Impact Investing Instruments Mechanisms and Actors Wolfgang Spiess

PALGRAVE STUDIES IN IMPACT FINANCE
Impact Investing
Instruments, Mechanisms and Actors
Wolfgang Spiess-Knafl · Barbara Scheck
Second Edition
Palgrave Studies in Impact Finance
Series Editor
Mario La Torre, Department of Management, Sapienza University of
Rome, Rome, Italy
The Palgrave Studies in Impact Finance series provides a valuable scien-
tific ‘hub’ for researchers, professionals and policy makers involved in
Impact finance and related topics. It includes studies in the social, polit-
ical, environmental and ethical impact of finance, exploring all aspects
of impact finance and socially responsible investment, including policy
issues, financial instruments, markets and clients, standards, regulations
and financial management, with a particular focus on impact investments
and microfinance.
Titles feature the most recent empirical analysis with a theoretical
approach, including up to date and innovative studies that cover issues
which impact finance and society globally.
Wolfgang Spiess-Knafl · Barbara Scheck
Impact Investing
Instruments, Mechanisms and Actors
Second Edition
Wolfgang Spiess-Knafl Barbara Scheck
Munich Business School Munich Business School
European Center for Social Finance Munich, Germany
Munich, Germany
ISSN 2662-5105 ISSN 2662-5113 (electronic)

Palgrave Studies in Impact Finance
ISBN 978-3-031-32182-5 ISBN 978-3-031-32183-2 (eBook)
https://doi.org/10.1007/978-3-031-32183-2
1st edition : © The Editor(s) (if applicable) and The Author(s) 2017
2nd edition: © The Editor(s) (if applicable) and The Author(s), under exclusive license
to Springer Nature Switzerland AG 2023
This work is subject to copyright. All rights are solely and exclusively licensed by the
Publisher, whether the whole or part of the material is concerned, specifically the rights
of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on
microfilms or in any other physical way, and transmission or information storage and
retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology
now known or hereafter developed.
The use of general descriptive names, registered names, trademarks, service marks, etc.
in this publication does not imply, even in the absence of a specific statement, that such
names are exempt from the relevant protective laws and regulations and therefore free for
general use.
The publisher, the authors, and the editors are safe to assume that the advice and informa-
tion in this book are believed to be true and accurate at the date of publication. Neither
the publisher nor the authors or the editors give a warranty, expressed or implied, with
respect to the material contained herein or for any errors or omissions that may have been
made. The publisher remains neutral with regard to jurisdictional claims in published maps
and institutional affiliations.
Cover illustration: VividaPhotoPC/Alamy Stock Photo
This Palgrave Macmillan imprint is published by the registered company Springer Nature
Switzerland AG
The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland
Contents
1 Introduction 1
2 Social Entrepreneurship 13
3 Impact Investing 51
4 The Impact Investing Market 73
5 Financing Instruments and Transactions 97
6 Impact Measurement and Management 117
7 Assessment Tools and Methodologies 137
Index 157
v
List of Figures
Fig. 3.1 Return expectations (Source Based on Spiess-Knafl [2012]) 54

Fig. 4.1 Outcomes-based financing structure (Source Own
depiction based on Beetz [2018]) 89
Fig. 4.2 Guarantee scheme (Source Own illustration) 91
Fig. 5.1 Layers in the financing structure of social enterprises
(illustrative) (Source Own illustration) 98
Fig. 5.2 Financing instruments (Source Based on Achleitner et al.
[2011a]) 102
Fig. 5.3 Fund structure (Source Own illustration) 112
Fig. 5.4 Principles of valuation (Source Own illustration) 114
Fig. 6.1 Impact value chain model OECD-DAC (Source Jackson
and Harji [2016]) 123
Fig. 6.2 The results staircase (Source Own depiction based
on Phineo gGmbH [2016]) 123
Fig. 6.3 Impact value chain model Clark et al. (Source Own
illustration, based on Clark et al. [2004]) 124
Fig. 6.4 Theory of change, planning triangle for a substance abuse
initiative (Source Own illustration based on Harries et al.
[2014]) 126
Fig. 6.5 IMM along the investment process (Source Own depiction) 128
Fig. 6.6 Levels of evidence in IMM (Source Own illustration based
on Harries et al. [2014]) 132
Fig. 7.1 Possible scope of impact assessment (Source Own depiction) 141
Fig. 7.2 Categorization of IMM tools (Source Own depiction) 143
vii
List of Tables
Table 1.1 Potential invested capital to fund selected BoP businesses

over the next 10 years 6
Table 1.2 Forms of creation of social impact 7
Table 2.1 Institutional actors 19
Table 2.2 Growth strategies 22
Table 2.3 Categories of social business model innovation 24
Table 2.4 Categories of non-profit organizations 28
Table 2.5 Issues along the food value chain 37
Table 2.6 Key Performance Indicators to track progress for all SDGs 39
Table 2.7 Child labor situations 42
Table 2.8 Two schools of thought 42
Table 3.1 Legacy and non-legacy capital of foundations 55
Table 3.2 Opportunities for the achievement in different asset classes 56
Table 3.3 Theories to explain financing decisions 58
Table 3.4 Income streams 66
Table 3.5 Financing conflicts 68
Table 4.1 Actors of the social capital market 74
Table 4.2 Selection criteria 77
Table 4.3 Selected social venture capital funds 78
Table 4.4 Balance sheet data of selected ethical banks 82
Table 4.5 Forms of crowdfunding 83
Table 4.6 Costs per unit in the social sector (selection) 90
Table 5.1 Characteristics of funds 98
Table 5.2 Fund index summary 99
Table 5.3 Use of financing instruments 106
ix
x LIST OF TABLES
Table 5.4 Age distribution of investments 106

Table 5.5 Focus groups in different regions 107
Table 5.6 Acquisition of ethical brands 109
Table 5.7 Acquisition of social enterprises 111
Table 6.1 Overview terminology 127
CHAPTER 1
Introduction
1.1 Context
Over the last thirty years, we have seen surprising changes in the way
societal changes are initiated. These changes were driven by changes in
the way public authorities deal with societal challenges, how individ-
uals decide to work for the common good and what has changed for
corporations.
Take the examples of microfinance, social housing, green tech, or social
businesses. While those sectors were either inexistent or unfunded, they
are at the moment important sectors and attract significant amounts of
capital. Behind this trend is a range of underlying trends.
Milton Friedman once famously wrote “The business of business is
business” (Friedman 1970). That was long true and shareholder value
thinking dominated and still largely dominates capital markets (Hart
and Zingales 2017). The end of stock market bubble in the early
2000s, a financial and economic crisis starting in 2008, the increased
feeling of economic disparity led to the belief that the world needs new
economic thinking. That change came among others in the form of social
entrepreneurship.
This was combined with the Nobel Peace Prize for Muhammad Yunus
and the Grameen Bank as well as success stories of social enterprises which
were illustrating that social and financial return are not mutually exclusive.
© The Author(s), under exclusive license to Springer Nature 1

Switzerland AG 2023
W. Spiess-Knafl and B. Scheck, Impact Investing,
Palgrave Studies in Impact Finance,
https://doi.org/10.1007/978-3-031-32183-2_1
2 W. SPIESS-KNAFL AND B. SCHECK
A new generation of social entrepreneurs is working on new business

models to further a specific social mission. There is the belief that there
is a business model for almost every social problem and businesses can be
social platforms. This belief is supplemented by the fact that everybody
can be a changemaker.
Societal challenges are changing and there is an increased under-
standing that the private sector and the civil society need to be a part
of the solution. New arising and persistent challenges are climate change,
international migration flows, and economic disparities. Refugees from
the Middle East, Afghanistan, or Africa all have different issues, skills, and
needs. It is becoming clearer that those challenges can only be addressed
by working in broad coalitions.
The pressure on public sector budgets was one of the impulses for
the commercialization of the social sector and the emerging sector of
social enterprises. Those new actors were an attractive alternative for
foundations which were searching for more entrepreneurial organizations.
Impact investors are also considering impact investments as an attractive
alternative. Individuals are also increasingly interested in financial assets
which support a social mission.
1.1.1 Social Enterprises

Social entrepreneurship aims to solve social issues and societal problems
by applying business techniques. The visible success of the social enter-
prises supported and promoted by fellowship associations such as the Skoll
Foundation, Ashoka, or the Schwab Foundation for Social Entrepreneur-
ship has helped social entrepreneurship to gain a prominent role in policy
debates and to become an investment focus for foundations and venture
philanthropy funds.
Social entrepreneurship is the process from identifying opportunities
to exploiting them (Grichnik 2006; Austin et al. 2006), while the social
entrepreneur is the person driving this change (Dees 1998; Martin and
Osberg 2007). The social enterprise is the organizational form to deliver
those services and products (Defourny and Nyssens 2008; Alter 2006).
Universities have adapted their curricula to help students better under-
stand the economics and mechanisms of the sector. Incubators and
investment-readiness programs help aspiring entrepreneurs start their
business.
1 INTRODUCTION 3
Often these solutions find their way to the more traditional sectors.
Many disruptive innovations have been developed in the social sector
and many technologies are diffused with the help of social sector orga-
nizations. Social technologies can be understood as methods to organize
society.
Different development phases of social business models can be
observed. The first business models were built around ethical sourcing
which included organic agriculture, the pursuit of fair-trade principles,
a reduction of harmful behavior in the supply chains, and a focus on
the recruitment of disadvantaged groups. Examples can be found in the
fair-trade business or ethical fashion.
The second group of business models tried to establish a more direct
relationship with the target group of beneficiaries. Toms Shoes pioneered
the “one for one concept”. Whenever a shoe is sold an additional show is
given to an impoverished child in a developing country. The model was
even expanded and now includes eyewear, coffee, and bags. Other compa-
nies are following this approach and have included this giving policy in
their company.
The third group of business models attempts to achieve a much more
direct social impact and tries to create a business model around the social
problem. Landfill sites in developing countries are now the source and
inspiration to produce handbags or jewelry. Those concepts are labeled
“waste couture” or upcycling. The circular economy also needs those
business models (Ellen McArthur Foundation 2013). Blind, autistic, or
street children are no longer seen as a burden, but social entrepreneurs
developing new social business models increasingly see their special abil-
ities which gives them a superior productivity for certain tasks such as
software testing.
In the last years we have seen new business models built around new
technologies. Social enterprises are integrating artificial intelligence or
blockchain technology in their offerings. Examples can be found in agri-
culture, healthcare, renewable energy, or inclusive finance (Spiess-Knafl
2022).
1.1.2 Societal Challenges and Changes in the Social Sector

At the same time, there was a shift in the societal challenges. Migration
flows will continue to dominate headlines and growing ethnic diversity of
societies leads to the necessity to develop different and multiple programs.
Collier (2014) even speculates about an accelerating pace of interna-

tional migration. At the same time, societies are continuing to age and
thus increasing the pressure to develop new elderly care systems. Climate
change is also happening and needs new international approaches and also
new funding mechanisms.
Those are just a few examples of changing societal challenges which
also illustrate that not only the government or public agencies can solve
them. There needs to be a rather large coalition of actors which can work
together.
A parallel trend is the pressure on public budgets which leads to budget
cuts for social sector organizations and the need to identify new and
additional funding sources. Previously, this led to the situation that non-
profit organizations had to identify additional income streams. Museums
started to develop museum shops or host events and hospitals started to
offer additional services. Weisbrod (2000) covered it as the commercial
transformation of the social sector.
The pressure was supplemented by a widespread introduction of busi-
ness techniques and management studies. The public authorities also
started to use benchmark studies to better control and regulate price
schemes. Although, it is often considered to be controversial (e.g., Weis-
brod 2004; Edwards 2008) the impact of new approaches is significant
and tangible.
Different societal challenges and the commercialization of the social
sector were supplemented by a development for hybridization. Thirty
years ago, there was a clearer distinction between markets, governments,
and the third sector. Each sector was responsible for a certain set of tasks
and had a very distinct rationale and way of acting. The development
of new approaches which are often referred to as hybrid organizations
is one of the more significant changes (e.g., Pache and Santos 2013).
Those hybrid organizations are an important organizational form in the
emerging field of impact investing.
Moreover, mainstream companies feel the need to adopt their busi-
ness model to follow social objectives. There is pressure from employees,
customers as well as the media. That is one of the reasons why companies
are buying ethical, fair trade, or social enterprises to protect their business
model and help them to innovate.
1 INTRODUCTION 5
1.1.3 Capital Providers

The next years will see significant wealth transfers to a generation often
called millennials. They place higher values on corporate social responsi-
bility and are also more interested in impact investing as they are more
concerned about societal and environmental issues. Moreover, the tech
and finance industry will continue to create self-made billionaires who
are interested in applying the same business techniques in financing social
causes they support.
Historically, social sector organizations were funded through dona-
tions. Although they remain a very important currency, new financing
techniques have been applied to the social sector.
Foundations have found interest in applying the venture capital
approach to the funding of social sector organizations. This resulted in the
development of a field called venture philanthropy. Instead of providing
small grants to many different organizations this approach takes a more
active approach funding only selected social sector organization.
Individuals have also developed interest in impact investing. Nowadays,
negative and positive screening when investing in the public equity and
bond market is the main vehicle. Some new platforms are working on
ways to open the market for private investments. That also made it inter-
esting for banks as they want to satisfy the customers’ demand for social
investments.
Additionally, institutional investors such as pension funds or insurance
companies are investing and providing capital to impact investment funds.
Impact investments can offer attractive returns and the returns are uncor-
related to the equity market. That makes impact investing an alternative
once the volumes are increasing.
Governments are also increasingly interested in providing funding to
social sector organizations (Cohen 2011). Examples are social impact
bonds and funding programs for the social capital market of the creation
of dedicated offices.
1.2 Impact Investing

Solar energy and primary education in rural Africa or work integration
and social infrastructure in Western Europe are all areas where addi-
tional funding could facilitate social impact. The big issues are often
underfunded.
Table 1.1 Potential

Sector Potential invested capital
invested capital to fund
required in USD bn
selected BoP businesses
over the next 10 years Housing: Affordable urban $214–$786
housing
Water: Clean water for rural $5.4–$13
communities
Health: Maternal health $0.4–$2
Education: Primary education $4.8–$10
Financial Services: $176
Microfinance
Source O’Donohue et al. (2010)
In an early study, O’Donohue et al. (2010) estimated the capital

needed to scale Bottom of the Pyramid business models across developing
countries. Housing is the largest sector in terms of capital requirements.
Housing is usually an attractive sector as cash flows are predictable but
depends on the availability of property rights. In this scenario the poten-
tial capital requirement ranges between 214 and 786 billion US dollars.
Other sectors are water, health, education, and microfinance (Table 1.1).
The field of microfinance was developing rapidly over the last years.
The Nobel Peace Prize awarded to Muhammad Yunus and the Grameen
Bank showed that social and financial targets do not need to be mutu-
ally exclusive. The success of microfinance has developed over 30 years.
Interestingly, those microfinance institutions are mainstream institutions
nowadays but have often started as non-profit organizations.
In 2022, these numbers have become much larger. The International
Finance Corporation (2022) estimates $5–7 trillion/year of financing is
needed to achieve the SDGs. Public and philanthropic sources which are
traditional sources of funding are not sufficiently large to cover these
investment needs.
Impact investing has its roots in the search of foundations to better
invest and utilize its capital. While capital was previously allocated to a
wide range of projects it was targeted toward projects with potential for
social impact. This approach is also interesting to other capital owners.
Impact investing also needs to be differentiated from other approaches.
In this chapter, we differentiate between social finance, socially respon-
sibly investment, and impact investments which are often complementary.
1 INTRODUCTION 7
Impact investing is the art of investing with an intended social impact

while also achieving a positive financial return.
Grant giving can be a complementary strategy to impact investing.
Grants can be provided to organizations in the start-up stage or in the
form of hybrid financing structure. Socially responsible investing (SRI)
is focused on public investing and the selection of publicly traded stocks
and bonds which are in line with the values of the investor.
Impact investing also needs to be differentiated from corporate social
responsibility (CSR). Corporate social responsibility are corporate strate-
gies to reduce the negative externalities created by a company or even
create positive externalities. Those differences are shown in Table 1.2.
There are also the global development goals of the United Nations.
They cover, for example, poverty, hunger, food security and nutrition,
education, gender equality, access to water and energy, or the conversa-
tion of natural ecosystems (United Nations 2015). They show that almost
all the 17 development goals can be supported with the use of impact
investments.
Table 1.2 Forms of creation of social impact
Socially responsible Impact Corporate social Grant giving

investing (SRI) investing responsibility (CSR)
Description Public investing Private Corporate strategies Foundational

investing strategies
Form Selection of Funding of Cooperation with Grants
publicly traded companies actors of the social provided to
stocks and bonds focused on sector, supporting non-profit
creating social social initiatives organizations
impact
Social Indirect form of Direct form Direct and indirect Direct form
impact social impact through the of funding
through funding of
allocation of selected
capital companies
Source Own illustration

