Please note that this glossary is subject to on-going updates. Please contact us if you have any comments or suggestions.
Active ownership means to exercise investor rights (such as proposing shareholder resolutions and participating in proxy voting) in order to influence the activity or behaviour of the investee company. This investor engagement activity is sometimes described using the more general terms “stewardship”, or “shareholder activism”. Active ownership often forms part of a responsible investment strategy, to encourage investee companies to change their behaviour in relation to ESG issues. Active ownership strategies often involve investors working collectively; an example of this is the Climate Action 100+ initiative. In this context, it is thought that active ownership can build dialogue between the company and its investors, and help to manage ESG risks. For more, the PRI has published an Introduction to active ownership in listed equity.
An asset lock is a clause in the constitutional document of a corporate structure that prevents, or otherwise restricts, the assets of a company from being used for private gain, rather than for community benefit or the stated purposes of the organisation (see “mission lock”). An asset lock is mandatory and in a prescribed form in a Community Interest Company, but asset locks can also be included in, and tailored for, the constitutions of other corporate structures (such as a company limited by shares or guarantee).
B Corporation or ‘B Corp’
A B Corp is a business that has been independently certified by B Lab as meeting rigorous standards of social and environmental performance. To achieve certification, a business must also either become a benefit corporation, in jurisdictions where benefit corporation legislation is available, or otherwise amend its governing documents to ensure that the purpose of the firm includes having a material positive impact on society and the environment, alongside creating value for shareholders. Most B Corps are not benefit corporations, but in some states the only way to become a certified B Corp is to become a benefit corporation. See also ‘Benefit Corporation’. (More information: B Lab website.)
Bates Wells is the first UK law firm to become a B Corp; you can read more about our B Corp certification.
The term blended finance is used to describe deploying funds in sustainable development initiatives in order to help leverage further investment, typically from public and private sector actors. For example, philanthropic capital might be invested (or donated) in order to de-risk further investment from private investors, or development funding might be used to demonstrate the impact of a particular initiative so as to encourage government funding to scale it subsequently. (More information: OECD)
“The variability among living organisms from all sources including, inter alia, terrestrial, marine, and other aquatic ecosystems and the ecological complexes of which they are part; this includes diversity within species, between species, and of ecosystems (UN 1992).” (From the Capitals Coalition’s Natural Capital Protocol (2016). For more, please see ‘ecosystem’, ‘natural capital’, ‘Natural Capital Protocol’, and ‘natural resources’.)
A benefit corporation is a company formed under benefit corporation legislation (in jurisdictions where this is available) with modified obligations committing it and its directors to higher standards of purpose, accountability and transparency. Traditional US corporations are expected to use profit maximization as the primary lens in decision making, and in some US states the only way to amend the purpose and directors’ duties to meet the requirements for certification as a B Corp is to become a benefit corporation. Many see traditional corporate law as a hurdle in creating long-term value for all stakeholders, including the shareholders themselves. Benefit corporations reject this model. They are required to consider all stakeholders in their decisions. This gives them the flexibility to create value for all stakeholders over the long term, and even through exit transactions such as IPOs and acquisitions. There is no requirement for benefit corporations to certify as B Corps. See also ‘B Corporation or B Corp’. (More information: Benefit Corporation website.)
Carbon positive, carbon negative and climate positive
The terms ‘carbon positive’, ‘carbon negative’ and ‘climate positive’ are all used to describe going beyond net-zero and carbon neutral emission levels, to removing from the atmosphere more carbon dioxide than the particular business, service or product creates. Businesses seeking to achieve a carbon positive position will carry out carbon accounting to identify the carbon footprint that needs to be counteracted in order to achieve carbon neutrality, and then add an additional measure to account for some carbon emitted outside of the business or relevant product line, such as by its consumers. High profile companies that have committed to becoming carbon positive include Microsoft, Unilever and IKEA.
Carbon transition risk
Carbon transition risk refers to the risks to a company presented by transitioning to a low-carbon economy. Market participants are developing ways to measure the risk profile of a company in relation to its exposure to carbon assets and sensitivity to carbon-related policy initiatives (e.g. through its production of, or reliance upon, gas, coal or oil). See also ‘stranded assets’.
