Let’s Get Explicit: The Emergence of Impact-Linked Returns in the Commercial Debt Market

While impact investments place value on positive impact alongside financial returns, how those attributes are prioritized within investment decision-making varies drastically. How investors manage these trade-offs is an active area of practitioner interest. There is a gap in financial tools that directly tie financial returns to the observed impact of investee businesses to manage these trade-offs. This limits professional impact investors’ ability to efficiently manage impact and financial goals. This chapter examines the growing number of innovative, debt-based transactions that are explicitly tying investor returns to the observed impact of investee businesses. A particular focus is the direct linking of returns between asset managers and investee businesses. While there are examples of explicitly linking impact and returns in transactions on both large and small scales, strong theoretical similarities exist among these tools. They all involve internalizing previously externalized factors. The use of impact-linked debt instruments is viewed here as providing impact investing practitioners more and better options to manage the trade-offs between risk, return, and impact. Opportunities and challenges for the replication and adoption of these tools are discussed, with a particular emphasis on related challenges in impact data gathering and management. These tools are expected to become more commonplace as impact measurement tools and practices mature.