1.3 Outline of the Book

The first chapter gave an impression of the context and drivers of impact
investing. The book has five different chapters.
The second chapter looks at the underlying basics. There are different
forms to address societal challenges. Social entrepreneurship is one of the
most promising form as it combines social and entrepreneurial thinking.
This chapter defines social entrepreneurship and discusses the definitions
found in the literature. It also differentiates social entrepreneurship from
other forms of providing social services and analyzes different scaling
strategies. Those social enterprises can use different social business model
innovations and six different strategies are discussed to provide insights
into the operations of social enterprises.
Social problems are the underlying fields where social enterprises are
active. There are different approaches to discuss social problems which
are presented. The sustainable development goals (SDGs) are presented
as a best practice approach when it comes to classifying social problems.
Child labor will be used as a case study for a concrete social problem
with 168 million children working globally. It will discuss the drivers, the
fields, and possible solutions.
The third chapter covers impact investing. It will introduce the topic
and discuss the rationales of investors to allocate part of their resources to
impact investing. Those rationales are different for the different groups
of investors who are contributing to the capital in the impact investing
market.
There are different theoretical approaches to understand investment
decisions. One key consideration is the interplay between financial and
social return requirements. Financial performances are easily quantifiable
in the form of EBIT, EBITDA, net profits, or revenues. Social goals are
another topic and social impact assessment will be covered in the sixth
chapter. Both goals are interdependent and trade-offs can occur when
capital providers with different return expectations are involved in the
financing of a social enterprise. Some aspects of the social sector are also
applicable in this field. Public sector funding usually comes with restric-
tions and has an impact on the financing structure of the organization.
Similar restrictions can be observed for the different income streams.
Crowding-out occurs when donors and public authorities support an
organization.
1 INTRODUCTION 9
The fourth chapter covers the market for impact investing. Interest-
ingly, the market is made up of various actors. The actors are networks,
social investment advisors, social venture capital funds, ethical banks,
and crowdfunding platforms. Each actor will be described and his role
analyzed.
This chapter also analyzes the mechanisms available for impact
investors. Socially responsible investments are a popular approach for
investors in the public equity or bond market. Pay for success models
are increasingly rolled out and social impact bonds are the one form that
is used extensively. This chapter will also cover guarantee schemes and
public subsidies as they are important components in this sector.
The fifth chapter takes a look at the financing instruments and trans-
actions in the space for impact investments. This chapter will discuss the
various financing instruments available to fund social sector organizations.
Equity capital and debt capital are well-known examples. However, in this
field there are also transactions based on mezzanine capital, recoverable
grants, forgivable loans, convertible grants, revenue share agreements, or
grants.
There also questions about which social enterprises are being financed.
This chapter also takes a closer look at a sample of 342 transactions and
shows the transaction sizes and the use of financing instruments. Inter-
estingly, the characteristics of the investee also have an influence on the
financing structures.
This chapter closes with an analysis of exits and the technical aspects of
the fund industry. Investors need to have an exit option for their invest-
ments to recover their investment. It will take a look at exits in the ethical
products space and also at acquisitions of social enterprises globally. Exit
considerations are driven by the structures of the funds and the return
requirements of those who provide capital for investing.
The sixth chapter covers social impact assessment. Social impact assess-
ment is an inherent part of impact investing, the intentional social change
an investment is seeking being a prerequisite for every transaction. The
chapter thus introduces the concept of social impact by illustrating the
most important terms. Furthermore, the purposes as well as advantages
when aiming for determining social impact are being discussed.
The seventh chapter explains the process of developing an impact
policy and impact guidelines which are necessary to follow a consis-
tent strategy. Assessment tools and methodologies offer a much-needed
framework for choosing an adequate evaluation method. Furthermore,
a summary of the most widely used social impact assessment methods is

given as well as an introduction to data collection methods and indicators.
The chapter concludes with an outlook on emerging approaches in terms
of efficient data collection and the use of mobile technology in impact
assessment.
Bibliography
Alter, Sutia K. 2006. Social Enterprise Models and Their Mission and Money
Relationships. Social Entrepreneurship: New Models of Sustainable Social
Change 28: 205–232.
Austin, James, Howard Stevenson, and Jane Wei-Skillern. 2006. Social and
Commercial Entrepreneurship: Same, Different, or Both? Entrepreneurship
Theory and Practice 30 (1): 1–22.
Cohen, Ronald. 2011. Harnessing Social Entrepreneurship and Investment to
Bridge the Social Divide. EU Conference on the Social Economy, November
18.
Collier, Paul. 2014. Exodus: Immigration and Multiculturalism in the 21st
Century. London: Penguin.
Dees, J. Gregory. 1998. The Meaning of ‘Social Entrepreneurship.’ http://www.
redalmarza.cl/ing/pdf/TheMeaningofsocialEntrepreneurship.pdf.
Defourny, Jacques, and Marthe Nyssens. 2008. Social Enterprise in Europe:
Recent Trends and Developments. Social Enterprise Journal 4 (3): 202–228.
Edwards, Michael. 2008. Just Another Emperor? The Myths and Realities of
Philanthrocapitalism, 1. Aufl. London (UK): Demos.
Ellen McArthur Foundation. 2013. Towards the Circular Economy. Cowes: Ellen
MacArthur Foundation.
Friedman, Milton. 1970. The Social Responsibility of Business Is to Increase Its
Profits. New York Times Magazine, September.
Grichnik, Dietmar. 2006. Die Opportunity Map Der Internationalen
Entrepreneurshipforschung: Zum Kern Des Interdisziplinären Forschungspro-
gramms. Zeitschrift Für Betriebswirtschaft 76 (12): 1303–1333.
Hart, Oliver, and Luigi Zingales. 2017. Companies Should Maximize Share-
holder Welfare Not Market Value. ECGI-Finance Working Paper, No. 521.
International Finance Corporation. 2022. Impact Investing at IFC. https://
www.ifc.org/wps/wcm/connect/Topics_Ext_Content/IFC_External_Cor
porate_Site/Development+Impact/Principles/Impact-investing.
Martin, Roger L., and Sally Osberg. 2007. Social Entrepreneurship: The Case
for Definition. Stanford Social Innovation Review 5 (2): 28–39.
1 INTRODUCTION 11
O’Donohue, N., C. Leijonhufvud, Y. Saltuk, A. Bugg-Levine, and M. Bran-

denburg. 2010. Impact Investments: An Emerging Asset Class. New York: JP
Morgan.
Pache, Anne-Claire, and Filipe Santos. 2013. Inside the Hybrid Organization:
Selective Coupling as a Response to Competing Institutional Logics. Academy
of Management Journal 56 (4): 972–1001.
Spiess-Knafl, Wolfgang. 2022. Artificial Intelligence and Blockchain for Social
Impact: Social Business Models and Impact Finance. New York, NY: Taylor &
Francis Ltd.
United Nations. 2015. Sustainable Development Goals. http://www.un.org/sus
tainabledevelopment/sustainable-development-goals/.
Weisbrod, Burton A. 2000. To Profit or Not to Profit: The Commercial Transfor-
mation of the Nonprofit Sector. Cambridge: Cambridge University Press.
———. 2004. The Pitfalls of Profits. http://papers.ssrn.com/sol3/papers.cfm?
abstract_id=1850719.
CHAPTER 2
Social Entrepreneurship
Impact investing is the process of funding social innovations. This process

needs investees to absorb the capital. These investees are often social
enterprises or social businesses. These terms are often used interchange-
ably but social enterprises are usually younger companies led by a social
entrepreneur whereas a social business is more established and led by
managers.
The concept of social entrepreneurship has been used in scientific
research since the late 1980s. At that time, a retreat of the state from
financing social services was observed and brought non-profit organiza-
tions under pressure to consider new revenue opportunities and business
models. This also explains the development of social entrepreneurship
through the pursuit of non-profit organizations for additional sources of
income. In Western Europe, the time was also marked by high unemploy-
ment. For this reason, work integration initiatives were the starting point
for social enterprises in Europe (Hoogendoorn et al. 2010).

Switzerland AG 2023
https://doi.org/10.1007/978-3-031-32183-2_2
2.1 Social Entrepreneurship at the Core

2.1.1 Introduction
Social entrepreneurship is an old phenomenon. In a European context,
reference is often made to Friedrich Wilhelm Raiffeisen as an early
social entrepreneur. Raiffeisen created favorable financing options for
farmers and is considered to be the founder of the cooperative move-
ment. He is also regarded as an inspirational model for the development
of modern microfinancing institutions. Another prominent example is
Florence Nightingale who was a driving force behind the changes in how
to care for patients.
There are many factors which contributed to the growth of social
entrepreneurship. Some authors point to globalization, individual wealth
accumulation, or more transparency when it comes to the under-
standing of social problems (e.g., Beckmann 2011). The concept of social
entrepreneurship was characterized in particular by Bill Drayton, the
founder of the fellowship organization Ashoka (Drayton and MacDonald
1993).
There have been long debates on the definitions of social entrepreneur-
ship (Danko et al. 2011). What they all have in common is the recognition
that social enterprises pursue the goal of solving or alleviating social
problems, using entrepreneurial means.
However, both conceptual components “social” and “entrepreneurial”
which describe the core elements of this specific company form are
complex to define. Social is often used in a self-referential manner and
entrepreneurial is a process which is complicated to operationalize.
There are basically two different schools of thought for social
entrepreneurship (Dees and Anderson 2006). One school of thought is
termed the Social Innovation School and the other one the Social Enter-
prise School. As the name suggests, the first school of thought focuses
on the social innovation while the second school of thought is building
its thinking on the income generation of the social enterprise. In prac-
tice, every income generation model needs some form of innovation while
innovation is hardly sustainable without any form of income generation.
The Social Enterprise School was conceived in the 1980s. It was driven
by the fact that nonprofit organizations had to identify additional sources
of income supplementing donations and declining public funds. Non-
profit organizations were especially looking for revenue from businesses
that were not directly related to the primary social objective. Examples
2 SOCIAL ENTREPRENEURSHIP 15
such as fitness centers operated by hospitals, the renting of museum space

for company events, or the sale of advertising products in independent
trade journals were discussed in the literature.1
Within the social innovation school, it is often stressed that social
enterprises are the experimental laboratory of society and they develop
important innovations for the benefit of society. A task that is regularly
attributed to social enterprises is the identification of social problems and
the development of viable solutions. In this school of thought social enter-
prises focus more on the strengths of the target group in an empowerment
approach.
These two schools of thought, however, have their limitations and the
boundaries between these two schools of thought are blurring. At this
intersection new challenges arise due to requirements, expectations, and
different logics of action (Battilana et al. 2012).
2.1.2 Defining Social Entrepreneurship

Conceptual Challenges
It is obvious that the definition of social entrepreneurship is difficult.
Social enterprises cover a wide range of topics. Some try to protect
rainforests, some tackle homelessness while still others try to reduce
inequality. Additionally, social enterprises are not restricted by legal forms,
as opposed to non-profit organizations. This makes the definition and
understanding of the work of social enterprises more difficult. However,
there are a couple of definitions which are increasingly being accepted.
The aspects of social innovation and the establishment of a business
model with income generation characterize the scientific debate. In the
scientific discussion, there is also a consensus to accept social enterprises
which rely mainly on donations as they have no access to government
funds or serve a target group without sufficient financial resources. These
include social enterprises that raise awareness of a social problem in the
public sphere and cannot resort to any income model.
Social innovation is a recurring theme in this area. Social innovations
can be clustered in several categories. Rüede and Lurtz (2012) identify
1 Defourny and Nyssens (2010) about the “Earned Income School of Thought”
because it uses the term “social enterprise” exclusively for social enterprises with income
generation.
seven categories. They are focused on (1) human well-being in soci-

eties, (2) social practices, (3) human-centered community development,
(4) work organization, (5) non-technological aspects of innovation, (6)
social work provision, and (7) innovations in a digital world setting.
Social enterprises are usually working on a combination of those trying
to achieve very different aims. They combine digital business models with
the general human well-being.
In the following some definitions will be discussed. G. J. Dees (1998)
defines social entrepreneurs in an idealized definition as change agents
by creating social value, always exploiting new business opportunities,
engaging in a continuous process of innovation while acting boldly
without being restricted by the currently existing resources. Additionally,
they exhibit a high degree of accountability toward their stakeholders.
Accountability is a criticism often heard in the non-profit sector. Non-
profit organizations receive funding from public authorities and donors
but often lack the necessary transparency (e.g., Greenlee et al. 2007).
Most definitions, however, impose more stringent conditions on social
enterprises, since not only the goal, but also the path of goal-fulfillment
should be social. This includes fair pay, efficient management struc-
tures, and transparent governance structures. Often it can be difficult to
reconcile with the breaking up of social structures.2
An interesting aspect of a definition is formulated by Leadbeater
(1997). Social entrepreneurs are understood as people who use under-
utilized resources such as buildings, equipment, or human resources to
solve social problems. Austin et al. (2006) define social entrepreneurship
as an innovative activity that creates social value and can take place in the
non-profit sector, for-profit sector, or the public sector. With this rela-
tively broad definition they reflect the fact that not the private benefit but
the social value added is a crucial element of the definition.
Another definition is provided by Zahra et al. (2009). They argue
that social entrepreneurship includes the entrepreneurial process from the
discovery to the exploitation of an opportunity to create social wealth.
New companies can either be created or the processes of existing organi-
zations can be changed. Total wealth is the sum of economic and social
wealth.
2 Interestingly, prominent social leaders often have to face criminal charges as they
challenge the status quo.
Rather unsurprisingly, those definitions are often hard to operationalize

and one of the more practical definitions was developed by the European
Commission within their funding programs for social enterprises (Official
Journal of the European Union 2013). It states that social enterprises have
a primary objective of achieving measurable and positive social impact by
providing goods or services which generate a social return or employing
a method of production which meets the social objective. Additionally,
the definition states that the profits are used primarily for the social goal
and the organization is managed in an entrepreneurial, accountable, and
transparent way.
Legal Forms of Social Enterprises

Every legal form is suitable to create social impact. Social enterprises can
choose non-profit and for-profit legal forms or combinations thereof.
Globally, there are a few legal structures which incorporate the dual
mission of social enterprises. Social enterprises follow a social mission but
need to consider financial returns as well.
Those legal forms aim at helping to safeguard the company’s mission in
the long term and give certainty to the company’s directors when it comes
to the integration of non-financial criteria in decision-making processes.
Community interest companies (CIC) are popular in the United
Kingdom. They are designed for enterprises which have a social goal as
primary objective and reinvest the surpluses they generate in the busi-
ness or the community. Many countries have introduced legal structures
or labels for social enterprises (Borzaga et al. 2020). Examples include
benefit corporations in the United States, Verified Social Enterprise in
Austria, or the Société Coopérative d’Intérêt Collectif in France, among
others.
In practice, social enterprises often use a system where a non-profit
entity owns the for-profit entity or where a non-profit entity and the for-
profit entity follow similar goals. In recent years there was a trend toward
associations and cooperatives as they are suitable legal forms.
2.1.3 Differentiation from Other Actors

Social services and goods are provided by different actors which all have
a different role. Santos (2012) proposed a classification according to the
distinct role in the economic system, the dominant institutional goal, and
the dominant logic of action.
The actors are governments, businesses, charities, commercial enter-

prises, social activists, and social enterprises and they follow different
goals.
One important aspect of the economic system is negative externalities.
Negative externalities arise when others must cope with the results of
a specific action. In most cases, negative externalities are dealt with by
the government. They can regulate, mandate, or tax. Examples where
the government is taking a role include pollution, drug use, or waste
recycling.
Social activists also play a leading role in reducing negative external-
ities. The shaming strategy of social activists often works well and is
often exemplified by Greenpeace or Attac. Companies targeted by social
activists include Nestle, Wal-Mart, Timberland, or Neumann. It is often
focused on labor-related issues in the supply chain such as sweat shops in
South-East Asia in the fashion industry.3
There is also the question of who creates positive externalities. In
a positive theory of social entrepreneurship (Santos 2012) sees social
enterprises as those actors who are working on the creation of positive
externalities.
The difference between social and commercial entrepreneurship lies
in the role of value appropriation and value creation. While commercial
enterprises focus on the creation of financial returns, social enterprises
focus more on the creation of social return. Both see opportunities
and build business models around it. Charities are more redistributing
organizations with their focus on grant-based strategies.
Table 2.1 shows the distinct role, the dominant institutional goal, and
the dominant logic of action.
Some actors can take a double role. Social entrepreneurship can be
combined with social activism and can also often be observed in the field.
Corporate Social Responsibility (CSR) is another form of creating
social impact.4 The reduction of negative externalities is often seen as
the purpose of corporate social responsibility initiatives. Corporate social
responsibility departments are trying to reduce damaging effects for
3 Interestingly, family firms were also found to pollute less than their peers (Berrone
et al. 2010).
4 There are different streams. Collective Impact was first discussed by Kania and Mark
R. Kramer (2011) and Shared Value by Porter and Kramer (2011).
Table 2.1 Institutional actors
Actors Distinct role in economic Dominant Dominant logic

system institutional goal of action
Governments Centralized mechanism Defend Public Regulation

through which the interest
infrastructure of the
economic system is created
and enforced
Business Distributed mechanism Create Control
through which society’s sustainable
resources and skills are advantage
allocated to the most valued
activities
Charity Distributed mechanism Support Goodwill
through which economic disadvantaged
outcomes are made more populations
equitable despite uneven
resource endowments
Commercial Distributed mechanism Appropriate value Innovation
entrepreneurship through which neglected for stakeholders
opportunities for profits are
explored
Social activism Distributed mechanism Change social Political action
through which behaviors system
that bring negative
externalities are selected out
Social Distributed mechanism Deliver Empowerment
entrepreneurship through which neglected sustainable
positive externalities are solution
internalized in the economic
system
Source Santos (2012)
instance by improving working conditions and environmental protection

systems to reduce itself.
There are three principles of corporate social responsibility formu-
lated by Wood (1991). The principle of legitimacy states that society
grants legitimacy and power to business. Those companies who do not
use this principle responsibly will lose it. There is also the principle
of public responsibility which states that companies are responsible for
the results of their activities. The third principle focuses on manage-
rial discretions. Managers are more actors and they have flexibility to
exercise discretionary measures to take decisions in the service of their

responsibility.
The ownership structure is yet another distinguishing criterion. The
ownership structure can also have an influence on the decisions taken by
the company. Family companies pollute less than comparable companies
which is probably driven by the desires of the owning family (Berrone
et al. 2010). Non-profit organizations have no owners and the organiza-
tions are usually controlled by the management or a board of directors. In
the case of for-profit companies, the owners are much more aware of their
control and voting rights. Social enterprises often have an ownership and
governance structure and are increasingly viewed as being accountable to
their stakeholders (Achleitner et al. 2012).
Another difference between for-profit companies and non-profit orga-
nizations lies in a different type of competition. For-profit companies
often compete on price or product characteristics. Non-profit organiza-
tions often compete on criteria such as reputation, quality of service, or
the ability to meet the needs of the target group. For non-profit organiza-
tions, it is often about the quality of the service or the access to traditional
media and social media in order to propagate their own mission accord-
ingly (Tuckman 1998). Some authors also focus on market failure to
explain the role of non-profit organizations (Steinberg 2003).
Another difference lies in the form of the services provided. Basic social
services are usually regulated by public authorities in developed coun-
tries. This regulation includes the amount of remuneration as well as
quality levels. Examples include hospitals, nursing homes, or emergency
services.5 Additionally, non-profit organizations carry out tasks for allevi-
ating social problems which can be explained by their religious or social
roots. Another area of activity could be the change of social conventions
or codified rules perceive is another activity that social enterprises and
social activists. In this context, the extended rights of homosexuals or the
change of ideas about life of blind persons can be mentioned.
5 Over time the conditions for profit-oriented companies may become attractive.
2.1.4 Scaling Strategies

