while the lower-tiered creditors receive principal payments only after the higher-tiered creditors are paid back in full. Debtors typically structure these schemes into such tranches to prioritize the highest-principal loans first because they are also likely the most expensive. For example, this type of plan works best for a company repaying more than one loan. Assume this company has three operating loans, each with different interest rates. The company makes principal and interest payments on the costliest loan, and makes only interest payments on the remaining two. Once the most expensive loan is paid off, the company can make all interest and principal payments on the next, more expensive loan. The process continues until all loans are repaid.
A wealth manager is a subset of financial advisor that primarily serves high-net-worth and ultra-high-net-worth individuals – in other words, people with wealth that needs managing. A wealth manager’s role is far more comprehensive than just offering a client investment advice. These financial professionals provide a holistic suite of services that encompasses all parts of a person’s financial life, including both investment management and financial planning, as well as accounting and tax services, retirement planning, estate planning and more.
An agreement established at the time of investment that allows the investor to withdraw its capital from the equity investment under certain agreed upon circumstances. In the context of PRIs, withdrawal rights are typically a function of expenditure responsibility and the requirement that the PRI recipient repays the private foundation in the event it fails to comply with the charitable terms of the investment.
Women and girls
Targeted engagement of women and girls as beneficiaries and/or clients in value-add services; provision of services to help improve quality of life for these groups; investment into livelihood creation for women owned ventures; programs targeted at mobilizing female employees and leaders; promotion of education access and affordability for girls; protection of women’s rights, safety, security and livelihood, etc.
The difference between an organization’s assets that can be converted to cash within one year and liabilities payable within one year.