Catalytic capital can be conceptualised as a subset on the spectrum of investment. Catalytic capital is typically patient, risk-tolerant, concessionary, and/or flexible in ways that conventional investment usually is not; it is intended to be a tool to bridge capital gaps, in order to support the achievement of desired social impacts, and to complement conventional forms of investment capital. It can take the form of debt, equity or guarantees. (More information: MacArthur Foundation’s Catalytic Capital Consortium)
An economic activity (e.g. producing goods) is described as ‘circular’ when the resources used in that activity are recaptured (in the same form, or in a transformed state) and reused or recycled rather than discarded as waste. This is compared to the predominant ‘linear’ model of production, where the outputs (i.e. by-products of production and the product itself at the end of its lifespan) are discarded. In order to stay within planetary boundaries (including finite resources and environmental limits), the circular economy movement encourages all economic participants to design processes and products to be regenerative, and move away from linear resource use. (More information: Ellen MacArthur Foundation)
Co-operative or ‘Co-op’
Co-operatives, or ‘co-ops’, are designed to be people-centred enterprises – they are owned and run by and for their members, who use the structure to work towards their shared economic and social goals. Co-ops are used to facilitate collaboration in a democratic and equal way; members participate by a ‘one member, one vote’ rule, and their voting rights are equal regardless of the how much capital they have invested. (More information: International Co-operative Alliance).
Community development finance institution (CDFI)
Community development finance (or ‘financial’) institutions are private institutions dedicated to providing affordable debt finance (loans) to individuals, third-sector organisations and businesses from low-income or otherwise disadvantaged communities. A CDFI will typically be a not-for-shareholder-profit company and take a responsible, ethical approach to lending. (More information: Responsible Finance (previously the ‘Community Development Finance Association’)
In the UK there is no legal definition of ‘community shares’ but the term is typically used to mean ‘withdrawable shares’; these are a form of share capital that can be issued by co-operatives or community benefit societies registered with the Financial Conduct Authority (FCA). (More information: Community Shares)
Corporate venturing is where a large firm supports the development of small/start-up ventures, often providing non-financial support and investing if a start-up shows promise. The objectives of corporate venturing can include gaining a specific competitive advantage, supporting innovation and creating positive social impact. (More information: Global Corporate Venturing.)
Crowdfunding is a method of raising finance by asking a large number of people to contribute a small amount. Using online crowdfunding platforms, typically run by specialist crowdfunding intermediaries, millions of potential funders can be reached online and via social media. (More information: UK Crowdfunding)
A data trust is a where the holder of data rights grants some of these rights to a set of trustees, who then make decisions about the use of the data, such as what data is used and for what purposes. Data trusts are being trialled as a tool to help restore confidence in digital technology, as recommended by the 2017 independent review into AI, commissioned by the Government. (More information: Open Data Institute)
‘Double materiality’ is a concept used in corporate reporting to refer to the risks and opportunities that are important to a business. For the purposes of financial reporting, a company will measure those things that have a material impact on the business’ financial position; this may include impacts on the business from social and environmental factors. For example, it is now widely accepted that climate-related impacts on a company can be financially material and require disclosure. However, double materiality recognises that risks can be material from both a financial and non-financial perspective, and that issues that are material to environmental and social objectives can also have financial consequences in the long term. For example, a business’ negative social and environmental impacts may lead to legal liabilities or reputational risks or, particularly for investors with a long-term horizon, acting prudently may include avoiding contributing to social and environmental systemic destabilisation.
Taking a double materiality approach, a business would therefore report both on material topics that have an ‘inward impact’ (influencing the company’s value), as well as those that have an ‘outward impact’ (affecting the economy, the environment and people). This approach is reflective of the dependence of business on natural, social and human capitals. (More information: the concept of double materiality is described in the context of reporting climate-related information in the European Commission’s ‘Guidelines on reporting climate-related information’.)
Related terms include: ‘Impact measurement and impact reporting’, ‘Natural capital’ and ‘Universal owner’.
“A dynamic complex of plants, animals, and microorganisms, and their non-living environment, interacting as a functional unit. Examples include deserts, coral reefs, wetlands, and rainforests (MA 2005a). Ecosystems are part of natural capital.” (From the Capitals Coalition’s Natural Capital Protocol (2016). For more, please see ‘biodiversity’, ‘natural capital’, ‘Natural Capital Protocol’, and ‘natural resources’.)
Employee ownership is where a business is entirely or mostly owned by its employees. There are different forms of employee ownership, but typically the employees will have both a financial stake in the business (e.g. share ownership) and a say in how it’s run. (More information: Employee Ownership Association)
ESG means ‘environmental, social and governance’. ESG factors are frequently used when evaluating the non-financial performance of a company; this would typically include consideration of sustainability, ethical and corporate governance issues, such as a company’s carbon footprint and what systems are in place to help maintain accountability.
