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An amuse-bouche of impact investing terms

Updated: Jun 7, 2021

Impact investing can be an intimidating place for newcomers. Despite how young the field is there is already a preponderance of terms to digest.

As much as possible when I write my newsletter, record a podcast, or speak to an audience, I try to create onramps that welcome more people into the fold. Given the number and magnitude of the problems facing us, we need all the help we can get.

At the risk of being too reductive, here are my simple definitions for impact investing's most common terms. An amuse-bouche to whet your appetite:

  • ESG (Environmental, Social, and Governance) Investing: Investing in traditional companies that are friendly to the environment (E), treat people well (S), and are managed well (G).

  • Social Enterprise: Unlike a traditional company (e.g. a clothing retailer or cosmetics brand), a social enterprise exists to make a profit from solving a social or environmental problem. For instance, a business that removes carbon from the atmosphere and uses it to make and sell concrete.

  • Theory of Change: A detailed mapping of the logic behind how a social enterprises' solution solves a social or environmental problem. This is a useful litmus test of a real social enterprise, it must have a theory of change.

  • Impact Investing: Investing in social enterprises. In other words, investing in companies whose mission is to make a positive impact on the world.

  • Blended Finance: An attempt to get more money into impact investing by reducing the risk of an impact investment or enhancing its return. This requires the help of a donor (usually a large institution like a Government department or Foundation) to assume some of the risk.

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