Most services of social enterprises are based on the provision of services.
The development of technology-intensive products is not yet widespread
among social enterprises. Scaling strategies are therefore difficult to
implement.
Moreover, brands are usually not well-known and products are rarely
patentable. The number of large non-profit organizations can be taken
as an evidence. Although more than 200,000 non-profit organizations
have been established in the United States since 1970, only 144 of these
non-profit organizations have achieved more than $50 million in annual
revenue (Foster and Fine 2007).
The focus on low-technology and personnel-intensive services also
explains the difficulty of realizing productivity gains. Productivity gains
are generated by additional capital or additional equipment per employee,
improved technologies, improved employee skills, better management,
and scale effects. In areas such as the elderly or youth work, where
human contact is a big part of the service, productivity gains are diffi-
cult to accomplish (e.g., Heilbrun 2003). Nevertheless, there are areas in
which non-profit organizations need a larger organizational size. Inter-
national disaster relief organizations need a correspondingly dimensioned
infrastructure to be able to react promptly in case of need.
In general, social enterprises are not as focused on scaling as traditional
enterprises. Some social enterprises focus more on the scaling of their
impact than on the scaling of the organization itself (Heinecke and Mayer
2012).
Surprisingly, only a few bankruptcies are known to the authors. This is
probably driven by low external financing volumes and the associated low
risk of over-indebtedness. In addition, it should be possible to continue
the social mission on a reduced scale with volunteers.
The growth strategies differ according to the degree of control over
the business model and the speed of the scaling. Table 2.2 shows different
growth strategies based on the speed of scaling and the degree of control
of the business model. The four different categories are (1) Networkers,
(2) Blueprinters, (3) Localizers, and (4) Scalers.
Networkers can either use closed or open structures. Closed structures
are social franchise strategies. Social franchise models are comparable to
those models developed by fast food chains and give partners a consistent
set of criteria to reach (Tracey and Jarvis 2007). Open structures are open
Table 2.2 Growth strategies
Speed of scaling
Low High
Control of the business model Low Networker Blueprinters

High Localizers Scalers
Source Spiess-Knafl and Jansen (2014)
access models where the idea is provided without any costs and partners
can decide on how to adapt the idea. There are many concepts which
cannot be protected such as new ways to work with disabled persons or.
Those models are cost-effective as it involves other organizations to
reach more people. Depending on the structure of the network they have
differing degrees of control over the business model. The open access
limits the available cash flows while social franchise models with regular
payments are attractive for investors.
Developers show the effectiveness of a concept at a location and pass
on their best practice example to interested imitators. These development
solutions can also be called “blueprint”. They can only control their busi-
ness model to a small extent, but they enable a higher spreading speed.
Through the open source approach, developers will be more dependent
on philanthropic contributions such as donations or contributions to
foundations.
Localizers use a different approach than developers. They bring
existing concepts into their local environment and make use of existing
contacts and infrastructure for the dissemination of social services. They
thus remain in control of the business model, but can only implement it
locally. As a result, all possibilities for financing as well as possible internal
cross-financing are available to localizers.
Social enterprises are often selling their products and services in soli-
darity markets. They are effectively intermediaries who mobilize and
distribute resources under solidarity. These solidarity markets work best
in a local environment and may be difficult to scale.
Scalers have developed a business model that enables them to scale
their business model with high speed and a high degree of control over
the business model. Digital components, which significantly reduce the
marginal costs of the service provision, are particularly supportive. In
general, digital social business models are characterized by the fact that
the respective platform can be used for any number of activities. Due to
the high degree of control over the business model, this growth strategy
is also attractive for investors with a yield claim.
2.2 Social Business Model Innovation

The business model can be labeled as the operating system of a social
enterprise. Business models are a system of activities and relationships
to offer products and services (Chesbrough and Rosenbloom 2002).
It describes the way firms do business and involves revenue and cost
structures, value propositions, customer segments, and target markets
(Spiess-Knafl et al. 2015).
Those business models have been under increasing pressure to innovate
themselves. Digitalization, automatization, new technological advances,
and political pressures have led to the need to think about business
model innovation. It can thus be seen as a reaction to changes in
the company’s environment (Demil and Lecocq 2010). Examples are
widespread. Consumers are more aware of failures in the supply chain,
disintermediation disrupts many industries and digitalization creates new
markets.
Digital business models are increasingly being found among social
enterprises. They have some attractive components and can be used to
organize resources more efficiently.6
Digital goods are nonrival, infinitely expansible, discrete, aspatial, and
recombinant (Quah 2002). Ushahidi is one example how digital tech-
nology can be used for the common good. The company is offering
crowd-based election monitoring, crisis response after crisis collecting
reports through SMS, email, web app, and Twitter. The company also
reports on critical human rights situations.
Berlin-based Abgeordnetenwatch is a platform which tracks and moni-
tors representatives in parliaments. Finance is another area where the
customers can benefit from the digitalization. London-based Fair Finance
is one example. They publish data and maps on all loans made and are
especially an alternative to payday or cash lenders.
6 There are many applications where digital business models can contribute to the
solution. The allocation of food, volunteering time, or donations are examples.
Table 2.3 Categories of social business model innovation
Type of innovation Description
Opportunity creation Creation of new entrepreneurial opportunities for the target

group
Smart distribution Development of distribution channels to reach customers
Ecosystem engineering Combination of initiatives to change an existing ecosystem or
create a new ecosystem
Cheap sourcing Identification of underutilized resources to support the
provision of the service
Smart pricing Use of pricing innovations to facilitate the consumption of
the services
Inclusive production Inclusion of disabled persons or persons with special skills in
the production process
Source Spiess-Knafl et al. (2015)
Six different types of social business model innovation can be classified

(Spiess-Knafl et al. 2015). An overview of these categories is provided in
Table 2.3.
2.2.1 Opportunity Creation

The first category focuses on the opportunity creation through business
models which enable the target group to become entrepreneurial them-
selves. Some social enterprises are creating additional sales channels for
African artisanal designers and thereby giving them additional income
opportunities. Other examples are water or sanitary business models
in developing countries which provide different micro-entrepreneurial
opportunities including maintenance, repair, and distribution. Various
crowd-based platforms are also giving micro-tasks to individuals.
2.2.2 Smart Distribution

One of the problems social enterprises are often facing is that the target
group is often hard to reach and thus increasing transaction costs. Exam-
ples are farmers in rural Africa, homeless in North America, or microcredit
borrowers in Bangladesh. Especially, in developing countries the infras-
tructure is often lacking (Mair et al. 2012). Social enterprises in this
category have created a business model which succeeded in overcoming
the costs of distributing the products and goods. One well-known and
interesting example for an intersectoral partnership is colafife which uses

the infrastructure of a beverage company to transport pharmaceutical
products.
2.2.3 Ecosystem Engineering

Ski resorts or sports leagues are interesting examples for ecosystems
as all participants benefit from the success of others. There are many
other ecosystems which profit from common initiatives and social enter-
prises are valuable organizations to orchestrate the development of these
ecosystems.
Examples are rainforest initiatives which bring together hotels, tour
operators, and biodiversity conservation projects. In general, agricultural
projects often need the interplay of various organizations to be successful
and orchestrating organizations which are trustworthy to the partners.
Problems can occur in the distribution of profits and how strategic
decisions are taken.
2.2.4 Cheap Sourcing

The customers are often not able to pay the full price for the services
and goods provided. One way to reduce the costs of the business is to
develop cost-effective sourcing strategies. Social enterprises are often able
to access in-kind contributions, donations, or other philanthropic capital
which might help to reduce the costs. Leadbeater (1997) sees it even as
one strength of social entrepreneurs in the ability to identify underutilized
resources. Volunteering is another form to help in the provision of social
services and can be substantial (Linardi and McConnell 2011; Preston
2007). These business models are summarized as cheap sourcing.
Examples are social enterprises which target highly qualified volunteers
to do work on data-related issues or use waste materials to produce bags
or jewelry.
2.2.5 Smart Pricing

Another way to reduce the costs for the target group is the use of smart-
pricing strategies. Social sector organizations often have the challenge to
find allocation models to distribute their services. Some are price-based
mechanisms while others are based on waiting lists or selection criteria.
The basis for the trust in the internal decision-making processes of social
enterprises as they are more trusted to work for the common good.
Social enterprises can use different models such as the pay-per-use
model which benefits those who use it only in a limited way or the pay-
what-you-want model which relies on the honesty of the customers. It
can often be observed in cultural events.
Social control also contributes to the functioning of those models.
Social enterprises also use cross-subsidization models in which one group
pays higher prices to support the consumption of another group.
2.2.6 Inclusive Production

The last category is inclusive production. Social enterprises often employ
a form of production which is social through the inclusion of disadvan-
taged people (Arora and Ali Kazmi 2012). Some organizations employ
disabled or long-term unemployed persons and build a production and
marketing strategy around it. Those business models often command
premium prices.
Specialisterne coordinates the work of people with autism to work in
IT companies. Blind people are often employed in specific jobs. Those
concepts also need special working conditions as the target group has
specific needs.
2.3 Thematic Areas for Impact Investing

2.3.1 Introduction
The overall objective of impact investing is to solve social problems. Social
problems are complex and some are solved by good policies, some are
solved through volunteering work, and some are solved by grants from
traditions and donors.
Some of the key problems to work against include youth employment
and long-term unemployment, poverty and social exclusion, inequality
between women and men, inadequate and decent social protection, and
discrimination based on sex, racial or ethnic origin, religion or belief,
disability, age, or sexual orientation.
There are also other ways to think about social problems. The first
perspective is from a development point of view as social problems
develop over time. A small group of people start noticing social prob-
lems and then academics or niche media publications will start to cover
it. Afterwards, it reaches mass media and political actors will get involved
(e.g., Hilgartner and Bosk 1988; Schetsche 1996).
This chronological approach helps to understand the process behind
certain social problems. In the case of the deforestation of the rain forest,
HIV, or child labor the awareness was often created by activists. Green-
peace is an important example which illustrates the importance of raising
awareness at the beginning. After the public is aware of the problem,
other actors can become active and build business models around the
solution of the social problem. It can become mainstream.
Another view is from a social sector perspective which helps to gather
sector-specific knowledge. The International Classification of Nonprofit
Organization is a valuable starting point. Another perspective is from a
social problem perspective. Table 2.4 shows the two potential perspec-
tives.
2.3.2 Sustainable Development Goals

Building upon the experience and lessons learned from the previous
eight Millennium Development Goals (MDG) which expired at the
end of 2015, the United Nations have set up 17 so-called Sustainable
Development Goals (SDG). The SDGs constitute a global action plan
consisting of goals, targets as well as indicators, focused on eliminating
extreme poverty and hunger, fighting inequality, tackling climate change,
and achieving sustainable development for everyone (Sachs 2012). The
plan promotes a people-centered development agenda understanding that
human prosperity, both social and economic, need to go hand-in-hand
with protecting the planet. The SDGs constitute a complementary norma-
tive framework to the tools of international law, such as global treaties or
conventions (Sustainable Development Solutions Network 2015).
There are four underlying key principles of the SDGs that can be
viewed as transformational in the way they perceive society could work
on future development: The first principle is that these goals are universal,
meaning they apply to all countries regardless of location, cultural back-
ground, or economic prosperity. The second principle is the integration
of all aspects of sustainability, social, environmental as well as economic
taking into account also their interlinkages. The third key pillar is inclu-
sion, meaning that these goals should leave no one behind due to race,
Table 2.4 Categories of non-profit organizations
International classification of nonprofit Social problems

organization
Culture and recreation Permanent or temporary physical

disability
Education and research Permanent or temporary psychological
disability
Health Poor housing situation/homelessness
Social services Severe threat to life/emergency aid
Environment Missing or insufficient mobility
Development and housing Language and linguistic skills
Law, advocacy and politics Insufficient educational opportunities
Philanthropic intermediaries and voluntarism Insufficient opportunities for
promotion self-realization and realization of life
plans
International Insufficient access to information and
participation opportunities
Religion Insufficient structural access to art,
natural experiences, positive interpersonal
relationships
Business and professional associations, Insufficient financial strength
unions
Other Insufficient ecological consciousness
Isolation and insufficient sense of
belonging
Insufficient integration with the work
environment
Insufficient knowledge of civil rights
Source Salamon and Anheier (1996) and Scheuerle et al. (2015)
gender, physical ability, socio-economic status, religion, or location. The

final principle relies on the participation of all, both on a national and
global scale, and in the public, private, and third sectors (Sachs 2012;
Sustainable Development Solutions Network 2015).
This comprehensive collection of goals and their set-up is ambitious
and at the same time comparatively well implementable. However, it also
has some drawbacks. For example, the goals cannot, and should not be
considered separately. Rather, the 17 SDGs are highly interconnected,
there are synergies as well as trade-offs between different goals. Synergies
are understood as the positive statistical relationship (correlation) between
individual SDGs. Here, progress in one target promotes the achievement
of other targets. Trade-offs are negative statistical correlations. In this
case, progress in one target hinders the achievement of another target.

There is still a lack of valid data regarding the relationship between some
of the SDGs, but first statistical analyses on synergies and trade-offs within
each SDG suggest that the number of synergies outweighs the trade-offs.
However, it was also found that there are also significant negative
correlations between different SDGs. Synergies can be identified, for
example, for SDGs 1 (end poverty) and 3 (Ensure healthy lives and
promote well-being). Achievement of targets in the area of these SDGs
has a positive impact on almost all other SDGs. In contrast to these posi-
tive relationships, SDGs 8 (Promote inclusive and sustainable economic
growth, employment, and decent work for all) and 9 (Build resilient
infrastructure, promote sustainable industrialization, and foster innova-
tion) are characterized by their high number of negative correlations. The
achievement of these targets, as executed to date, has resulted in negative
impacts on the achievement of other targets (Kroll et al. 2019).
In addition, a certain hierarchy is inherent within the SDGs (Stock-
holm Resilience Centre 2017): Environmental SDGs and the biosphere
represent the foundation for global sustainability and are considered foun-
dational to all other goals (SDGs 6, 13, 14, 15) followed by the societal
goals (SDGs 1, 2, 3, 4, 5, 11, 16) and lastly, the economic goals (SDGs
8, 9, 10, 12) all of jointly contributing to SDG 17 (“Revitalize the global
partnership for sustainable development”).
The SDGs are about to become a widely used framework for thinking
about and categorizing social and environmental issues and can serve
as a starting point for impact investing considerations (Global Impact
Investing Network [GIIN] 2016).
Goal 1: End poverty in all its forms everywhere

Although the global poverty rate has been halved since 2000, the
numbers are still alarming: an estimated 767 million people still lived
below the international poverty line of $1.90 a day in 2013 and 18,000
children still die each day from poverty-related causes (United Nations
2017c). Poverty influences human decisions in a number of ways and
often leads to seemingly irrational decisions (e.g., Banerjee and Duflo
2012).
Poverty is a multi-faceted topic. Official statistics usually rely on
income-oriented measures which are often declared to be incomplete or
arbitrary, not taking into account relative poverty (e.g., Hagenaars and De
Vos 1988). There are other more individual-based approaches, e.g., calcu-
lated on consumption, daily calories, or housing. The so-called capability
approach, developed in the 1980s by Amartya Sen understands poverty as
a deprivation of individuals’ capabilities in achieving the kind of lives they
have reason to value (Nussbaum and Sen 1993; Sen 2005). However,
income-oriented measures remain the most reliable and easiest to measure
criteria.
There are several solutions which impact investments could help to
achieve. On the product side, for example, in the area of microfinance:
Besides the more widely known microcredit products, micro-savings are
an important topic: Karlan et al. (2014) see the following five factors
which hinder the usage of savings products: (1) transaction costs, (2)
lack of trust and regulatory barriers, (3) information and knowledge
gaps, (4) social constraints as well as (5) behavioral biases. Those are all
barriers which could be addressed by impact investments. Unsurprisingly,
microfinance is a large area and there are many institutions which are
ready to manage investments. Micro-insurance is another closely related
field which could have similar effects on the clients. Besides health and
life insurance, there are increasingly products for low-income farmers
protecting them against loss of or damage to crops or livestock. Other
investment possibilities are represented by projects that aim to change
behavior patterns, e.g., better family planning or reducing expensive
customary practices associated with weddings and funerals.
The concept of addressing the market at the so-called bottom of
the pyramid (BOP, Prahalad, 2006, 2012) focuses on addressing the
poorest socio-economic group, i.e., the 2.7 billion people who live on
less than $2.50 a day, with products or services that enable them to escape
poverty. Not without critic, especially concerning the idea of perceiving
beneficiaries as consumers, the concept provides large opportunity for
impact investments created by BOP markets as a new source of radical
innovation.
Goal 2: End hunger, achieve food security and improved nutrition

and promote sustainable agriculture
According to figures from the United Nations (2017b), almost 800
million people worldwide are undernourished. Undernourishment leads
to stunted growth which affects one in four of the world’s children. Being
hungry also affects the capacity to pursue a job and earn a living. In order
to be able to feed all human beings, the agriculture sector is a key player.
As we will see in the following chapters, agriculture is one of the major
investment topics for impact investors (Spiess-Knafl and Aschari-Lincoln
2015). Agriculture offers many investment opportunities and also offers
the possibility to invest larger sizes in one transaction. The agriculture
sector also employs 40% of today’s global population and accounts for
30% of greenhouse gas emissions.
Impact investments in the agriculture sector address the following
issues (Lang et al. 2017):
– Sustainable production:
• Crops, livestock, fisheries
• animal welfare
• timber and wood products
– Sustainable consumption:
• nutrition and healthy foods
• food safety
• Genetically modified crops
• Food waste
– Agricultural technology:
• Smart irrigation
• Biowaste
• Software and big data
• Green chemistry
• Digital precision
– Conservation and climate change
• Climate change mitigation and adaptation
• Deforestation
• Land care and soil health
• Water use
• Biodiversity
– Social equity and sustainable livelihoods