Externality is a term frequently used in the field of economics, meaning a cost or benefit that affects someone who did not choose to incur that cost or benefit. Where an externality is not accounted for in a particular activity, this can distort an evaluation of whether that activity is sustainable. Pollution is a common example of an externality: a producer may produce more products if it does not have to account for the full environmental cost of production. (More information: Wikipedia)
Gender lens investing
The term gender lens investing is used to describe a range of contexts in which funds are deployed to pursue gender parity, including: investing in products and services for the benefit of women, investing in businesses founded/led by women, or investing in initiatives and policies within workforces that pursue gender equality. (More information: Criterion Institute; The Wharton School)
Human capital is defined in the Capitals Coalition’s Social and Human Capital Protocol (2019) as “The knowledge, skills, competencies and attributes embodied in individuals that facilitate the creation of personal, social and economic well-being”. (In this definition, the Protocol draws on the OECD’s 2007 publication by B. Keeley, ‘Human Capital: How what you know shapes your life’.) Human capital and ‘social capital’ are described by the Protocol as resources that “need to be maintained and enhanced to make society more cohesive and resilient and business more successful”. The Protocol is intended to help shift the consideration of social and human capital performance to the core of business decision-making. (For more, please see the Capitals Coalition website, and further definitions in this glossary of ‘Natural capital’, ‘Natural Capital Protocol’, ‘Social capital’ and ‘Social and Human Capital Protocol’.)
In the context of impact measurement, the ‘impact’ is the extent to which that change arises from a particular intervention. (More information: GECES sub-group on impact measurement 2014 – Study)
The term ‘impact economy’ is used to refer to businesses that take a “triple bottom line” approach to their operations, aiming to benefit society and the environment alongside achieving financial success. Such businesses can include, but are not required to be, registered B Corps, benefit corporations, social enterprises or cooperatives. ‘Impact investing’ is a core sector within the impact economy (see below). Public sector organisations working in partnership with the private sector to deliver initiatives for sustainable development could also be an example of activity within the impact economy.
Impact investing and social impact investing
Impact investing and social impact investing is where investments are made in order to create specific positive social and/or environmental outcomes (and long-term impact), whilst also achieving a financial return. The term ‘social impact investing’ (SII) is also used. (More information: Global Impact Investing Network)
Related terms are: “sustainable finance”, “ethical investing”, “socially responsible investing” and “negative screening”.
Impact measurement and impact reporting
Impact measurement and impact reporting are terms used to describe the processes by which an organisation, such as a charity or a business, evaluates and publicly reports on the effect it has had on society and/or the environment, or on its progress towards achieving its purpose and intended outcomes.
This term comes from the Impact-Weighted Accounts Project at Harvard Business School, led by Professor George Serafeim, which is part of a broader partnership with the Global Steering Group for Impact Investment and the Impact Management Project. The Project aims to create a unified approach to accounting that reflects a business’ financial, social and environmental performance. Such financial statements would capture, as monetary values, the positive and negative impacts of the business on employees, customers, the environment and broader society, which are not normally factored in to company accounts. For example, such accounts might record as inputs the raw materials, water and electricity used by a company, and its outputs may include its greenhouse gas emissions. Standard accounting provides investors and directors with financial metrics, but measurement of non-financial impacts provides a holistic view of the value a business creates. This increased impact transparency is intended to drive investor and corporate decision-making, spur the development of capital markets driven by sustainability considerations, and help create incentives to improve ESG performance. Please also see ‘externalities’.
The term ‘intrapreneurship’ is used to describe taking the approach of an entrepreneur whilst working within a large organization. It can be considered a style of corporate management, and the term may be used in relation to deliberate entrepreneurial activity (i.e. starting a new business) within, and supported by, a large organisation. (More information: The League of Intrapreneurs)
Mission-led businesses were considered in detail in the government’s Mission-led Business Review 2016. The key features of a mission-led business are that it:
- identifies its intended positive social impact(s) as a central purpose of its business (this could be set out within its constitution, or integrated into its operational strategy and how it does business);
- makes a long-term or binding commitment to deliver on its intended social impact, through its business and operations (i.e. through its strategy, governance and board obligations, interactions with key stakeholders (e.g. employees, customers, suppliers, community), investor relations and reporting);
- can fully distribute its profits (i.e. there is no ‘asset lock’ restricting its use of profits or other assets); and
- reports on its social impact to its stakeholders.
