Impact Investment Tools, Structures and Instruments

Abstract

This chapter described tools, structures and instruments used by impact investors to effectively apply their theories of environmental and/or social change. Impact tools are actions that impact investors can take to create a portfolio that is aligned with the investor’s investment and impact goals. Each impact investment needs to be structured properly to optimize impact while fitting within the investor’s overarching impact investment goals and policies. Impact structures are a function of decisions made regarding the investor, intermediary and enterprise vehicles and the use of certain transactional tools that are intended to drive specific impact outcomes. The selection of the investment instrument that will be used by the investor or the intermediary to provide capital to the enterprise depends on a number of factors including the investment goals and risk tolerances of the investor/intermediary; the legal structure of the enterprise; the instruments that the enterprise have previously issued to other investors, since the relative priorities of different groups of investors with respect to return of capital and their rights to the assets of the enterprise as collateral for their investment must always be clear; the relative cost of the financing to the business and the existing owners; the risks associated with the instrument and the degree of flexibility associated with any payment obligations under the terms of the instrument.