• Fair trade
• Land grabs
• Workers’ rights and child labor
• Women farmers
• Food sovereignty.
Major investments aim to address the sector’s immense carbon foot-

print by focusing on an increase in efficiency of input factors such
as water, energy, fertilizers, or pesticides or by aiming at decreasing
wastage. Another field of significant social innovation is driven by the
fact that farmers in rural areas of developing countries often lack access
to data including information on crop yields, economic variables, or
environmental data such as weather forecasts (Burwood-Taylor 2016).
Goal 3: Ensure healthy lives and promote well-being for all at all ages
The world has seen tremendous advances in the health sector over the
last decades and medical advances have saved million lives. However,
according to figures from the United Nations (2017a), more than six
million children still die before their fifth birthday, maternal mortality
ratio is 14 times higher in developing than in developed regions and
HIV/AIDS, malaria, and other diseases remain widespread.
Given the costs of healthcare it is one of the more challenging social
problems to address. Vaccination, pharmaceutical products and research,
medical personnel, and medical equipment are cost-intensive. Thus, a
variety of social entrepreneurs have developed market-based solutions to
health problems in emerging economies (Bafford and Gelfand 2016).
Health-focused impact investments can be made in
– Health care: prevention and health care services, such as health

centers, training, or pharma.
– Health coverage: payment vehicles such as niche health insurance
companies.
– Health community: reducing the need for health care, for example,
with providers of physical activities, healthy delivery systems (Grant-
makers in Health 2011)
Goal 4: Ensure inclusive and quality education for all and promote
lifelong learning
Education is the basis for economic development. Although access to
education has increased dramatically over the past decade, globally, still 57
million children remain out of school and even when they go to school,
poor quality education leads to the fact that 103 million youth lack basic
literacy skills (United Nations 2015).
However, providing quality education is a good field for impact
investors. There is a willingness to pay for the education and the
customers are easily identifiable. Opportunities for impact investors have
proven to be successful when scaling successful models, tapping into
the potential of edtech, investing in student financing. In terms of
market-place building, the field can also be segmented in investment
opportunities addressing
– Infrastructure: mostly school buildings

– People: loan programs, vocational training, teacher training
– Technology: education software, back-office support for school
chains
– Ecosystem: strengthening the education sector, e.g., with rating
programs (D. Capital Partners 2013).
Goal 5: Achieve gender equality and empower all women and girls
Gender inequality remains an issue globally depriving women and girls
of their basic rights and opportunities: at least 20% of women have
experienced physical or sexual abuse in their life, child marriages still
persist as well as female genital mutilation. Gender equality also affects
differences in compensation, representation in national parliaments, and
enrollment in schools. However, women’s empowerment is a prerequisite
for building prosperous societies and it could be one of the transfor-

mative economic trends of our time (“Goal 5: Sustainable Development
Knowledge Platform,” n.d., 5).
Specific impact investments in this sector are still limited, the issue is
usually addressed as a side effect in other areas (e.g., education). However,
due to the huge potential social leverage, investors should consider the
following areas of opportunity (LaRue 2017):
– Microfinance institutions empowering women in developing coun-

tries,
– Female networking organizations,
– Women’s investing networks and organizations,
– Funds focused on women-led startups.
Goal 6: Ensure access to water and sanitation for all

There is enough fresh water available for every person. However, bad
economics or poor infrastructure negatively impact water accessibility.
Universal access to basic sanitation and ending the unsafe practice of open
defecation are prerequisites to ensure health and access to freshwater for
everyone. In addition, clean, plentiful water is essential for all other forms
of life, too.
Impact investments in this field either focus on the provision and distri-
bution of clean water (“doing good”) or on preventing harm to water
by addressing issues of pollution, land grab, or irresponsible extraction.
For financial-first impact investors, companies that provide the opera-
tions, equipment, chemicals, and services that make water available for
municipal, industrial, and agricultural markets worldwide could be inter-
esting, e.g., in the area of water waste and utilities, infrastructure, or
technology. Furthermore, a wide variety of organizational levels can be
found in the sector, ranging from the seed to the maturation stage, even
including publicly traded companies (Falci and Emerson, n.d.; Impax
Asset Management 2013).
Goal 7: Ensure access to affordable, reliable, sustainable and modern

energy for all
Access to affordable, reliable, sustainable, and modern energy is still not
available for one in five people globally. And although there is already
a range of alternative and sustainable energy forms available, almost 3
billion people still use wood, coal, charcoal, or animal fuel for cooking
and heating which has severe health consequences. In addition, fossil fuels
further global warming and thus climate change.
Energy is a good source for impact investments. They enable a busi-
ness model based on the consumption which can be monitored efficiently.
The business model can also take advantage of cost savings for the user.
Investments can be categorized as either taking place in the field of inno-
vation of energy technologies or the deployment of clean energy solutions
(Kearney et al. 2014).
Goal 8: Promote inclusive and sustainable economic growth, employment,

and decent work for all
This SDG addresses the issue of labor productivity, unemployment, espe-
cially for young people, and access to financial services and benefits for
all. For example, global unemployment amounted to 202 million as of
2012 while employment still does not guarantee an income above poverty
levels.
Impact investments are a good tool to address these issues as they
aim to provide job opportunities with decent working conditions. Social
enterprises in this field mostly either ensure employability or provide
training or employment (Petrick 2013).
Goal 9: Build resilient infrastructure, promote sustainable

industrialization and foster innovation
Globally, there is still a lack of functioning basic infrastructure such as
roads, information and communication technologies, electricity grids, or
sanitation. Basic sanitation and electricity have already been covered but
up to 1.5 billion people still lack reliable phone services. However, quality
infrastructure is necessary to achieve sustainable growth.
Impact investments can tackle these challenges by, e.g., fostering
the use and spread of information and communication technologies
(ICT), especially mobile phones which have proven to significantly impact
economic growth (Piatkowski 2006; Vu 2005).
Goal 10: Reduce inequality within and among countries

Inequality remains an issue within countries but also among countries.
According to figures from the United Nations (2015) income equality
increased by 11% between 1990 and 2010. While some inequality is
inevitable, inequality harms economic growth beyond certain thresholds.
The possibility to address these issues with impact investments are very
limited—they are rather a positive side effect when addressing other
challenges such as goals 4, 7, or 8.
Goal 11: Make cities inclusive, safe, resilient and sustainable

Half of the global population is living in urban areas. In cities, major
sustainability issues converge, such as urbanization, a rising middle
class, and population growth. Cities are a hub for innovation, culture,
and development. However, urbanization is putting pressure on water
supplies, infrastructure, and public health. Impact investments can help
to make cities more inclusive, safe, resilient, and sustainable, for example,
with investments in the area of building energy efficiency, energy recovery
from municipal waste, pollution issues (air, water, noise), transportation,
or infrastructure (Global Environment Facility, n.d.; D. Wood, n.d.).
Goal 12: Ensure sustainable consumption and production patterns

One-third of all food produced is going to waste. Water is in many
places around the world not managed sustainably. The world is also facing
declining soil fertility or overfished seas. The field can be categorized into
four sub-sectors where impact investments can add value (Deloitte 2013;
Pons et al. 2013): production, processing, distribution, and consumption,
drivers in the field are access to food, waste of food as well as the reduc-
tion of the carbon footprint of food production (see also SDG 2) (Table
2.5).
Goal 13: Take urgent action to combat climate change and its impacts
Climate change is one of the bigger risks the world is currently facing.
From 1880 to 2012 the average global temperature increased by 0.85 °C
and has reduced grain yield, led to the rise of sea levels, and possibly led to
more volatile weather. The world’s governments largely agree that global
warming must be limited to no more than 2 °C (3.6 °F) above the average
Table 2.5 Issues along the food value chain
Sub-sector Production Processing Distribution Consumption
Details Research & Harvesting Distribution Shopping

development Butchering Logistics Consumption
Framing Manufacturing Retailing
Ranching Marketing & Sales
Trading
Key issues Management Strategy Distribution Food prices
capabilities Achieving scale strategy Food security
Strategy Supply chain strategy Food safety
Access to Health and
capital wellness
Source Own illustration based on Deloitte (2013)
global temperature experienced before the Industrial Revolution (USSIF

2013). The increase in temperature observed during the last decades has
been caused largely by human activities, especially by the use of fossil fuels
such as coal, oil, or gas adding to the concentration of carbon dioxide and
other greenhouse gases in the atmosphere hindering the heat from the
sun to escape. The International Energy Agency (IEA) estimates that $1
trillion per year in investment is needed to achieve this goal and impact
investments are very popular in addressing this challenge (also through
addressing other SDGs). Investments are possible across all asset classes,
for example, in innovative technologies, improving energy efficiency, or
developing infrastructure.
Goal 14: Conserve and sustainably use the oceans, seas and marine
resources
Oceans contain 97% of the earth’s water. Three billion people depend on
the coastal biodiversity for their livelihoods. That may explain that the
value of those marine and coastal resources and industries is estimated at
$3 trillion per year.
Impact investments can create value by investing, e.g., in sustainable
global fishery on a small scale (in order to protect and restore fish stocks
or support fisher livelihoods), on an industrial scale (e.g., larger fisheries
in order to restore depleted fish stocks and feed more people), or on
a national scale (e.g., fishery-wide data collection and port infrastruc-

ture). However, examples of successful marine impact investments are
very rare—existing investments are either in fisheries finance or marine
eco-tourism.
Goal 15: Sustainably manage forests, combat desertification, halt

and reverse land degradation, halt biodiversity loss
The Sustainable Development Goal 15 covers forests, desertification, and
biodiversity. Forests are responsible for the livelihood of 1.6 billion world-
wide. They are also home to 80% of all terrestrial species of animals,
plants, and insects. Desertification is another issue which needs to be
tackled globally. Drought and desertification lead to the loss of arable
land in the amount of 12 million hectares each year.
As forestry resources are being demanded in large quantities at the
moment, sustainable forestry provides many opportunities for achieving a
financial return while addressing environmental issues. Problem-solving
mechanisms include, for example, reforestation, the establishment of
cooperatives, a focus on marketable native species or the use of organic
fertilizers. However, due to a lack of metrics and a very intransparent
market, forestry is still underrepresented as an asset class in large invest-
ment portfolios (Glauner et al. 2013).
Goal 16: Promote just, peaceful and inclusive societies

Goal 16 covers just, peaceful, and inclusive societies. Corruption, bribery,
theft, and tax evasion are undermining societies. Tackling those issues is
hard for impact investments as they are hard to identify and there is rarely
a business model around it. However, impact investors can follow good
business practices and comply with all legal requirements.
Goal 17: Revitalize the global partnership for sustainable development

The last goal is more about the ways to achieve these goals in an inter-
sectoral manner. It is also concerned about the best use of development
assistance, the reduction of debt distress and new partnerships, and the
ease of the debt burden for developing countries.
The World Business Council for Sustainable Development, the Global

Reporting Initiative as well as the Global Compact have already drafted
a first set of Key Performance Indicators to track progress for all SDGs
(Table 2.6).
Table 2.6 Key Performance Indicators to track progress for all SDGs
Goal Key performance indicators
1 Poverty headcount ratio at $1.90 a day (2011 PPP; % of population)

Poverty headcount ratio at national poverty lines (% of population)
2 Prevalence of undernourishment (% of population)
Prevalence of obesity, BMI ≥ 30 (% of adult population)
Cereal yield per hectare
3 Mortality rate, under-5 (per 1,000 live births)
Life expectancy at birth, total (years)
4 Lower secondary completion rate (% of relevant age group)
PISA score
5 Proportion of seats held by women in national parliaments (%)
School enrollment, secondary (gross), gender parity index (GPI)
6 Improved water source (% of population with access)
Water Stress Score
7 Access to electricity (% of population)
Alternative and nuclear energy (% of total energy use)
8 Share of youth not in education, employment or training, total (% of youth
population)
Average annual per capita GDP over the past 5 years
9 Mobile broadband subscriptions per 100 inhabitants
Research and development expenditure (% of GDP)
10 Palma ratio
Gini index
11 Percentage of urban population living in slums or informal settlements
Mean annual concentration of PM2.5 in urban areas
12 Municipal solid waste generation (kg per capita)
13 CO2 emissions per capita
Losses from natural disasters (% GNI)
14 Share of marine areas that are protected
Fraction of fish stocks overexploited and collapsed (by exclusive economic zone)
(continued)
Table 2.6 (continued)
Goal Key performance indicators
15 Red List Index

Annual change in forest area
16 Homicides per 100,000 population
Corruption Perception Index
17 For high-income and upper-middle-income countries: International concessional
public finance, including official development assistance (% GNI)
For low- and lower-middle-income countries: Government revenues (% GNI)
Subjective Wellbeing (average ladder score)
Source Sustainable Development Solutions Network (2015)
2.3.3 Child Labor

Introduction
Child labor is one issue which is interesting for impact investing. Child
labor is also a topic which helps to understand the drivers behind certain
social problems.
A few hundred companies have so far signed the Responsible Sourcing
Network’s cotton pledge. They have committed to not source Uzbek
cotton until forced and child labor are eliminated in the country.
According to Responsible Sourcing Network (2015) over one million
children are forced to pick cotton by the Government of Uzbekistan and
children who fail to pick their quota face fines, physical punishment, or
expulsion from school. While Western consumers and fashion labels are
quick to condemn child labor sociologists, employers and NGOs have
different thoughts. Employers believe that child workers become used to
being productive and laborious which can be beneficial in their later life.
Labor also keeps them away from mischief and it increases the income of
the children’s families (Kumar 2013).
Academics study poverty, income inequality, lack of education, the
break-up of family structures, and traditions. It might be rather surprising
that it can be beneficial for mothers when they can bring their children to
the factory. Experts see that child labor is both an economic necessity and
a widespread phenomenon. With 168 million children working globally
it seems to be wishful thinking that you just ban child labor.
Definition
The International Labour Organization (2015) which is the most relevant
international organization covering child labor defines it as work that:
– is mentally, physically, socially, or morally dangerous and harmful to

children; and
– interferes with their schooling by:
– depriving them of the opportunity to attend school;
– obliging them to leave school prematurely; or
– requiring them to attempt to combine school attendance with
excessively long and heavy work.
It has a focus on negative effects on their health and the interference with
school requirements. A priority is the elimination of the worst forms of
child labor which is driven by slave-like conditions and/or activities which
are either illicit (e.g., drug trafficking or prostitution) or work which is
likely to harm the health of children.
Drivers
Child labor can also be found in a number of situations. It can be either
visible or invisible or concentrated or dispersed (Table 2.7).
Bachmann (2000) estimates that only 5% of all child laborers are
working in the formal economy. That may explain why children are less
well paid when they are working. In Ghana, the (International Labour
Organization 1996) found that the average monthly earning for around
75% of the child laborers was roughly $1.25 while the national average
was at $7.70.
There are basically two schools of thought when dealing with child
labor and the right approaches (Table 2.8).
Most of the research is focused on the drivers of the supply side
(Hilowitz 2004). Family context, economic shocks, influence of society,
and the dynamics of poverty all play a role in understanding why families
are deciding to forego an investment in education and let their children
work.
The demand-driven school of thought says that children are better
workers as they are cheaper, less likely to unionize, or just have the right
size to pick fruits or manufacture specific items.
Table 2.7 Child labor situations
Child labor situation

Visible Invisible
Concentrated Child labor which is concentrated and Children in these situations

visible includes children who work in work together or near each
one place, are easily observed, and can other, but cannot be seen or
be approached from the outside are inaccessible to outsiders
• Seamstresses, tailors, soccer ball • Brick kiln workers, quarry
stitchers, workers
• Service workers in congested areas, • Carpenters, helpers, and
e.g., shoe shiners, car washers, carriers at construction sites
• Plantation workers (sugar cane, • Miners of coal and minerals
coffee, vegetables)
Dispersed These children work alone and are, or These are the children most
may appear to be, self-employed unknown and hardest to
• Delivery boys, messengers, reach; they work in remote
• Professional beggars areas, isolated and powerless
• Herders and those engaged in • Domestic servants
livestock care • Children working in
family-based industries, such
as craftwork
• Children held under
conditions of slavery or
bondage
Source Illustration based on ILO (2002)
Table 2.8 Two schools of thought
Supply-driven Demand-driven
Main motive Child is part of the family as an Factory owners search for cheap labor
economic unit and is supposed and replace adult workers through
to contribute to family income children laborers with less rights
Benefits for Children learn skills and are None
children introduced to the adult life
Long-term Low level of education and impact on national human capital
effects
Solution Creating economic Sanctions, creation of fair-trade
opportunities for families, certificates
improve family planning

Examples of how such a complex social problem could possibly be

solved will be discussed later in this book. New Zealand-based Child
Labour Free is offering a certification of a supply chain free of child
labor. Nobel Peace Prize recipient Kailash Satyarthi established Good-
Weave International which was a pioneer in monitoring and certifying
rugs manufactured in South Asia. Ethical fashion is a way to achieve this
goal. The US-based Cordes Foundation has invested in ethical fashion
companies which connect artisans with international department stores
(“How and Why Stephanie Cordes Pursues Her Passion for Ethical
Fashion Through Impact Investing—Cordes Foundation,” n.d.). Bain
Capital has invested in TOMs (Stock 2014).
Bibliography
Achleitner, A.K., J. Mayer, A. Heinecke, M. Schöning, and A. Noble.
2012. A Guidebook to Corporate Governance of Social Enterprises.
World Economic Forum. http://www3.weforum.org/docs/WEF_Govern
ance_Social_Enterprises_2106_light.pdf.
Arora, B., and S.B. Ali Kazmi. 2012. Performing Citizenship: An Innovative
Model of Financial Services for Rural Poor in India. Business & Society 51
(3): 450–477. https://doi.org/10.1177/0007650312446784.
Austin, James, Howard Stevenson, and Jane Wei-Skillern. 2006. Social and
Commercial Entrepreneurship: Same, Different, or Both? Entrepreneurship
Theory and Practice 30 (1): 1–22.
Bachmann, C. 2000. Family Structure, Parental Perceptions, and Child Labor in
Kenyan: What Factors Determines Who Is Enrolled in School? Social Forces
78 (4): 1349–1379.
Bafford, Beth, and Sarah Gelfand. 2016. Impact Investing in Global Health:
Let’s Get Flexible. Stanford Social Innovation Review, April.
Banerjee, Abhijit, and Esther Duflo. 2012. Poor Economics: A Radical Rethinking
of the Way to Fight Global Poverty. Reprint. New York: PublicAffairs.
Battilana, Julie, Matthew Lee, John Walker, and Cheryl Dorsey. 2012. In Search
of the Hybrid Ideal. Stanford Social Innovation Review 10 (3): 51–55.
Beckmann, Markus. 2011. Social Entrepreneurship–Altes Phänomen, Neues
Paradigma Moderner Gesellschaften Oder Vorbote Eines Kapitalismus 2.0?
In Social Entrepreneurship–Social Business: Für Die Gesellschaft Unternehmen,
67–85. Wiesbaden: Springer.
Berrone, Pascual, Cristina Cruz, Luis R. Gomez-Mejia, and Martin Larraza-
Kintana. 2010. Socioemotional Wealth and Corporate Responses to Institu-
tional Pressures: Do Family-Controlled Firms Pollute Less? Administrative
Science Quarterly 55 (1): 82–113.
Borzaga, Carlo, Giulia Galera, Barbara Franchini, Stefania Chiomento, Rocío