Note that there is overlap in the terminology used to describe types of purpose-conscious business and it may help to think of them on a scale of commitment to social purpose, rather than always being clearly delineated. Please also see ‘profit-with-purpose business’, ‘Purposely’, ‘responsible business’ and ‘social enterprise’.
A mission lock is a clause in the constitutional document of a corporate structure that specifies the objects of that entity. For example, rather than a UK company limited by shares having unrestricted objects, a mission lock can be used to restrict the objects to a specific social mission. For some corporate forms, like Community Interest Companies and charitable companies, are required to have a mission lock.
“The stock of renewable and non-renewable natural resources (e.g., plants, animals, air, water, soils, minerals) that combine to yield a flow of benefits to people (adapted from Atkinson and Pearce 1995; Jansson et al. 1994).” (From the Capitals Coalition’s Natural Capital Protocol (2016). For more, please see the Capitals Coalition website, and further definitions of ‘biodiversity’, ‘ecosystem’, ‘Natural Capital Protocol’, and ‘natural resources’.)
Natural Capital Protocol
“A standardized framework to identify, measure, and value direct and indirect impacts (positive and negative) and/or dependencies on natural capital.” (For more, see the Capitals Coalition’s Natural Capital Protocol (2016), and further definitions of ‘biodiversity’, ‘ecosystem’, ‘natural capital’, and ‘natural resources’.)
“Natural resources encompass a range of materials occurring in nature that can be used for production and/or consumption.
- Renewable resources: These may be exploited indefinitely, provided the rate of exploitation does not exceed the rate of replacement, allowing stocks to rebuild (assuming no other significant disturbances). Renewable resources exploited faster than they can renew themselves may effectively become non-renewable, such as when over-harvesting drives species extinct (UN 1997).
- Non-renewable resources: These will not regenerate after exploitation within any useful time period. Non-renewable resources are sub-divided into reusable (e.g., most metals) and non-reusable (e.g., thermal coal).”
(From the Capitals Coalition’s Natural Capital Protocol (2016). For more, please see ‘biodiversity’, ‘ecosystem’, ‘natural capital’ and ‘Natural Capital Protocol’.)
Negative screening is when investors screen out potential investments that do not align with their values; for example, an investor may not want their portfolio to include investments in tobacco, arms or gambling. This is not impact investing (i.e. investing to create a positive social / environmental impact), but an approach used to avoid financing specific activities.
In the context of impact measurement, an outcome is the change arising in the lives of beneficiaries and others. (More information: GECES sub-group on impact measurement 2014 – Study)
Patient capital is used to describe investment that has a long-term timeframe. Patient capital is often important for businesses trying to achieve a social impact, which may take longer to generate financial returns whilst working to develop their social impact. Patient capital investors are more likely to prioritise social impact over financial return, offer flexible terms and have a higher risk tolerance. Patient capital may be deployed alongside other types of investments, to help bridge the gap between efficient, market-based approaches and achieving social impact.
Place-based impact investing
Place-based impact investing is where investments are made with the intention of creating both financial returns and social / environmental outcomes to address social issues within a specific geographic location, often with a focus on the needs of marginalised communities and tailored to the strengths and resources particular to that area. Through engaging with local stakeholders, such as entrepreneurs, community organisations and local government, investors aim to achieve long-term financial and social sustainability in the community, building local capacity and ownership, and to prompt larger systemic change by influencing other forms of capital and empowering local businesses. For example, The Good Economy, the Impact Investing Institute and Pensions for Purpose are co-leading The Place-Based Impact Investing Project, which aims to build market knowledge and influence institutional investors to consider investing in asset classes that deliver long-term financial returns alongside place-based environmental, economic and social impacts.
The term ‘planetary boundaries’ is used to refer to a framework that was formally proposed in 2009 by an international group of scientists led by Stockholm Resilience Centre co-founder, Johan Rockström. It identifies the Earth-system processes and associated thresholds which, if exceeded, could generate unacceptable environmental change, and provides a quantitative underpinning for the thresholds. There are nine processes for which the framework defines planetary boundaries: climate change; rate of biodiversity loss (terrestrial and marine); interference with the nitrogen and phosphorus cycles; stratospheric ozone depletion; ocean acidification; global freshwater use; change in land use; chemical pollution; and atmospheric aerosol loading.
