Impact Economy Glossary

Talk the talk in the Impact Economy… As the Impact Economy develops, so too does the language used by participants; we’re compiling a glossary of some of the terms that we have noticed being used in this arena.

Please note that this glossary is subject to on-going updates. Please contact us if you have any comments or suggestions.

Glossary

A

Asset lock

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

Blended finance

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)


C

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

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)

Circular economy

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’

Cooperatives, 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’)

Community shares

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

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. For example, Centrica Innovations.

Crowdfunding

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)


D

Data trust

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)


E

ESG

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. (More information: ft.com/lexicon)

Externalities

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)

Employee ownership

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)


G

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)


I

Impact

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)

Impact Economy

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 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.

Intrapreneurship

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)


M

Mission-led business

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.

(More information: GOV.UK (Mission-led business review); In pursuit of impact: Mission-led businesses’ research report (Deloitte/Big Society Capital/DCMS))

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’.

Mission lock

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.


N

Natural capital

Natural capital is a term used to describe the natural assets of the world, including animals, soil and plants, minerals, water and the air, which humans need to survive. (More information: World Forum on Natural Capital)

Negative screening

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.


O

Outcome

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)


P

Patient capital

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.

Profit-with-purpose business

In summary

There is no particular legal structure for this type of business, which can sometimes make it harder to recognise. 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’).

More detail

Making this commitment, to a primary purpose other than profit, allows profit-with-purpose businesses to demonstrate their social 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 a traditional, 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’.

(More information:  G8 Social Impact Investment Taskforce (Profit-with-purpose businesses paper); Blueprint for Better Business; Tomorrow’s Company; The Big Innovation Centre: The Purposeful Company)

Purposely

In summary

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’.

More detail

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.


R

Responsible business

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:

For more, please also see ‘mission-led business’, ‘profit-with-purpose business’, ‘Purposely’ and ‘social enterprise’.


S

Social enterprise

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 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

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’.



T

Tech-for-good

‘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).


U

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)

Universal owner

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)

Please note that this glossary contains links to websites run by third parties, the content of which is not monitored or controlled by Bates Wells; we will update the links where we become aware that they no longer take the reader to relevant content.