Nogales, and Chiara Carini. 2020. Social Enterprises and Their Ecosystems in
Europe—Comparative Synthesis Report. Luxembourg: Publications Office of
the European Union.
Burwood-Taylor, Louisa. 2016. How Does Agtech Fit an Impact Investing
Thesis? AgFunderNews, October 5. https://agfundernews.com/how-does-
agtech-fit-an-impact-investing-thesis.html.
Chesbrough, Henry, and Richard S. Rosenbloom. 2002. The Role of the
Business Model in Capturing Value from Innovation: Evidence from Xerox
Corporation’s Technology Spin-Off Companies. Industrial and Corporate
Change 11 (3): 529–555.
D. Capital Partners. 2013. Impact Investing in Education: An Overview of the
Current Landscape. ESP Working Paper Series.
Danko, Adriana, Claudia Brunner, Sascha Kraus, et al. 2011. Social Entrepreneur-
ship—An Overview of the Current State of Research. European Journal of
Management 11 (1): 82–91.
Dees, Gregory J. 1998. The Meaning of ‘Social Entrepreneurship.’ http://www.
Fuqua.Duke.Edu/Centers/Case/Documents/Dees_Sedef.Pdf.
Dees, J. Gregory, and Beth Battle Anderson. 2006. Framing a Theory of
Social Entrepreneurship: Building on Two Schools of Practice and Thought.
Research on Social Entrepreneurship: Understanding and Contributing to an
Emerging Field 1 (3): 39–66.
Defourny, Jacques, and Marthe Nyssens. 2010. Conceptions of Social Enterprise
and Social Entrepreneurship in Europe and the United States: Convergences
and Divergences. Journal of Social Entrepreneurship 1 (1): 32–53.
Deloitte. 2013. The Food Value Chain. A Challenge for the Next Century.
London: Deloitte Touche Tohmatsu Limited.
Demil, Benoît, and Xavier Lecocq. 2010. Business Model Evolution. In Search
of Dynamic Consistency. Long Range Planning 43 (2): 227–246.
Drayton, William, and Shawn MacDonald. 1993. Leading Public Entrepreneurs.
Arlington: Ashoka.
Falci, Steve, and Jed Emerson. n.d. Increasing Impact and Enhancing Returns:
Integrating Publicly Traded Water and Agribusines Equities into Impact
Investor Portfolios.
Foster, William, and Gail Fine. 2007. How Nonprofits Get Really Big. Stanford
Social Innovation Review 5 (2): 46–55.
Glauner, Reinhold, James A. Rinehart, and Peter D’Anieri. 2013. Timber-
land in Institutional Investment Portfolios: Can Significant Investment Reach
Emerging Markets? Report of a Survey of Institutional Investment Decision-
Makers for The Food & Agriculture Organization of the United Nations,
Tropenbos International, and Natural Resources Canada—Canadian Forest

Service. Forestry Policy and Institutions Working Paper.
Global Environment Facility. n.d. Sustainable Cities.
Global Impact Investing Network (GIIN). 2016. Achieving the Sustainable
Development Goals: The Role of Impact Investing. New York: Global Impact
Investing Network.
Goal 5: Sustainable Development Knowledge Platform. n.d. Accessed July 9,
2017. https://sustainabledevelopment.un.org/sdg5.
Grantmakers in Health. 2011. Guide to Impact Investing. New York: Grant-
makers in Health.
Greenlee, Janet, Mary Fischer, Teresa Gordon, and Elizabeth Keating. 2007.
An Investigation of Fraud in Nonprofit Organizations: Occurrences and
Deterrents. Nonprofit and Voluntary Sector Quarterly 36: 676–694.
Hagenaars, Aldi, and Klaas De Vos. 1988. The Definition and Measurement of
Poverty. Journal of Human Resources 23: 211–221.
Heilbrun, James. 2003. Baumol’s Cost Disease. In A Handbook of Cultural
Economics, 91–101. Cheltenham: Edward Elgar Publishing.
Heinecke, Andreas, and Judith Mayer. 2012. Strategies for Scaling. Under-
standing Social Entrepreneurship & Social Business: 191–210.
Hilgartner, Stephen, and Charles L. Bosk. 1988. The Rise and Fall of Social
Problems: A Public Arenas Model. American Journal of Sociology 94 (1):
53–78.
Hilowitz, J. 2004. Child Labour: A Textbook for University Students. International
Labour Office.
Hoogendoorn, Brigitte, Enrico Pennings, and Roy Thurik. 2010. What Do
We Know about Social Entrepreneurship: An Analysis of Empirical Research.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1462018.
How and Why Stephanie Cordes Pursues Her Passion for Ethical Fashion
Through Impact Investing—Cordes Foundation. n.d. Accessed June 27,
2017. http://cordesfoundation.org/2016/12/09/b-the-change-feature/.
Impax Asset Management. 2013. Investing in Water: Global Opportunities in a
Growth Sector. New York: Impax Asset Management.
International Labour Organization. 1996. Child Labour Surveys, Results of
Methodological Experiments in Four Countries 1992–93. Geneva: International
Labour Office.
International Labour Organization. 2002. A Future without Child Labour: Global
Report Under the Follow-up to the ILO Declaration on Fundamental Principles
and Rights at Work. Geneva: International Labour Office.
International Labour Organization. 2015. What is Child Labour. http://www.
ilo.org/ipec/facts/lang--en/index.htm.
Kania, John, and Mark R. Kramer. 2011. Collective Impact. Stanford Social
Innovation Review 9 (1): 36–41.
Karlan, Dean, Aishwarya Lakshmi Ratan, and Jonathan Zinman. 2014. Savings
by and for the Poor: A Research Review and Agenda. Review of Income and
Wealth 60 (1): 36–78.
Kearney, Sarah, Alicia Selger, and Peter Berliner. 2014. Impact Investing in the
Energy Sector. How Federal Action Can Galvanize Private Support for Energy
Innovation and Deployment.
Kroll, Christian, Anne Warchold, and Prajal Pradhan. 2019. Sustainable Develop-
ment Goals (SDGs): Are We Successful in Turning Trade-Offs into Synergies?
Palgrave Communications 5 (1): 140. https://doi.org/10.1057/s41599-
019-0335-5.
Kumar, Ganesh. 2013. Child labour: Determinants, Dimensions and Policies in
India. Economic Affairs 58 (4): 417–429.
Lang, Kristin, Joshua Humphreys, and Andreea Rodinciuc. 2017. Impact
Investing in Sustainable Food and Agriculture across Asset Classes. Financing
Resilient Value Chains Through Total Portfolio Activation. Durham.
LaRue, Ana. 2017. 7 Key Impact Investing Vehicles Targeting Women. Maxim-
pact Blog (blog), September 7. http://maximpactblog.com/7-key-impact-inv
esting-vehicles-targeting-women/.
Leadbeater, Charles. 1997. The Rise of the Social Entrepreneur. London: Demos.
Linardi, Sera, and Margaret A. McConnell. 2011. No Excuses for Good
Behavior: Volunteering and the Social Environment. Journal of Public
Economics 95 (5–6): 445–454. https://doi.org/10.1016/j.jpubeco.2010.
06.020.
Mair, J., I. Marti, and M.J. Ventresca. 2012. Building Inclusive Markets in
Rural Bangladesh: How Intermediaries Work Institutional Voids. Academy of
Management Journal 55 (4): 819–850. https://doi.org/10.5465/amj.2010.
0627.
Nussbaum, Martha, and Amartya Sen, eds. 1993. The Quality of Life. Oxford
University Press. https://doi.org/10.1093/0198287976.001.0001.
Official Journal of the European Union. 2013. Regulation (EU) No 1296/
2013 of the European Parliament and of the Council of 11 December
2013 on a European Union Programme for Employment and Social
Innovation (‘EaSI’). http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=
CELEX%3A32013R1296.
Petrick, Stephanie. 2013. Impact Investing in the Area of Long-Term Unemploy-
ment. München: Social Venture Fund.
Piatkowski, Marcin. 2006. Can Information and Communication Technologies
Make a Difference in the Development of Transition Economies? Information
Technologies & International Development 3 (1): 39–53.
Pons, Elena, Maud-Alison Long, and Raul Pomares. 2013. Promoting Sustainable
Food System Through Impact Investing. San Francisco.
Porter, Michael E., and Mark R. Kramer. 2011. Creating Shared Value. Harvard
Business Review 89 (1/2): 62–77.
Prahalad, Coimbatore Krishna. 2006. The Fortune at the Bottom of the Pyramid.
Upper Saddle River, NJ: Pearson Education India.
———. 2012. Bottom of the Pyramid as a Source of Breakthrough Innovations.
Journal of Product Innovation Management 29 (1): 6–12.
Preston, Anne E. 2007. Volunteer Resources. In Financing Nonprofits: Putting
Theory into Practice, 183–206. Lanham: National Center on Nonprofit
Enterprise and AltaMira Press.
Quah, Danny. 2002. Digital Goods and the New Economy. CEP Discussion
Paper, No. 563. http://www.academia.edu/download/29216/1kkbrtf4nolx
u6mkj8o5.pdf.
Responsible Sourcing Network. 2015. Company Pledge Against Child and Adult
Forced Labor in Uzbek Cotton. http://www.sourcingnetwork.org/the-cot
ton-pledge.
Rüede, Dominik, and Kathrin Lurtz. 2012. Mapping the Various Meanings of
Social Innovation: Towards a Differentiated Understanding of an Emerging
Concept. EBS Business School Research Paper, No. 12-03. http://papers.
ssrn.com/sol3/papers.cfm?abstract_id=2091039.
Sachs, Jeffrey D. 2012. From Millennium Development Goals to Sustainable
Development Goals. The Lancet 379 (9832): 2206–2211.
Salamon, Lester M., and Helmut K. Anheier. 1996. The International Classifica-
tion of Nonprofit Organizations: ICNPO-Revision 1, 1996. Baltimore: Johns
Hopkins University Institute for Policy Studies.
Santos, Filipe M. 2012. A Positive Theory of Social Entrepreneurship. Journal
of Business Ethics 111 (3): 335–351.
Schetsche, Michael. 1996. Die Karriere Sozialer Probleme. Walter de Gruyter
GmbH & Co KG. https://books.google.at/books?hl=de&lr=&id=bKUDDg
AAQBAJ&oi=fnd&pg=PA1&dq=schetsche&ots=-nGJnz2pcb&sig=LtpW1q
pmAVtgiYfMAcLNSqy4jY4.
Scheuerle, Thomas, Björn Schmitz, Wolfgang Spiess-Knafl, Rieke Schües, and
Saskia Richter. 2015. Mapping Social Entrepreneurship in Germany—A
Quantitative Analysis. International Journal of Social Entrepreneurship and
Innovation 3 (6): 484–511.
Sen, Amartya. 2005. Human Rights and Capabilities. Journal of Human Devel-
opment 6 (2): 151–166. https://doi.org/10.1080/14649880500120491.
Spiess-Knafl, Wolfgang, and Jessica Aschari-Lincoln. 2015. Understanding Mech-
anisms in the Social Investment Market: What Are Venture Philanthropy
Funds Financing and How? Journal of Sustainable Finance & Investment 5
(3): 103–120.
Spiess-Knafl, Wolfgang, and Stephan A. Jansen. 2014. Social Enterprises and the
Financing of Different Scaling Strategies. In Emerging Research Directions in
Social Entrepreneurship, 67–83. Springer. https://doi.org/10.1007/978-94-
007-7896-2_5.
Spiess-Knafl, Wolfgang, Clemens Mast, and Stephan Jansen. 2015. On the
Nature of Social Business Model Innovation. Social Business 5 (2): 113–130.
Steinberg, Richard. 2003. Economic Theories of Nonprofit Organizations. In
The Study of the Nonprofit Enterprise, ed. Helmut K. Anheier and Avner Ben-
Ner, 277–309. Boston, MA: Springer.
Stock, Kyle Stock. 2014. Bain Capital Buys Toms, Will Still Give Away Shoes.
Bloomberg.Com, August 22. http://www.bloomberg.com/news/articles/
2014-08-21/bain-capital-buys-toms-the-625-million-do-gooder-shoe-com
pany.
Stockholm Resilience Centre. 2017. Stockholm Resilience Centre’s (SRC)
Contribution to the 2016 Swedish 2030 Agenda HLPF Report. Stockholm.
https://www.stockholmresilience.org/download/18.2561f5bf15a1a341a5
23695/1488272270868/SRCs%202016%20Swedish%202030%20Agenda%
20HLPF%20report%20Final.pdf.
Sustainable Development Solutions Network. 2015. Getting Started with the
Sustainable Development Goals. A Guide for Stakeholders. New York: Sustain-
able Development Solutions Network.
Tracey, Paul, and Owen Jarvis. Toward a Theory of Social Venture Franchising.
Entrepreneurship Theory and Practice 31 (5): 667–685.
Tuckman, Howard P. 1998. Competition, Commercialization, and the Evolu-
tion of Nonprofit Organizational Structures. Journal of Policy Analysis and
Management 17 (2): 175–194.
United Nations. 2015. Sustainable Development Goals. http://www.un.org/sus
tainabledevelopment/sustainable-development-goals/.
———. 2017a. Health. United Nations Sustainable Development (blog). http:/
/www.un.org/sustainabledevelopment/health/.
———. 2017b. Hunger and Food Security—United Nations Sustainable Devel-
opment. http://www.un.org/sustainabledevelopment/hunger/.
———. 2017c. Poverty. http://www.un.org/sustainabledevelopment/poverty/.
USSIF. 2013. Investing to Curb Climate Change. A Guide for the Institutional
Investor. Washington, DC: USSIF
Vu, Khuong. 2005. Measuring the Impact of ICT Investments on Economic
Growth. Cambridge, MA: Harvard Kennedy School of Government.
Wood, David. n.d. Making Sustainable Cities Investable. Low2no (blog).
Accessed September 7, 2017. http://www.low2no.org/essays/making-sustai
nable-cities.
Wood, Donna J. 1991. Corporate Social Performance Revisited. The Academy of
Management Review 16 (4): 691. https://doi.org/10.2307/258977.
Zahra, Shaker A., Eric Gedajlovic, Donald O. Neubaum, and Joel M. Shulman.
2009. A Typology of Social Entrepreneurs: Motives, Search Processes and
Ethical Challenges. Journal of Business Venturing 24 (5): 519–532. https://
doi.org/10.1016/j.jbusvent.2008.04.007.
CHAPTER 3
Impact Investing
3.1 Introduction and Definition

The concept of using investments to enable social change is not new. The
entire field of impact investments already spans a wide range of efforts in
building a global industry striving for investments with a positive social
and environmental impact. Efforts to build a formal impact investing
market have substantially increased in the second decade of the twenty-
first century and the disparate and uncoordinated innovation in the field
has transformed into a distinct field of public and academic discourse.
The term “impact investing” first appeared in 2007 at an event orga-
nized by the Rockefeller Foundation for leaders in finance, philanthropy,
and development. On a very general level, it describes investments that are
made with the explicit intention to generate societal or ecological benefits.
However, it means that the financial return is not the only objective but
that also social and environmental impact is considered. The idea to use
investing to achieve social outcomes is not a new idea. O’Donohue et al.
(2010) mention the Commonwealth Development Corporation in the
United Kingdom or the World Bank’s International Finance Corporations
for this approach.
Höchstädter and Scheck (2015) see three different levels to discuss
the meaning of impact investing which are definitional, terminological,
and strategic. The definition is around the two core elements which are

Switzerland AG 2023
https://doi.org/10.1007/978-3-031-32183-2_3
the pursuit of a financial return and some additional non-financial impact.

The Global Impact Investing Network (2016) defines impact investing as
Impact investments are investments made into companies, organizations,

and funds with the intention to generate social and environmental impact
alongside a financial return.
The financial return is understood to be at least the return of the prin-

cipal while others expect at least the rate of inflation or even normal or
above market-rate returns. There is no agreement on whether the finan-
cial or the non-financial return requirements should be weighted higher:
So-called financial-first investors favor the pursuit of the financial returns,
while the impact-first investors strive for the pursuit of a social impact
first.
The social goal is sometimes substituted or understood more
broadly including environmental, developmental, economic, or gover-
nance aspects.
It is not tied to a specific legal form. Impact investments can be made in
non-profit organizations as well as for-profit companies. As it is common
in the social entrepreneurship area, the term social is usually rather vaguely
defined. However, the social impact cannot be an incidental side effect
(Brown and Swersky 2012). There is a range of companies who created
an enormous social impact over their life cycle but were not doing it as a
planned output. Additionally, the social impact should be measured and
quantifiable.1
On a terminological level social (impact) investment is often used as a
synonym for impact investment and vice versa. Overall, the use of words
is confusing and the level of interactions is changing. In general, social
investments are more common in Europe than in the United States. Social
investments and social finance are often understood to also include grants.
Socially responsible investing and impact investing share very similar
definitions. However, most practitioners and academics share the view
that both forms are rather distinct. Socially responsible investing targets
investments in publicly traded bonds or stocks while impact investing is
focused on private equity and debt. SRI investors also want to achieve
close to market-rate returns.
1 The different tools and methods to assess the social impact are presented in later
chapters of this book.
3 IMPACT INVESTING 53
Socially responsible investment funds have basically three different

forms of investment strategy. They follow a negative selection where they
exclude companies from specific segments such as tobacco, weapons, or
gaming industry which are often referred to as “sin stocks”. They can also
follow a positive selection strategy where they invest in companies which
outperform their peers in certain benchmarks (best-in-class) or invest in
specific sectors such as renewable energy, water management, or energy
efficiency. The third strategy is based on engaging with the companies’
management to make them aware of potential improvements in terms of
ecological, social, or governance issues.
Looking at the foundations globally, one can recognize why impact
investing is a relevant approach. According to numbers from Global
Philanthropy Report there are more than 260,000 foundations in 39
countries. Their assets exceed USD 1.5 trillion (Johnson 2018).
3.2 Rationale for Impact Investing