The thresholds define the safe operating space for humanity with respect to the Earth’s biophysical systems. The framework reflects concepts of interdependence and tipping points within planetary systems, and is based on the understanding that many of these systems are sensitive around threshold levels of certain fundamental variables. Not all of the Earth’s systems have clear thresholds, but human activities can undermine their resilience and increase the risk of exceeding the thresholds in other planetary systems. More information: Stockholm Resilience Centre, Stockholm University.
There is no prescribed legal structure for this type of business. Fundamentally, a profit-with-purpose business:
- has made a primary and long-term commitment to social impact, which will be locked-in through its governance and/or embedded in its business model;
- creates duties upon its directors to work to achieve this social purpose;
- creates and reports transparently on its social impact; and
- has not created restrictions on its ability to distribute its profits or deal with its assets (see also ‘asset lock’).
Making this commitment, to a primary purpose other than profit, allows profit-with-purpose businesses to demonstrate their social impact credentials (for example, to impact investors), and to stay true to their purpose in the long-term, helping avoid mission-drift (for example, upon the founders’ exit).
Unlike a social enterprise, its commitment to its purpose does not restrict how the profit-with-purpose business uses its profits and assets; it is fully profit-distributing. This allows freedom to offer returns to investors, as can any for-profit commercial business.
The use of this specific terminology could be critiqued because “profit-with-purpose” might be taken to suggest that profit is primary, ‘with’ purpose accompanying it, bolted onto the businesses. The type of business described above, which has purpose at its core and achieves its commercial success by way of pursuing that purpose, could therefore alternatively be described as “profit-through-purpose”.
Note that there is overlap in the terminology used to describe types of purpose-conscious business and it will develop over time. It may help to think of them on a scale of commitment to social purpose, rather than always being clearly delineated. Please also see ‘mission-led business’, ‘Purposely’, ‘responsible business’ and ‘social enterprise’.
The Purposely platform was developed by UnLtd and Bates Wells, with the support of the Department for Digital, Culture, Media and Sport, and is designed to guide entrepreneurs who want to embed purpose into their businesses, using a company limited by shares structure. Purposely presents a range of template articles of association which, to varying degrees, all give importance to the social/environmental impact in business.
You can register on Purposely to access the questionnaireto help you decide how you want to embed purpose into your business, or you can view the model articles of association and accompanying guidance.
Note that there is overlap in the terminology used to describe types of purpose-conscious business and it may help to think of them on a scale of commitment to social purpose, rather than always being clearly delineated. Please see ‘mission-led business’, ‘profit-with-purpose business’, ‘responsible business’ and ‘social enterprise’.
The Model 4 articles of association are designed to be suitable for a social enterprise; in particular, the social/environmental purpose takes priority over shareholder value and at least the majority of profits and any surplus on winding up are to be applied in furthering that purpose. It also specifies its intention be a social enterprise. An impact report must be produced for the members.
In Model 3 the social/environmental purpose takes priority over shareholder value, but the application of profits and any surplus on winding up is not expressly restricted. There is an obligation for the directors to consider how to use profits/recommend the use of surplus as part of a strategy to achieve the primary purpose. A Model 3 company is similar to a social enterprise, but without specific restrictions on the use of its assets. An impact report must be produced for the members.
Model 2 allows for dual objectives, of creating shareholder value as well as committing to having a material positive impact on society and the environment. This model does not restrict or direct the use of profits or surplus upon winding up. The directors shall prepare an impact report. This model reflects the minimum requirements to meet the legal test for B Corp certification.
Model 1 allows for a purpose to be specified, but is designed so that social/environmental impact is realised in the way that the business is carried out, in pursuit of the success of the company for the benefit of its shareholders. Like the other Models, the company has a statement of responsible business principles, which guide the way the company does business. The Model includes the option to require impact reporting. This Model is designed to support a company in pursuing responsible business practices.
Racial Justice Lens Investing or Racial Equity Investing
The terms ‘Racial Justice Lens Investing’ and ‘Racial Equity Investing’ describe an approach to using investment capital in order to deliberately and specifically promote racial justice and alleviate racial inequality. Such investment activities may include: investing in businesses owned, founded and/or led by those from marginalised communities, investing in companies that produce products and services beneficial to members of marginalised communities, investing in organisations that intentionally seek to address systemic racial inequalities and engaging with investees generally about their diversity and inclusion policies and practices, such as in relation to their recruitment and promotion. For more information on diversity, equity and inclusion in the investment context, you may like to visit the Diversity Forum for inclusive social investment and the Equality Impact Investing Project.
