The following report defines the concept of impact-linked finance and juxtaposes it with blended finance, impact investing, and results-based finance. It covers current constraints that stakeholders may face and develops a clear roadmap to accelerate and scale impact-linked finance. The concept has the potential to mobilize additional private sector investments, as it directly links financial rewards for market- based impact organizations (or organizations with great impact potential) to the achievement of positive social outcomes, thereby improving the risk-return profile. Although manageable, impact-linked finance has to address constraints around experience, knowledge, regulation, attractiveness, capacity, and data to unlock its full potential.
Impact-linked finance can be summarized in the following four points:
- It follows the blended finance approach, as it aims to mobilize (additional) private sector investment for organizations, projects, or initiatives with significant potential for creating positive impact, with private sector investments blended with public or philanthropic funds.
- It overlaps with impact investing, as it enables investors to target financial returns while creating positive impact. Linking financial rewards to impact allows for stabalized and risk-adjusted impact investments if impact performance is in-line with expectations.
- It shares some of the characteristics of traditional results-based finance approaches, as financial rewards are tied to generated results. However. impact-linked finance puts a mor explicit emphasis on actual outcomes for the beneficiaries and on mobilizing private sector capital than traditional results-based-finance.
- It is designed to financially reward and scale market-based organizations, while exhibiting a simple structure. Due to itsprinciples, impact-linked finance is different from pay-for-success approaches such as social impact bonds, development impact bonds, and other outcome-based contracts, as these structures primarily focus on financing public services and non-market-based interventions, necessitating more complex contractual frameworks.