Andreoni (2015) sees three different motives why people are getting
involved in charitable activities. People might like the services the charity
is producing, they might get a benefit or have some kind of internal
motivation which is often referred to as “warm glow” (e.g., Andreoni
1990; Harbaugh 1998). In practice, it might mean better quality of media
someone is consuming, better seats at the opera, or a positive feeling when
providing money to a charity.
Traditionally, there was a clear separation between investing and dona-
tions and they were considered and managed separately. The development
of the impact investment market is a response to the financing needs of
projects, enterprises, and organizations creating social impact which were
not met previously.
Impact investing has arrived in the mainstream although it might not
be always labeled as such. Crowdfunding platforms are a favorite financing
source for social impact companies and there are also socially responsible
investment funds which have a large investment base.
The investors can be classified according to the net present value of
their investment decisions. The net present value is zero if the returns are
equivalent to market rates. If investors are only willing to invest when the
net present value is zero or slightly positive they are aiming at market-rate
returns. If they are willing to have a negative net present value but a posi-
tive return in absolute numbers they are supporting the social mission
Fig. 3.1 Return expectations (Source Based on Spiess-Knafl [2012])
with a reduced social mission. There are also other investors who are
willing to have a negative financial return or no financial return at all.
Those different approaches are shown in Fig. 3.1.
3.3 Investors
There are different group of investors and they can be classified according
to their return preferences.
3.3.1 Donors
Investors who exclusively support the social goal without a financial return
expectation are the first group of investors. In this case, no financial return
on investment is equivalent to a complete transfer of funds without any
repayment or interest. These investors are donors or charitable foun-
dations. Although they might not invest in impact investments it is
important to understand their motives as they are often involved in the
financing of social enterprises.
Table 3.1 Legacy and non-legacy capital of foundations
Legacy fund Non-legacy capital
Description Identity-creating assets that are held Investment in the traditional

and not sold capital market to achieve
market-rate returns
Typical Large company shareholdings, real Stock market holding,
examples estate, rights, and other intangible investment funds, bonds
assets
Andreoni (2000) speaks of three possible explanation strands. They

might demand that more of a public good is produced. This public good
can be the national public radio or the integration of refugees. The second
rationale might be a direct benefit drawn from the donation. Benefits
can include tax savings, material benefits like lottery tickets, free entry or
special access to art exhibitions for a donation, or increased visibility for
the donor.2
The third motive might be the so-called “warm glow effect”. Andreoni
(1990) sees the warm-glow effect as another motivation to donate. Warm
glow means that even the pure act of donation gives the donor a certain
benefit (Crumpler and Grossman 2008). The personal benefit from the
warm-glow effect is independent of the expected future output of the
organization.
Apart from donors, foundations are important institutions with
differing rationales. The capital of foundations is usually divided into
legacy capital and non-legacy capital. Large company shareholdings, real
estates, rights, and other intangible assets are often identity-creating assets
for a foundation. They might derive their name from a company or the
family firm and they might not be willing to sell those assets. Non-legacy
capital are public equity or debt holdings or fund investments. They are
held to achieve market-rate returns which are then used to provide grants
to social sector organizations (Table 3.1).
Interestingly, when foundations want to achieve social impact within
their existing use of capital they have different opportunities. In the
2 The motives of foundations and donors are also regularly criticized. Large foundations
can influence entire fields and occasionally even control them and there are concerns about
democratic legitimacy and governance issues.
Table 3.2 Opportunities for the achievement in different asset classes
Approach
Aim Cash Stock Real estate Non-tradeable Grant
market shares in giving
companies
Environmental Use of Use of SRI Use of new Use of new Promotion

Protection ethical-social strategies, environmental environmental of
banks that avoiding protection protection ecological
lend to companies technologies technologies projects
ecological in the fossil in factories
company energy
sector
Costs Cost neutral Cost Cost neutral Cost neutral Traditional
over time neutral over time over time distribution
over time
following table it is shown for the environmental protection. They can

use social-ethical banks, use socially responsible investment strategies or
implement new energy saving technologies in their real estate. They might
also engage with their privately held companies to consider new tech-
nologies. The traditional form of achieving this goal would be through
traditional grant giving (Table 3.2).
3.3.2 Investors with Reduced Financial Return Expectations

Investors seeking a reduced financial return are the second group of
investors. These investors expect a low positive return but would also
accept a slightly negative financial return in favor of the social purpose.
These investors want to support a social purpose, but assume that it is to
be implemented optimally and sustainably with entrepreneurial financing
instruments. The simultaneous pursuit of social and financial returns is
also called blended value proposition (Emerson 2003).
It is often considered that the origins of this approach lie in the 1990s
when wealthy entrepreneurs have started thinking about new ways to act
philanthropically. This group will try to solve problems of a specific group
of a company with concrete concepts and provide capital for them.
3.3.3 Investors with Market-Oriented Financial

Return Expectations
Investors who seek a market-oriented financial return but which do
not necessarily consider financial or social and ecological criteria in the
investment decisions represent the third group of investors.
Although there is a trade-off between social and financial returns there
is the possibility to achieve market-rate returns. Impact investment funds
with an emphasis on venture capital in developing countries expect an
average return of 12.0% to 14.9% and in industrialized countries 15.0%
to 19.9%. The investment areas are primarily energy, telecommunications
solutions, and fair trade (O’Donohue et al. 2010).
The origins of the approach of ethically conscious dealings, especially
with investments in the general stock market, lie in the 1960s driven by a
change of the political climate (e.g., Williams 2007).3
3.4 Impact Investment Theories

3.4.1 Introduction
The traditional finance theories are not applicable without adjustments
to the field of social investment. There are many differences between
traditional and impact investments. First, there is an additional return
requirement in the form of social return.4 Those considerations are
described in the form of trade-off considerations in this chapter. The theo-
ries can be based on the return expectations of the investors. Investors can
have different return expectation and this can result in conflicts as part of
the trade-off considerations.
Second, social enterprises are operating in segments with their own
logic. Public authorities have different rules when they are providing
3 Investor profiles can be found in Chapter 4.

4 Similar considerations are known for family firms which focus on socio-emotional
issues when considering decisions (Berrone et al. 2012).
Table 3.3 Theories to explain financing decisions
Return expectation of the investors Financing Income streams

instrument
Spectrum – No financial return expectation – Equity – Public income

– Reduced financial return expectation capital streams
– Market-return expectation – Debt – Private income
capital streams
– Hybrid
capital
– Mezzanine
capital
– Grants
Criteria Agency theory Pecking order Contract
restrictions
Source Based on Spiess-Knafl (2012)
contracts or supporting social enterprises. The same is true for the income
streams social enterprises can access. Those conflicts are described in the
following sections.
Third, the financing instruments can be explained by using the pecking
order for traditional companies. Those considerations are explained in the
subsequent chapter. Additionally, the use of different financing instru-
ments can lead to pecking order issues. However, it is more complicated
as there is no clear pecking order for social enterprises.
Those different views are shown in Table 3.3.
Social enterprises have a dual mission. They need to achieve a finan-
cial return but also pursue a social mission and create social value. In
certain cases, it might be possible to increase social and financial returns
simultaneously. This is the so-called lockstep model. Grabenwarter and
Liechtenstein (2012) even state that social and financial returns are always
positively correlated.
In other cases, there is a trade-off function between social and finan-
cial return requirements means that every increase in one dimension leads
to a reduction of the other dimension. These trade-off preferences are
different for each investor. While foundations might be content with
negative financial returns, traditional banks might only focus on financial
returns.
Traditional investors have thus a steep preference curve, where a reduc-
tion in financial returns must be balanced with a significant increase in
social returns. On the other hand, foundations and donors have a flatter
yield curve. This means that they are willing to offset a small increase in
social return with a higher financial loss.
3.4.2 Trade-Off Considerations Between Social

and Financial Return
Introduction
The conflicts which are caused by the involvement of several investors
with different expectations of return can be analyzed with the help of the
agency theory. The social entrepreneurs may be perceived as an agent,
whereas the external investors are the principals.5
The agency costs are relevant to the theoretical consideration of the
relationship between social enterprises and capital providers. Jensen and
Meckling (1976) define agency costs as the sum of monitoring costs,
signaling costs, and the residual loss. Agency costs may occur both
in monetary and non-monetary terms and arise if the interests of the
principal and agent are not aligned.
The monitoring of a social enterprise is more complicated than for
other companies.6 Investors in the for-profit sector can rely on market
mechanisms that prefer better products and efficient trading companies.
Market mechanisms are less distinctive as the recipient of the product or
service often pays only a fraction of the costs and has thus less incentives
to refuse a service or a product. Hansmann (1980) speaks in this context
of the separation between the buyer and recipient of the service. Even if
the beneficiary takes over the entire cost of the service evaluation may be
difficult. Elderly care or childcare facilities are examples.
Social enterprises have to make an effort to signal to the investor
that the right measures are taken. These expenses are combined under
the term signaling costs. Decisions by social enterprises are difficult to
communicate since the impact of measures can have a variety of causes.
In addition, in the decision-making process a variety of stakeholders as
well as a balance between social and financial goals must be considered.
5 Donors and lenders without a claim to a return can also have a great influence on
the orientation of the organization. In this case, they can be understood as principals.
6 The chapter on social impact assessment discusses the methodologies to monitor the
performance of social enterprises.
Fama and Jensen (1983) argue that the legal form of a non-profit
organization acts as a sign of confidence because this legal form prevents
access to residual cash flows. It is also possible with a for-profit legal form
to adapt the articles of association accordingly. However, the distribution
restriction for non-profit organizations is much more firmly anchored and
widely understood.
The residual loss is the equivalent of the loss of welfare suffered by the
principal based on the decisions of the agent, which do not coincide with
his interests. Donors will mainly consider the social return and consider
deviations from the maximum social return as loss of welfare.
Trade-Off Conflicts
The use of different financing instruments does not lead to conflicts.7 It is
rather the return requirements by the investors. The conflicts arise because
of the simultaneous inclusion of investors with different expectations of
return.
A social enterprise might simultaneously receive donations and repay a
loan to a bank. A donor might dislike the lender’s access to the cash flows
and special rights in case of insolvency or liquidation. Additionally, part of
the current income is used for interest payments and the repayment and
not for the pursuit of the social objective. The lender might not under-
stand the specifics of social business models which are partly funded by
donations. The stability of donations for the assessment of repayability is
also difficult to estimate.
With a well-defined use, donations reduce the organization’s costs
for service delivery and increase output accordingly. The unearmarked
donation to organizations, however, is associated with significant agency
costs, which are due to the wide-ranging freedom of action for the social
entrepreneurs.
Conflicts might arise over the governance of the social enterprise and
the management of conflicts. Traditional investors will ask for maximiza-
tion of the financial return while donors and foundations will ask for a
maximization of the social return.
These differences in return expectations between financial and social
returns mean that agency costs increase if the business model does not
match the expectations and interests of external investors. The agency
7 Conflicts are all those situations in which the interests are aligned.
costs depends on the sum of the monitoring costs, signaling costs, and
the residual loss.
These conflicts can occur in the growth phase or at any time when the
investor base changes with refinancing. There are different strategies to
resolve these financing conflicts.
Strategies for the Resolution of the Financing Conflicts

The four strategies available to resolve these conflicts are (1) focus, (2)
creation of a satellite model, (3) creation of a hybrid model, or (4)
lifecycle financing.
Strategy 1: Focus
This strategy implies that the social enterprises focus on the most
promising financing source. This reduction in the diversification of capital
sources and the associated agency costs also means that the investor base is
shifting. The consequence is that investors’ aggregate return expectations
change as one of the investor groups no longer needs to be considered.
The social enterprise has to consider the changed combination of yield
expectations on the capital side. Interestingly, the strategy of social enter-
prises often follows the financing options, whereas it is different in the
for-profit area.
Strategy 2: Satellite model
A strategy to reduce the financing conflicts can be to split the social enter-
prise into a non-profit and a for-profit part. The non-profit unit becomes
the owner of the for-profit unit and thus the beneficiary of future profits.
An example is a consulting business in the profit-oriented unit and oper-
ation of the core business in the non-profit unit. Examples are hospitals,
nursing homes, or educational programs in which a non-profit company
has one or multiple for-profit units.
The structure can be used if the splitting is useful for legal or financial
reasons. However, this does not include models in which the for-profit
sector is solely responsible for financing the non-profit organization. One
example would be the operation of a bakery to finance a well construction
company in Africa. This is referred to as a profit generator model.
Strategy 3: Hybrid model
Many social enterprises continue to face the challenge that the provision
of social services requires grants and donations and they cannot split the
company into a non-profit and for-profit sector. Within the framework the
social enterprise uses basic funding of foundations or public authorities
institutions and can leverage capital from private investors with a market-
oriented financial return expectation. The financing structure of the social
enterprise is comparable to the layers of a cake (Milligan and Schöning
2011). Large foundations and public institutions are increasingly using
this approach as it helps them to mobilize additional private capital to
solve the social problem.
Strategy 4: Financing lifecycle
Especially for social enterprises, a financing life cycle could be a viable
alternative. This means that foundations, donors, or the public sector take
over innovation financing in the first part of the lifecycle, while investors
with a positive return expectation are providing more commercial funding
for scaling and expansion.
This approach seems attractive, since it already reflects today’s
financing practice. Foundations are more focused on supporting inno-
vation and are not focused on further follow-up financing. At the same
time, there are investors with a positive financial return expectation that is
not interested in the risk of innovation financing. In this model, however,
it remains unclear how to deal with the profits in the later phase.8
It would also be an innovation-friendly financing structure as debt
is often considered to be inhibiting innovation while donations are not
putting pressure on the business model.
3.4.3 Flexibility Restrictions Driven by Public Authorities

Capital cost restrictions are another issue often encountered in the field.
In some cases public authorities reimburse on a cost basis and exclude
for reimbursement any capital costs for interest. This specific restriction
makes the use of mezzanine or debt capital more difficult. Any capital
costs would then have to be paid either through donations or income
from other branches of business.
A similar problem arises if the costs are paid in equal installments
during the project runtime. A considerable part of the investment costs
8 Compartamos Banco’s and SKS’s initial public offerings have caused considerable
criticism as part of the start-up financing has been provided through public funds and the
profits have been distributed to private actors.
is incurred at the beginning of the project period but they are only reim-
bursed with a certain delay. In addition, assets acquired through public
funds can often not be used as collateral.
These restrictions are particularly relevant to social enterprises wishing
to finance capital-intensive assets or real estate with borrowed capital.
Social enterprises receiving guaranteed future payments from a national
or international institution face similar problems. This promise of future
payments can also not be used to securitize the payments and thus to have
the capital available at an early stage.
The restriction is that the interest component of a possible securiti-
zation cannot be paid. These interest costs should then be covered by
donations or other means. However, this leads to other possible conflicts.
3.4.4 Sustainability Conflicts

Many researchers assume that non-profit organizations do not prefer
commercial activities but prefer to rely on donations as a source of
income. Commercial activities are therefore only undertaken when the
donation volume is not sufficient.
James (1998) explains the conflicts that exist between donors and
managers. Managers are likely to be interested in sales, while at the same
time fearing that donors will no longer consider supporting them because
of the possible impact of a market-oriented economy and thereby reduce
donations.
Segal and Weisbrod (1998) found in a sample of US non-profit orga-
nizations a negative relationship between donations and sales that either
arise in the context of activity such as entrance fees or non-related busi-
nesses. The results vary depending on the topic field and in some areas of
the topic, this connection is also not demonstrable.
This relationship is not fully valid for social enterprises. Many
donation-based venture philanthropy funds will support these sales-based
models. They are interested in the ways sustainability can be achieved.
For single donors, however, these revenues will significantly reduce the
appearance of the need for a donation. In this case, it is possible to
speak of a sustainability conflict even if a donation would help the social
enterprise.
3.4.5 Income Streams

Social enterprises have a business model and different groups of bene-
ficiaries. Private beneficiaries are patients or homeless persons who are
identifiable. They can receive a service and there is usually a way to charge
for the services either directly or indirectly. Public beneficiaries are the
public or a larger population group that benefits from the service. For
those beneficiaries, it is harder to establish a business model which relies
on the charging of a fee. Mixed beneficiaries have both features with iden-
tifiable individuals but also a public benefit. Fischer et al. (2011) analyzed
the beneficiary nature of more than 45,000 non-profits. They find that
59% have mixed, 28% private, and 13% public beneficiaries. Each business
model has corresponding income streams.
Results show that a higher diversification of income sources leads to
a low volatility of the total income. However, non-profit organizations
also show a clear concentration of income sources. Carroll and Stater
(2009) investigate all US non-profit organizations with an annual budget
of more than $25,000 on the diversification of income streams. They
consider the revenue from donations, commercial income, and investment
income from the accumulated capital. Both greater diversification and
growth relative to total expenditure lead to lower volatility in revenues.
These results are, however, to take with caution, as the three income
streams require in an investigation for social enterprises a more detailed
subdivision.
There are also conflicts between the different income streams. When
choosing the income structure, social enterprises must focus on income
sources and thus create a stable and sustainable structure of internal
financing. Studies for the non-profit sector show that most non-profit
organizations have a rather one-sided or concentrated revenue structure
despite the supposed advantages of diversification.
Foster and Fine (2007) analyze the 144 US non-profit organizations
with an annual budget of over $50 million. Although they represent less
than 0.1% of all US non-profit organizations, they are interesting to study
to understand the implications of the size. The authors show that these
non-profit organizations base their financing model almost exclusively on
a single source of funding and adjust the organizational structure to meet
the needs of the investors, even if there are adjustments to the program
design.
Table 3.4 shows the income streams of German social enterprises which
can be found in similar proportions in all Western countries. On average,
the income structure is quite diverse and social enterprises access different
income streams. However, individual social enterprises have 3 different
income streams with one primary income stream accounting for most of
total income.
Weisbrod (1998) found that there are interdependencies between the
various income streams. For example, an increase in commercial activities
in non-profit organizations will have a negative impact on the donation.
A cut in public funding will lead to the non-profit organization having
to cover the income with new income strategies. Weisbrod (1998) also
argues that the choice of source of income has an impact on the output
of the organization, and the output of the organization in turn affects
the sources of income. Obviously, diversification across different income
streams can be an important support of risk minimization (Light 2009).
The conflicts between the various income streams are especially driven
by the special contract design of public authorities. The restrictive provi-
sions which exist from the side of the public sector can be explained by
the fact that monitoring capacities are limited and therefore the provisions
against possible misuse or incorrect use of funds are restrictive.9
Van Slyke (2007) identified four potential problems that may occur
in the awarding of public contracts and grants to non-profit organiza-
tions. First, there is incomplete competition in certain areas which makes
the efficient allocation of orders more difficult. Second, there is a lack
of administrative capacities in the public agencies to check the perfor-
mance. Third, there is a lack of coordination between the different levels
of government and divergent political opinions. Fourth, misplaced incen-
tives found in contracts may eventually lead to a dependency on public
funds.
9 The public authorities acts in the interests of the target group and ensures equivalent
access to the service. Examples include school visits where parents’ contributions are
deducted from the public contributions. The same applies in shelters where the homeless
cannot contribute monetarily to the service. All additional revenues would be deducted
from the public payments.
66
Table 3.4 Income streams
Income Fees Earned Subsidies (public) Donations Foundations Sponsor-ship Member-ship fees Other
(‘000e) (public) income (%) (%) (%) (%) (%) (%)
(%) (%)
Education 20.7 16.8 14.7 9.8 10.7 16.8 2.9 7.6