There is no agreed definition of what makes a ‘responsible business’, and a business can strive to follow responsible business practices using any legal structure. By default, the directors’ duties to a UK limited company include pursuing the company’s commercial success for the benefit of its members (shareholders), and it will be fully able to distribute its profits (by contrast, see ‘asset lock’). However, in addition, a responsible business operates with the view that a healthy environment and society is necessary for the long-term commercial success of the business.
Responsible businesses incorporate corporate social responsibility and sustainability practices. This approach to business reflects the concepts of ‘enlightened shareholder value’ and needing a ‘social licence to operate’. Responsible businesses will also emphasise consideration of key stakeholders, ESG factors and the long-term benefit of the business to society. Responsible businesses that have highly developed sustainability practices may have significantly integrated these considerations into their business models.
There are a number of frameworks available for businesses to use to help develop their responsible business practices, and some businesses have created their own frameworks. For example:
- BITC’s Responsible Business Map and Tracker
- UN Global Compact and its Blueprint for Business Leadership on the SDGs
- Unilever Compass
For more, please also see ‘mission-led business’, ‘profit-with-purpose business’, ‘Purposely’ and ‘social enterprise’.
Social and Human Capital Protocol
The Capitals Coalition’s Social and Human Capital Protocol (2019) is a voluntary, decision-making framework intended to provide businesses with a credible and comparable means by which to identify, measure, and value direct and indirect impacts (both positive and negative) and their dependencies on social and human capital, as drivers of sustainable growth. (For more, please see the Capitals Coalition website, and further definitions in this glossary of ‘Human capital’, ‘Natural capital’, ‘Natural Capital Protocol’ and ‘Social capital’.)
Social capital is defined in the Capitals Coalition’s Social and Human Capital Protocol (2019) as “Networks together with shared norms, values and understanding that facilitate cooperation within and among groups”. (In this definition, the Protocol draws on the OECD’s 2001 publication, ‘The Wellbeing of Nations: The Role of Human and Social Capital’.) Social capital and ‘human capital’ are described by the Protocol as resources that “need to be maintained and enhanced to make society more cohesive and resilient and business more successful”. The Protocol is intended to help shift the consideration of social and human capital performance to the core of business decision-making. (For more, please see the Capitals Coalition website, and further definitions in this glossary of ‘Human capital’, ‘Natural capital’, ‘Natural Capital Protocol’ and ‘Social and Human Capital Protocol’.)
A social enterprise is a business with a social or environmental mission. In the UK, there is no single legal definition of a social enterprise and the term is used to describe businesses run through a variety of legal structures and with a range of operating models. However, there are a number of key principles that define a social enterprise:
- it has its social or environmental mission or purpose explicitly stated in its governing documents (see also ‘mission lock’);
- it generates the majority of its income from trading activity;
- it reinvests the majority of its profit into its social/environmental mission; and
- it will seek to measure and report on its social impact.
In addition, a social enterprise will typically restrict the application of surplus upon winding up, so that at least a majority is channelled towards its social/environmental purpose. Restriction of the use of profit and other assets is mandated in some legal structures used by social enterprise, such as the community interest company. (See also ‘asset lock’.)
Social enterprises generate their social impact in a variety of ways. Some social enterprises trade in order to use their profits to fund, directly or indirectly, activities for specific social impact (for example, From Babies with Love sells baby products and donates 100% of profit to support for orphaned and abandoned children). Other social enterprises create impact directly through their trading activities (such as Change Please, which employs and supports homeless people), and many have a business model that incorporates both approaches to impact creation (for example, Toast Ale prevents food waste by brewing beer from unused bread, and donates profits from beer sales to the food waste charity, Feedback). (See also ‘theory of change’ and ‘impact measurement and impact reporting’).
Social impact bond
A social impact bond (SIB) is not a ‘bond’ within the usual meaning of the term (i.e. it is not a fixed income debt instrument). Typically, a SIB is a project involving a commissioning public body, a charity or social enterprise delivering services and one or more social investors. The purpose of a SIB is to achieve social impact by addressing particular social problems, often focusing on preventative interventions. For example, SIBs could be used for interventions working with people at risk of homelessness, children at risk of being taken into care, or people whose health (physical or mental) may deteriorate.