W. SPIESS-KNAFL AND B. SCHECK
Work 24.2 36.9 15.8 2.3 0.7 0.3 0.1 19.6

integration
Social 24.9 14.1 17.7 5.4 9.1 1.6 9.6 17.8
inclusion
Social services 27.7 7.9 20.0 10.8 10.7 10.5 3.7 8.7
Regional 8.3 38.3 6.0 18.8 3.3 0.8 0.2 24.2
development
Total 20.8 21.0 15.4 10.3 7.1 8.0 5.0 12.6
Source Based on Spiess-Knafl (2012)

3.4.6 Crowding-Out
Crowding-out occurs when the public sector and donors finance a
non-profit organization. Empirical studies show that an increase in tax-
financed public funding leads to a decrease in donations. One of the main
arguments is that donors see the increase in public funding as a substitute
for their own donation.
However, Andreoni and Payne (2011) show that reduced fundraising
activities to increase public posts explain this effect mainly. Non-profit
organizations have less incentives to maintain their fundraising activi-
ties to the same extent after increasing public funding. In a sample of
8,062 non-profit organizations, they show that the crowding-out effect is
significant and can be explained by the so-called “fundraising crowding-
out”. Crowding-out reduces thus the net effectiveness of public financing.
For this reason, some innovative financing concepts require so-called
matching grants which requires private investors to provide donations at
a proportional rate. As a result, these opposing effects can be avoided by
means of reduced fundraising activities.
3.4.7 Conclusion
This chapter has shown that there exists a range of interdependen-
cies between the different stakeholders. Between the capital providers
it is mostly trade-off situations. Between capital providers and public
funds or the target group there can be sustainability conflict, problems
arising due to the interest payment restrictions, and crowding-out. Those
interdependencies are shown in Table 3.5.
68
Table 3.5 Financing conflicts
Investors with Investors with reduced Investors without Public funds Target group &
market-rate return financial return financial return beneficiaries
expectations expectations expectations
Investors with – Trade-Off Trade-Off Interest payment Sustainability

market-rate return restrictions conflict
expectations
Investors with Trade-Off – Trade-Off Interest payment (No conflict)

reduced financial restrictions
return expectations
Investors without Trade-Off Trade-Off – Crowding-Out (No conflict)
financial return
expectations
Public funds Interest payment Interest payment Crowding-Out – Tight
restrictions restrictions contractual
terms
Target group & Sustainability conflict (No conflict) (No conflict) Tight contractual –
beneficiaries terms
Source Achleitner et al. (2014)

Bibliography
Achleitner, A. K., W. Spiess-Knafl, and S. Volk. 2014. The Financing Struc-
ture of Social Enterprises: Conflicts and Implications. International Journal
of Entrepreneurial Venturing 6 (1): 85–99.
Andreoni, James. 1990. Impure Altruism and Donations to Public Goods: A
Theory of Warm-Glow Giving. The Economic Journal 100 (401): 464–477.
———. 2000. The Economics of Philanthropy. Working Papers No. 2. Wisconsin
Madison-Social Systems.
———. 2015. Economics of Charity and Philanthropy. In International Encyclo-
pedia of the Social & Behavioral Sciences, ed. J.D. Wright, 2nd ed., 358–363.
Oxford: Elsevier.
Andreoni, James, and A. Abigail Payne. 2011. Is Crowding out Due Entirely to
Fundraising? Evidence from a Panel of Charities. Journal of Public Economics
95 (5–6): 334–343. https://doi.org/10.1016/j.jpubeco.2010.11.011.
Berrone, P., C. Cruz, and L.R. Gomez-Mejia. 2012. Socioemotional Wealth in
Family Firms: Theoretical Dimensions, Assessment Approaches, and Agenda
for Future Research. Family Business Review 25 (3): 258–279. https://doi.
org/10.1177/0894486511435355.
Brown, Adrian, and Adam Swersky. 2012. The First Billion. A Forecast of Social
Investment Demand. London: The Boston Consulting Group, Big Society
Capital.
Carroll, Deborah A., and Keely Jones Stater. 2009. Revenue Diversification in
Nonprofit Organizations: Does It Lead to Financial Stability? Journal of Public
Administration Research and Theory 19 (4): 947–966.
Crumpler, Heidi, and Philip J. Grossman. 2008. An Experimental Test of Warm
Glow Giving. Journal of Public Economics 92 (5–6): 1011–1021. https://doi.
org/10.1016/j.jpubeco.2007.12.014.
Emerson, Jed. 2003. The Blended Value Proposition: Integrating Social and
Financial Returns. California Management Review 45 (4): 35–51.
Fama, Eugene F., and Michael C. Jensen. 1983. Agency Problems and Residual
Claims. The Journal of Law & Economics 26 (2): 327–349.
Fischer, R.L., A. Wilsker, and D.R. Young. 2011. Exploring the Revenue Mix of
Nonprofit Organizations: Does It Relate to Publicness? Nonprofit and Volun-
tary Sector Quarterly 40 (4): 662–681. https://doi.org/10.1177/089976
4010363921.
Foster, William, and Gail Fine. 2007. How Nonprofits Get Really Big. Stanford
Social Innovation Review 5 (2): 46–55.
Foundation Center. 2013. Key Facts on U.S. Foundations. http://foundationce
nter.org/gainknowledge/research/keyfacts2014/foundation-focus.html.
Global Impact Investing Network. 2016. Impact Investing. https://thegiin.org/
impact-investing/.
Grabenwarter, Uli, and Heinrich Liechtenstein. 2012. In Search of Gamma. An

Unconventional Perspective on Impact Investing. IESE Business School.
Hansmann, Henry B. 1980. The Role of Nonprofit Enterprise. The Yale Law
Journal 89 (5): 835–901.
Harbaugh, William T. 1998. What Do Donations Buy?: A Model of Philanthropy
Based on Prestige and Warm Glow. Journal of Public Economics 67 (2): 269–
284.
Höchstädter, Anna Katharina, and Barbara Scheck. 2015. What’s in a Name: An
Analysis of Impact Investing Understandings by Academics and Practitioners.
Journal of Business Ethics 132 (2): 449–475.
James, Estelle. 1998. Commercialism Among Nonprofits: Objectives, Oppor-
tunities, and Constraints. In To Profit or Not to Profit: The Commercial
Transformation of the Nonprofit Sector, ed. B.A. Weisbrod, 271–286. New
York: Cambridge University Press.
Jensen, Michael C., and William H. Meckling. 1976. Theory of the Firm:
Managerial Behavior, Agency Costs and Ownership Structure. Journal of
Financial Economics 3 (4): 305–360.
Johnson, Paula D. 2018. Global Philanthropy Report: Perspectives on the Global
Foundation Sector. Cambridge: Harvard Kennedy School.
Light, Paul C. 2009. The Search for Social Entrepreneurship. Washington, DC:
Brookings Institution Press.
Milligan, Katherine, and Mirjam Schöning. 2011. Taking a Realistic Approach
to Impact Investing: Observations from the World Economic Forum’s Global
Agenda Council on Social Innovation. Innovations 6 (3): 155–166.
O’Donohue, N., C. Leijonhufvud, Y. Saltuk, A. Bugg-Levine, and M. Bran-
denburg. 2010. Impact Investments: An Emerging Asset Class. New York: JP
Morgan.
Segal, Lewis, and Burton A. Weisbrod. 1998. Interdependence of Commercial
and Donative Revenues. In To Profit or not to Profit: The Commercial Transfor-
mation of the Nonprofit Sector, ed. Burton A. Weisbrod, 105–127. Cambridge:
Cambridge University Press.
Spiess-Knafl, Wolfgang. 2012. Finanzierung von Sozialunternehmen: Eine
Theoretische Und Empirische Analyse. München, Technische Universität
München, Diss. http://d-nb.info/102496406X/34.
Van Slyke, David M. 2007. Agents or Stewards: Using Theory to Understand
the Government-Nonprofit Social Service Contracting Relationship. Journal
of Public Administration Research and Theory 17 (2): 157–187.
Weisbrod, Burton A. 1998. Modeling the Nonprofit Organization as a Multi-
product Firm: A Framework for Choice. In To Profit or Not to Profit:
The Commercial Transformation of the Nonprofit Sector, 47–64. New York:
Cambridge University Press.
Williams, Geoffrey. 2007. Some Determinants of the Socially Responsible Invest-

ment Decision: A Cross-Country Study. The Journal of Behavioral Finance 8
(1): 43–57.
CHAPTER 4
The Impact Investing Market
The market for impact investments has started to gain momentum in the
second decade of the twenty-first century. There is significant interest
from investors, the sector has professionalized its practices and there is
a lively investment activity.
However there is still a weak secondary market for equity investments
which leads to a preference for debt capital. There are also difficulties in
bringing together the supply and demand side of the market. Incubators
or intermediaries delivering investment-readiness programs are trying to
address those issues. Moreover, there is little cooperation between the
actors of the market (Spiess-Knafl and Scheck 2019).
In the following the different actors of the social investment market
are portrayed and discussed.
4.1 Actors
Over the last years a market for social investment developed. Every actor
of the traditional sector was replicated in the social finance sector (Table
4.1).

Switzerland AG 2023
https://doi.org/10.1007/978-3-031-32183-2_4
74
Table 4.1 Actors of the social capital market
Actors in the Examples Actors in the social Examples

traditional capital market
markets
Networks Invest Europe, National Networks European Venture Philanthropy Association (EVPA), Aspen
Venture Capital Network of Development Entrepreneurs (ANDE), Schwab
Association (NVCA) Foundation for Social Entrepreneurship, Global Impact
Investing Network (GIIN)

Investment bank Goldman Sachs, Morgan Social investment ClearlySo, Big Society Capital, Financing Agency for Social
Stanley advisor Entrepreneurship (FASE)
Venture capital funds Sequoia Capital, Kleiner Social venture Bridges Ventures, BonVenture, PhiTrust
Perkins Caufield & capital funds
Byers
Commercial banks HSBC, Bank of Ethical banks Triodos, First GREEN Bank, Vancity, GLS Bank
America, Deutsche Bank
Crowdfunding CircleUp, AngelList, Social impact BetterPlace, Green Rocket, Indiegogo Equity, Kiva
platforms Early Shares crowdfunding
platforms
4 THE IMPACT INVESTING MARKET 75
4.1.1 Networks
Networks try to connect actors working on the supply and demand side
of the social capital market. The social capital market suffers from very
high transaction costs. This can be explained by small investment sizes
and high costs for due diligence and the identification of targets. Both
financial and social criteria must be analyzed and evaluated. Search costs
arise in the identification of attractive investment targets in a fragmented
and complex market.
Moreover, cooperation between the players in the social capital market
is not well established. There are some conferences that bring together
stakeholders, but there is almost no co-operation between philanthropic
and yield-oriented investors. Networks can fill this role as an intermediary
between supply and demand and enable access to expertise. If necessary,
social innovations can be made visible and synergy effects can be used
within the network.
There are some networks that are positioned in this area. They can
therefore be defined according to the role of their networking activities.
There are networks that act exclusively on the supply or demand side, and
others that try to network supply and demand.
The aim of the European Venture Philanthropy Association (EVPA)
is to link European venture philanthropy funds and to contribute to
an exchange. In addition to regular studies and workshops, the annual
conference is an important contact for the sector. There are also orga-
nizations working on the potential deal flow (“pipeline”) and making it
available to several investors. The Asian Venture Philanthropy Network
offers similar services for the Asian market.
There are also networks for banks. FEBEA is the European Federation
of Ethical and Alternative Banks and Financiers. The Global Alliance for
Banking on Values (GABV) has a global approach and includes banks
which finance projects with a social or environmental focus.
The association of social enterprises is established by the Schwab
Foundation for Social Entrepreneurship, Ashoka, and the Skoll Forum
for Social Entrepreneurship. Every year, a certain number of social
entrepreneurs are selected as fellows and are also made visible by this
award. Within the framework of a fellowship program, they gain access to
networks, events, and pro bono services.
4.1.2 Social Investment Advisors

Investment banks are the key actors when it comes to match supply
and demand. The equivalent of traditional investment banks are social
investment advisors. Big Society Capital was founded with 600 million
GBP of funding from dormant bank accounts and is trying to connect
investors with charities and social enterprises. Since their start in 2011,
it has committed 820 million GBP to reach more than 2,000 organi-
zations. It is interesting to note how a commercial approach enables a
financial intermediary to give out loans more than once and thus multiply
its impact.
Besides Big Society Capital, there are other social investment advisors.
The Financing Agency for Social Entrepreneurship (FASE) is consulting
social enterprises in their fundraising process and connecting them with
investors. From the start they have helped social enterprises raise more
than 50 million Euros and have set up their own investment fund as well.
4.1.3 Social Venture Capital Funds

Social venture capital funds apply the concepts of venture capital to the
social sector. It was first discussed by Letts et al. (1997) about the promise
of using the concept of venture capital for philanthropy. It is thus also
known as venture philanthropy.
Those funds follow some rules. They provide their portfolio company
with access to their network, provide non-financial support in the form
of advice, support capacity building, and measure the performance
(John 2006). Social venture capital funds also apply multi-stage selec-
tion processes and apply a number of selection criteria. For this reason,
investors make a detailed analysis before investing to use capital as effi-
ciently as possible. Table 4.2 lists some selection criteria that investors
make.
The concept is concerned with aspects that relate to the specific service
provision. Like traditional investors, they also examine innovations and
strategies. There are also specific factors such as the intended system
change, which can be reflected in the change in the living conditions of
the target group or in new social patterns of thought.
The motivation is analyzed for entrepreneurs who are facing a social
problem. There are also the classical criteria, such as creativity and the
Table 4.2 Selection criteria
Concept Entrepreneur Market Social Financials
Innovation Creativity Social problem Social return Business

model
Strategy Communications Market Reach Legal due
capability development diligence
System change Social motivation Competition Transferability Financing
needs
Source Based on Heister (2010)
ability to communicate but also the social motivation often resulting from
the entrepreneur’s biography.
Markets of social enterprises are analyzed according to criteria other
than traditional markets. The question is whether it is a social problem
at all and which target group benefits from the concept. There is also
the question of how the market will develop and how many people are
affected. For the investor, there is always the question of the competitors
present in this market and how the social enterprise differs from the other
approaches.
In the case of investors who also pursue a social objective the social
return is of great interest. It concerns the value created for society
and involves the range and size of the social problem. Another differ-
ence concerns the transferability of the concept. An easy transferability
increases the attractiveness of the concept since other social enterprises
could adopt the concept.
Table 4.3 gives an overview of European social venture capital funds.
It describes the fund, the amount of capital they’ve raised, and portrays
selected investments.
4.1.4 Ethical Banks

Another actor of the social capital market are ethical banks. They focus
on a growing niche of the financial sector which integrates cultural, social,
local, and ecological criteria in their decision-making. They also refuse to
participate in speculative asset classes and usually provide their clients with
transparent processes.
There are even experiments to create democratic decision-making
processes.
78
Table 4.3 Selected social venture capital funds
Venture Description Selected investments

philanthropy fun
Name of Short description Amount &
investment instrument
BonVenture BonVenture funds companies and Ilses weite Welt Holistic interactive concept for Not publicly
Germany organizations with a social purpose dealing with senile dementia in disclosed
in German-speaking countries. The everyday life
fund seeks projects that are Rock your life! University students coaching Not publicly
innovative with a strong social problematic junior-high pupils disclosed
impact, are led by motivated and Kinderzentren Responsible day care centers with Not publicly
committed social entrepreneurs, and Kunterbunt proximity to the workplace disclosed
will be financially self-sustaining in
Wald 21 Ecologically responsible tree Not publicly

the long term in the areas of social nurseries for high grade wood disclosed
businesses, ecological impact, and
Parlamentwatch Monitoring of the political activities Not publicly
societal improvement of the representatives in the German disclosed
Parliament
philanthropy fun
Bridges Ventures Bridges Ventures is a sustainable Auto 22 Car service garage with preferable Not publicly
United Kingdom growth investor whose commercial employment of young people, disclosed
expertise is used to deliver both reinvesting in new job opportunities
financial returns and social and Care and Share Employee-owned homecare GBP 200,000
environmental benefits. They believe associates franchises for elder people Debt Capital
that market forces and cloud.IQ Apps and technical backend GBP
entrepreneurship can be harnessed to provision for firms of all kinds 2,000,000
do well by doing good. They Equity
currently have three types of funds Hackney Employment and social inclusion of GBP
under management Community the disadvantaged and community 2,000,000
Transport HCT development Debt Capital
4
Historic Futures Supply chain adjustment to assure it GBP

complies with corporate governance 1,600,000
goals, reduces emissions and waste Equity
Noaber The Noaber Foundation aims to Abakus B.V. Elaborated digital doctor–patient Not publicly
Foundation initiate and support the acceleration consulting system disclosed
Netherlands of innovations in the civil society Autest Employment of autists as software Not publicly
where “noabership” (neighbourship) testers disclosed
is key. These innovations are related Carefarm’t Agricultural farming project, which Not publicly
to health and care, education, and Paradijs lets visitors participate in the disclosed
community building. To reach its farming business
aims, the foundation acts as an Loco Tender Specialized schooling system for Not publicly
“entrepreneurial philanthropist” B.V. children with learning disabilities disclosed
Mentalshare Provision of e-mental health services Not publicly
for effective prevention and disclosed
THE IMPACT INVESTING MARKET
treatment of mental disorders