The public body contracts with the service provider on the basis that it will only pay for the successful delivery of specific outcomes. The service provider enters into a loan agreement with the social investor(s) to fund the provision of the service, and the repayment of the loan, together with interest, depends on those outcomes being achieved. For the public body, a SIB can help to de-risk trialling an intervention, particularly where it uses a new and innovative approach.
The first SIB was initiated in 2010 by Social Finance Limited, which raised funds to trial an intervention aimed at reducing reoffending among prisoners leaving a prison in Peterborough, in the UK. SIBs have now been used in many parts of the world, aimed at tackling a range of complex social issues. In September 2020, the University of Oxford’s Government Outcomes Lab listed 200 SIBs globally in its Impact Bond Dataset v2 (Beta). SIBs can also be described as ‘pay for success’ or ‘payment by results’ contracts, and such terms are more commonly used in the US. (More information: Gov.UK: A guide to Social Impact Bonds.)
Social return on investment (SROI)
Social Return on Investment (SROI) is a measure of the social, environmental and economic value of the outcomes of an activity (i.e. how much social value (£) is created for every £1 of investment). This measure is a way to capture the monetary value of a range of outcomes, even where a financial value is not readily attributable to a particular activity.
Sustainable finance/investment, and ‘ethical’ or ‘socially responsible investing’ (SRI)
The use of terminology in this area is not always clear, but can be conceptualised on a spectrum of capital:
Responsible investing seeks market-rate, risk-adjusted returns whilst mitigating ESG risks (for example, this approach may use negative screening to exclude investments in highly polluting activities).
Sustainable investing also seeks market-rate, risk-adjusted returns but actively pursues ESG opportunities.
Impact investing may seek market-rate or concessionary returns, and is designed to deliberately contribute to measureable, targeted solutions to social and/or environmental problems. Some consider ‘catalytic capital’ as a sub-set of impact investing that expects concessionary rate returns and overlaps with philanthropic grant-making, to provide patient, flexible capital focused on maximising impact.
Stranded assets are resources that have been devalued or written-down earlier than anticipated, or have become liabilities, because of changes in the market that impact upon their economic utility. Such changes could include regulatory or technical developments, or changing social norms. This term is sometimes applied to assets affected by the transition to a low-carbon economy, relating to the supply of fossil fuels. For example, if in order to help keep within 2˚C of global warming it is determined that coal will not be extracted from a coal mine then, prior to the end of its previously expected economic lifespan, the coal mine may stop being able to produce returns and be treated as a stranded asset. (More information: Carbon Tracker Initiative)
See also ‘carbon transition risk’.
Steward ownership is a concept for corporate ownership that provides an alternative to conventional ownership models based on shareholder prioritisation. The concept of steward ownership reshapes the goals and incentives that guide decision making in businesses, based on the premise that corporations should be rooted in their purpose, as well as generating profit, and on the inclusion of a wider group of stakeholders. Steward-owned businesses commit to two key principles: (1) self-governance: control and voting rights remain inside the business, with people who are actively connected to the business and are deeply aligned with its mission and purpose (and not, wherever possible, third party investors); and (2) profits serve purpose: profits are either reinvested in the business, used to repay investors, shared with stakeholders, or donated to charity to serve the mission of the business. Businesses that are steward-owned include Carlsberg, IKEA, John Lewis, Ecosia, Novo Nordisk and Bosch.
Steward ownership can be achieved using a range of legal structures, subject to what is allowed in the relevant jurisdiction. Such structures may involve ‘golden shares’, ownership trusts or foundation ownership. Broadly, these structures help to separate voting rights from the right to economic participation, thereby enabling the business to focus on serving its purpose. Founders and investors are able to receive fair returns, in a way that does not compromise the long-term sustainability of the business, as steered by the stewards. Profits can be focused on innovation, people and building reserves. (More information: Purpose.)
A sustainability-linked loan (SLL) is any type of loan or contingent facility that, in the context of corporate lending, incentivises borrowers by raising or lowering the interest rate (or margin) based on whether the borrower meets pre-agreed sustainability performance targets. SLLs can be taken out by any type of company and for any corporate purpose, including for general purposes such as working capital. The aim of an SLL is to incentivise the improvement of the borrower’s overall sustainability profile, rather than to finance specific green projects, as would be the case with products such as ‘green bonds’ and ‘green loans’. However, an SLL could be structured so that it is defined as both an SLL and a ‘green loan’ for a specific project, so these constructs are not mutually exclusive. SLLs are a relatively new product; the Loan Market Association has developed the Sustainability Linked Loan Principles, which are voluntary guidelines intended to promote the development and preserve the integrity of SLLs, and to promote sustainable development more generally.
‘Tech-for-good’ is a term used to refer to technological services and products that are designed to produce a positive social and/or environmental outcome. For example, tech-for-good can include apps or software to be used by the people they are designed to benefit, or technology that helps organisations with a public purpose, such as charities, to increase their social impact. The tech-for-good movement includes innovators using a range of technologies, from blockchain to AI and machine learning, to address a variety of social issues. Within the tech-for-good movement, the term ‘social tech’ is also used. (More information: Tech Nation report on tech for social good in the UK.)
Theory of change
In the context of impact measurement, a theory of change is a comprehensive description and illustration/diagram of how and why a desired change is expected to happen in a particular context. It usually traces how what an organisation does (its activities or interventions) leads to change in people’s lives (outcomes).
Transition bonds are a relatively new class of ‘use-of-proceeds’ debt instruments, aimed at helping companies in ‘brown industries’ (industries with high GHG emissions) to raise capital to invest in shifting to greener business activities. Transition bonds are different to ‘green bonds’, which are designed for “green industries” such as renewable energy. ‘Brown industries’ include mining, heavy industry (e.g. cement, steel and chemicals), utilities and transport. Whilst brown industries may struggle to become completely ‘green’, some aspects may be essential to achieving the green transition; for example, the mining of minerals that are critical for a low-carbon economy, such as lithium and cobalt used in electric vehicle batteries.
Examples of transition bonds issued so far include:
- Hong Kong-based Castle Peak Company Limited’s US$500m “energy transition bond”, for building a new combined cycle gas turbine unit (2017).
- Brazilian beef producer Marfrig Global Foods’ US$500m 10-year “sustainable transition bond”, funding the purchase of cattle from Amazon ranchers compliant with non-deforestation and other sustainability criteria (2019).
- The UK’s Cadent Gas’ EUR500m 12-year bond to facilitate the future supply of hydrogen and other low-carbon gases, and reduce methane leakage (2020).
Triple bottom line
The ‘triple bottom line’ approach requires businesses to commit to measuring their social, environmental, and economic impact: the financial ‘bottom line’ (a traditional measure of value creation in business) and social and environmental value creation. This more rounded approach to measurement aims to inform decisionmakers about a fuller range of the business’ impacts, including its ‘externalities’, and encourage management of the business so as to pursue profit creation in tandem with generating benefits for people and planet. The triple bottom line conceptualises sustainability performance as integrated into businesses’ DNA. The concept was proposed by John Elkington, sustainability advisor and author, in the 1990s and has since become a well-used term in business lexicon. However, 25 years after articulating the triple bottom line, Elkington argued that mainstream interpretation had frequently reduced the concept to an accounting tool, and expounded that its goal is more substantive: to create system change, for the transformation of capitalism.
United Nations Sustainable Development Goals (SDGs) or ‘Global Goals’
The 17 UN Sustainable Development Goals are a global plan to build a better world for people and the planet by 2030. Adopted by all United Nations Member States in 2015, the SDGs are a call for action by all countries to promote prosperity while protecting the environment. The SDGs reflect the understanding that ending poverty must be accompanied by economic growth and the meeting of a range of social needs, including education, health and equality, while also tackling climate change and preserving the environment. (More information: United Nations)
A universal owner is typically a large institutional investor, such as a pension fund. Given the nature of its investment activity (highly-diversified, long-term portfolio), it owns a representative fraction of most of the companies in the relevant market and its success depends on macroeconomic performance. Universal owners will therefore be inherently interested in sustainable development because they are affected, both positively and negatively, by the externalities (pollution, biodiversity loss, etc.) generated by companies in their portfolio. (More information: Principles for Responsible Investment)
This term describes an approach to investing whereby a grant-maker or social investor provides financial and organisational support to a social purpose organisation, such as a charity, NGO or social enterprise, in order to support the development of an innovative solution to social or environmental problems. This approach purports to apply the principles of venture capital funding to developing initiatives for positive social impact. Typically, this type of investment is made by investors who accept a higher level of risk compared to most market actors, are investing for the longer-term, and will be highly engaged with the investee’s project. The financial investment provided can take various forms (such as grants, debt, equity or a hybrid) and will be coupled with non-financial support to improve the investee’s organisational resilience. Impact measurement and management processes will be a key part of the investment arrangement. (More information: EVPA)
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