79
(continued)
80

philanthropy fun
Oltre Venture Oltre Venture is the first Italian Ambulatorio Offers access to high-end dental care EUR 115,000
Italy Social Venture Capital company, Dentistico to the economically weak Equity
supporting the growth of enterprises Boccaleone Sri
which are able to match social value Centro Medico High level of all kinds of specialized
EUR
and economic sustainability. Such Santagostino medicine, available to all 1,500,000
enterprises appeal to the grey area of Equity
invisible hardship and to fragile Concordia Spa Housing for elderly with special care EUR 300,000
social-economic problems such as
facilities Equity
housing discomfort, unemployment, Fraterniti Sistema Cooperative specializing in services EUR 300,000
solitude, and marginalization for public administrations such as Equity
tax plannings and collection of those
Personal Energy Planning and installation of EUR 570,000
photovoltaic systems Equity (100%
stake)
PhiTrust PhiTrust Partenaires is dedicated to Association Cooperative, providing excluded EUR 50,000
France funding and mentoring companies in Chênelet people with an accomodation, job Equity
the fields of social business through and healthcare paired with quality of
its foundation and social investment living
funds. Phitrust focuses its
investments both at a European and
a worldwide level. PhiTrust
Partenaires can be seen as the social
division of the PhiTrust Asset
Management Group
philanthropy fun
Dialogue social Disabled people guide through EUR 3,000

enterprise exhibitions in which visitors explore Equity, EUR
the life of blind people 150,000 Debt
Capital
Ecodair Refurbishment of computer EUR 65,000
technology by mentally impaired Equity, EUR
people 200,000 Debt
Capital
Ethical Property Development and management of EUR 530,000
office space for non-profits in Equity
high-environmental quality (HEQ)
4
buildings
Foncière Social housing project with support EUR 150,000
Chênelet from companies providing Equity, EUR
sustainable building materials 100,000 Debt
Capital
Groupe la Social reintegration through EUR 400,000
Varappe employment in construction, waste Equity, EUR
treatment, maintenance of green 52,000 Debt
spaces and installation of solar panels Capital
Source Own research, EVPA, Company information (Spiess-Knafl and Jansen 2013)
THE IMPACT INVESTING MARKET
81
Table 4.4 Balance

2020 2015 2010
sheet data of selected
ethical banks GLS Bank
Loans 4,828 2,323 1,142
Deposits 7,555 3,946 2,102
Alternative Bank Schweiz
Loans 1,631 1,077 801
Deposits 2,020 1,477 995
Triodos Bank
Loans 10,457 5,689 2,820
Deposits 13,415 7,943 4,027
Merkur Cooperative Bank
Loans 251 209 194
Deposits 539 336 247
Southern Bancorop
Loans 1,136 768 605
Deposits 1,378 1,009 939
Source Global Alliance for Banking on Values (n.d.); company data;

numbers in million USD
Some of the larger ethical banks are globally organized within the
Global Alliance for Banking on Values (Global Alliance for Banking on
Values, n.d.). The development of the loans and deposits are shown in
the following table. They have all posted impressive growth figures over
the last years (Table 4.4).
4.1.5 Crowdfunding Platforms

The last actors are crowdfunding platforms. Crowdfunding is a major
trend in the financing of social innovations and an attractive source of
financing for social enterprises (Lehner 2013).
There are four different types of crowdfunding depending on the type
of funding provided. The different types are equity, debt, donation, or
reward-based. In some cases it might be an equity investment which is
structured like a debt instrument. The different types are illustrated in
Table 4.5.
The total numbers are hard to estimate but go into the billions each
year with thousands of projects posted online.
For social enterprises, crowdfunding is an interesting alternative. The
large number of individuals supporting the social enterprise increases the
Table 4.5 Forms of crowdfunding
Form Description
Equity-based Individuals purchase equity issued by a company

Crowdfunding
Reward-based Backers provide funding to individuals, projects, or companies in
Crowdfunding exchange for non-monetary rewards or products
Donation-based Donors provide funding to individuals, projects, or companies based
Crowdfunding on philanthropic or civic motivations with no expectation of
monetary or material return
Debt-based Individuals provide a loan to the company
Crowdfunding
Source Own illustration based on Ziegler et al. (n.d.)
legitimacy and can also act as multipliers for the social mission. The large
number of backers and investors also pose certain problems. It is complex
to manage the stakeholder relationship and there might not be enough
resources to engage with the investors on an ongoing basis.
Moreover, we have already discussed the benefits of principals and
engaged shareholders. They have control and voting rights and act as an
important counterpart for the management of the social enterprise. Given
that the individual investor has only invested limited amounts of money
there is less incentive to control and advise the company’s management.
Crowdfunding has a certain preference for lifestyle segments or those
brands which are easier to communicate with potential investors. That
also explains why social media activities are integral to most crowdfunding
campaigns.
Investments are also rather illiquid and it might take a while to sell an
investment once it is needed.
Given that there are thousands of campaigns at any given time those
platforms can be interesting platforms to analyze what is happening next.
It could thus be an innovation radar.
In some cases, there was a first round of investing by the crowd which
was later supplemented by institutional investors. In those cases, it is
necessary to work on good mechanisms to have good governance struc-
tures. In the early days of crowdfunding there were some cases in which
each shareholder of the crowd had to support and agree to certain actions
of the company.
4.2 The Instruments and Mechanisms

4.2.1 Socially Responsible Investments
Introduction
Social responsible investments are the method to achieve social good in
the public capital markets.
Some date the origins of socially responsible investing date it back
to the Quakers but the more recent origins can in be found in the
1960s. Williams (2007) identifies different movements in different coun-
tries. In Germany, those initiatives were influenced by environment and
peace movements during the 1970. In the United Kingdom, it dates to
Victorian social concerns. The first ethical bank was created in 1974 and
the first ethical investment fund started its operations in 1984. In the
United States, socially responsible investments have started traction in
the political climate of the 1960s and 1970s. Nowadays, it has become a
mainstream approach which has been widely adopted.
Basically, there are different strategies to invest in the industry which
are (1) exclusion of stocks from the investment universe in the form of
negative screening, (2) positive screening and selection of best-in-class
investments, and (3) shareholder activism and engagement approaches.
Negative selection excludes investments in certain sectors, such as
the tobacco, weapons, or gambling industry. In the case of a positive
selection, investments are made in the companies with the most environ-
mentally friendly production processes or the best working conditions in
a benchmark process. However, it may also consist of a combination of
the two methods. These approaches, however, almost exclusively involve
investments in publicly traded shares and bonds. The third approach can
also be connected with the other two approaches which is based on
engagement and activism. This can happen through voting but also public
actions such as writing of reports, meeting the management or voting at
the annual general meeting.
Investor Profile
In the early days of this investment style studies found socio-demographic
differences between conventional and socially responsible investors.
Socially responsible investors were thus found to be younger and better
educated (McLachlan and Gardner 2004; Williams 2007).
Rosen et al. (1991) show that socially responsible investors are
younger and better educated than conventional investors. Beal and Goyen
(1998) asked the shareholders of the Australian environmental protection

company Earth Sanctuaries Limited (ESL) why they have invested. Most
were focused on non-financial criteria which is shown with the responses:
(1) conservation of endangered animals, (2) help to save endangered
ecosystems, (3) conservation of endangered plants, (4) provision of sanc-
tuaries, (5) help protect ecosystems, (6) provision of educational services,
(7) financial stability of ESL, (8) provision of recreational services, (9)
share price (capital) growth, (10) portfolio diversification, and (11)
dividends. Investors were also found to be more female and better
educated.
Lewis and Mackenzie (2000) show in a sample of 1,146 British
investors of ethical investment funds that they are often middle-aged
and middle-income and have an active role in political parties, non-profit
organization, or religious groups.
Socially responsible investors can also be segmented into various
groups. According to Nilsson (2009) the largest segment can be classified
as socially responsible and return driven. They believe that one person can
make a difference toward solving social and environmental issues. The
second group is primarily concerned about profit and believes that SRI
funds could be a good financial decision. The third group is primarily
concerned about social responsibility by allocating a part of their overall
portfolio to SRI funds.
McLachlan and Gardner (2004) compare 54 ethical investors against
55 conventional investors. Investors differed in terms of age, education,
income, and pro-social orientation. However, Williams (2007) shows in
an international sample that demographic factors do not play a prominent
role. This would mean that social selection criteria in the mainstream of
investment decisions arrived.
Financial Perfofrmance
The financial performance of SRI funds depends on the study, the
timeframe, and the selected universe. Early research focused on the rela-
tionship between corporate social performance and corporate financial
performance at the company level (e.g., Orlitzky et al. 2003; Waddock
and Graves 1997). Corporate social performance can be defined as “a
business organization’s configuration of principles of social responsibility,
processes of social responsiveness, and policies, programs, and observable
outcomes as they relate to the firm’s societal relationships” (Wood 1991).
The reasons for this causality and the factors driving this relationship are
still debated but it seems that being good is also an attractive strategy.
In recent years there has been research on the financial performance
of mutual funds following a SRI strategy. Capelle-Blancard and Monjon
(2014) find that industrial screens decrease financial performance but
that the following international agreements such as UN Global Compact
Principles or ILO regulations have no impact. Industrial screens reduce
the diversification of a portfolio more than a screen for compliance with
international regulations.
Nofsinger and Varma (2014) find that socially responsible mutual
funds outperform traditional mutual whenever market crises occur. They
tend to underperform in non-crisis periods. In a meta-analysis of invest-
ments in the public capital markets (Revelli and Viviani 2015) find that
the consideration of CSR is neither a weakness nor a strength compared
with traditional investment decision criteria.
4.2.2 Outcome-Based Financing Models

Scarce financial resources restrict the ability of many social services and
companies to innovate. This applies to companies and initiatives both
within and outside traditional welfare organizations. In order to make
funding more accessible, efficient, and effective, outcome-based financing
models have become increasingly popular. These models are built around
a payment structure that is dependent on the success of the under-
lying programs as opposed to the actual costs or outputs they occur.
Different terms are used to describe outcome-based schemes, such as
social outcomes contracting (SOC), payment by results (PbR), social
impact bonds (SIB), development impact bonds (DIB), pay for success
(P4S or PFS), results-based financing (RBF), or performance-based
financing (PBF). These terms are often used interchangeably or differ
depending on the geographic region in which they are used (European
Commission et al. 2021).
Different financing structures have been developed around this notion,
varying according to which stakeholder (1) provides working capital,
(2) funds the outcome premium, and (3) takes on the investment risk.
Depending on the actual model, an outcomes-based financing instrument

usually involves some or all of the following stakeholders:
● Outcome funder: A public entity or any other outcome funder(s)

(for example, a foundation, an international donor) is responsible
for paying back the principal and/or interest if the pre-determined
outcomes are achieved;
● Intermediary: Receives the loan from the investor(s) and coordi-
nates all project activities (such as distribution of funds, outcome
assessment, monitoring, etc.)
● Investor(s): Provides working capital upfront. Investors include
foundations, investment funds, banks, private sector CSR programs,
or individuals;
● Service provider(s): Government entity, NGO, or private enter-
prise that executes the interventions required to achieve the desired
outcomes.
● Evaluator: Entity that validates the achievement of the outcomes.
● Beneficiaries: Population that benefits from the project.
Different combinations of stakeholders, funding streams, and risk alloca-

tion have led to the emergence of various funding structures:
Social Impact Bonds (SIB) are the most widely known and were first
launched in 2010 in the United Kingdom addressing high recidivism rates
among young offenders (Bolton and Savell 2010). Within the structure
of an SIB, the government as outcome payer reimburses private investors
who have provided upfront capital plus an additional premium in case
of success. The reimbursement and the payout of a potential return only
take place if evidence shows that a certain, pre-agreed minimum success
has been achieved. In general, the more successful the intervention, the
greater the return to investors. In some cases, the interest rate is capped,
however. If the agreed-upon social objectives have not been reached,
investors lose their capital partly or entirely depending on the contractual
agreement.
An SIB thus enables effective partnerships between various stake-
holders from different sectors, i.e., public administration, private
investors, and social organizations. Sometimes, this model and the
ensuing partnership are structured by an intermediary, a special purpose
entity taking on legal, financing as well as operational tasks. However,
there are also examples of social impact bonds which operate without
such an intermediary (in this case, the social service providers receive, for
example, capital directly from the private investors) or mixed forms.
The name of the financing vehicle, “bond” is misleading, though: an
SIB is not a financial instrument with a fixed interest rate, nor are SIBs
legally structured as traditional bonds. Rather, the financial return that can
be generated by an SIB is variable, since it depends on the achieved social
impact, in some constructs, even the nominal capital is not necessarily
hedged. Thus an SIB can rather be considered a public–private partner-
ship, that some authors associate with an equity-like character due to the
involved risk, while others compare it with derivatives, and more specifi-
cally digital options, considering the complex contractual relationships as
well as the time-lag between the actual investment and the decision about
the payback.
The structure and objectives of an SIB have also been transferred
to other areas. In the context of development, they are implemented
as so-called Development Impact Bonds (DIBs; The Center of Global
Development & Social Finance, 2013). This financing mechanism intends
to improve the efficiency of development assistance by improving the
quality as well as the local accountability of development funding. The
outcome funders in this case are also government bodies, primarily
public sector agencies from developing or donor countries who pay for
achieved outcomes as local administrations often lack the capital for such
interventions.
As of January 1, 2022, there were 221 social and development impact
bonds in 37 countries around the world, including 21 in low- and middle-
income countries (LMIC). The leading sectors globally continue to be
social welfare (75) and employment (68), while in LMICs employment
(8) and health (6) prevail (Osborne 2022). Often, they are imple-
mented for preventative interventions leading to cost savings at a later
stage. SIBs are therefore an interesting alternative for budget-constrained
governments.
In the context of ecologically oriented investments, the first Environ-
mental Impact Bond (EIB) has been launched in 2016 in Washington,
DC to fund the construction of infrastructure to manage storm water
runoff and improve the local water quality (Glazier 2016). The construc-
tion cost will be paid for by the public administration, but the perfor-
mance risk of the infrastructure is shared among government and private
Fig. 4.1 Outcomes-based financing structure (Source Own depiction based on

Beetz [2018])
investors. Consequently, payments on the bond may vary based upon the
success of the environmental intervention.
Another outcomes-based structure that has emerged is the so-called
Social Success Note. In such a model, the service provider is contracting
directly with the investor for the funding. The investor is incentivized
by an outcome payer to provide this funding by an additional outcome
payment.
A Social Impact Incentive combines the same stakeholders, but in this
case, it is the social service provider that takes out a loan and receives the
outcome premium upon successful implementation (Fig. 4.1).
In a recent development, fund solutions have emerged for these
outcomes-based models. Rather than developing and funding outcomes-
based models one at a time, outcomes funds allow for designing and/or
implementing several projects simultaneously thus lowering transaction
costs through greater standardization and synergies as well as mounting
outcomes-based models on a larger scale.
All outcome-based models need strong underlying data to calculate
the costs and potential savings through various interventions. In order to
provide this data, the UK government has initiated a unit cost database
which collects cost estimates in a single place. Those cost estimates make
it easier for social sector organization to build and develop business plans
(Table 4.6).
The literature on outcome-based models mentions several advantages
for the involved stakeholders:
Public institutions must reimburse the cost of such an investment only
if the project is successful. Thus, limited financial resources can be used
more efficiently and social purposes can be promoted with orientation
Table 4.6 Costs per unit in the social sector (selection)
Detail Unit Fiscal

value
Child taken into care—average fiscal cost across different types Per year £52.676
of care setting
Average cost of a fire in a domestic building Per incident £51.129
Offender, Prison Per person £34.398
Male Category B prison including central costs (costs per per year
prisoner per annum)
Temporary accommodation—average weekly cost of housing a Per week £177
homeless household in temporary accommodation using stock
belonging to a private landlord
Not in Employment Education or Training (NEET) Per year £4.637
Source New Economy (n.d.)
toward impact. This leads to efficiency gains. Since the financial risk is
taken on by private investors or the social service providers, govern-
ment agencies can experiment with new innovative interventions for
complex problems addressing beneficiaries that are not well-known, diffi-
cult to reach, or emerging (effectiveness gains). Moreover, through their
financing structure, outcome-based models are very well suited to endorse
preventive measures that could often not be funded in the past due to
difficulties in proving results.
Private investors can channel their funds into the social sector and thus
combine financial investment with the solution of social problems. In
addition, outcome-based models offer the possibility to further diversify
impact investing portfolios according to individual risk-return criteria.
Social organizations are enabled to focus on their core work with
the beneficiaries rather than continuously fundraising through a secure
financing base. In addition, the pre-defined project budget gives them a
certain degree of flexibility in the administration of the funds.
However, a number of challenges have also been identified that may
occur during the implementation of such an instrument: There is a high
complexity involved and significant transaction costs might occur. Those
transactions costs can probably be reduced once a certain level of stan-
dardization is introduced. Moreover, it might be complex to determine
the remuneration reflecting a risk-adjusted interest rate. Given that the
remuneration is linked to the achieved social change there needs to be a
professional assessment.
4.2.3 Guarantee Schemes

Guarantees enable the social enterprise to take on additional debt capital.
They are thus credit-enhancing and a way to leverage additional capital.
The guarantor takes on the risk of the repayment and therefore enables
the investee to get debt capital at preferential interest rates as the credit
rating of the guarantor is used to calculate the loan terms.
Governments are the traditional providers of guarantees. They give
guarantees to financial institutions which leads to lower credit default
costs. Once a loan is defaulting the guarantee covers these losses which
leads to lower overall costs for the bank (Fig. 4.2).
Potential cases are loans for housing in undervalued neighborhoods,
operating loans for companies or loans for energy efficiency improve-
ments (Schiff and Dithrich 2017). This shows that guarantees are a good
financing mechanism to leverage additional capital and enable financing
structures.
It can either be combined with other financing provided at the same
time such as equity or there can be a fee on the provision of the guarantee.
Fig. 4.2 Guarantee scheme (Source Own illustration)

4.2.4 Catalytic Structures

Although impact investing is about investments which are repayable
public subsidies and grant financing are an important component of the
market for impact investments. Catalytic investments can initiate large
changes through additional funding.
Catalytic investments focus on initiating social change, economic devel-
opment, and creating social value by attracting additional private capital.
They can include a range of financing instruments as the private capital
can be levered through signaling effects, risk mitigation, or capacity
building which is also often referred to as investment-readiness programs.
As diverse as the aims and the financing instruments are also the capital
providers of catalytic solutions. They can be either institutions of the
public sphere or strategic philanthropists. Ultimately, they can make
high-performing social value creating enterprises investable and scalable.
The main tool to achieve these targets is by attracting private capital
and unlocking larger amount of capital for investments into business
models with strong evidence for generating social impact. Examples of
sectors that where were established by catalytic investments especially in
their early stages are microfinance or renewable energy. Various instru-
ments used have shown how to attract significant amounts of private
capital while at the same time generating social and environmental value.
One example is Gavi Alliance which was previously known as Global
Alliance for Vaccines and Immunisation is building such a model. It pools
the demand from the world’s poorest countries and signals thus that there
is a large and viable market. It combines this pooled demand with support
from governments and donors. One interesting financing mechanism is
the International Finance Facility for Immunisation (IFFIm). It raises
funds by issuing bonds which are based on legally binding commitments
from donors. It thus makes the long-term commitments immediately
available for programs.
Convertible grants have already been discussed as an attractive
financing instrument. Convertible Grants are one way to link financing
in these two phases of the cycle. Donations are converted into equity
in case of success. For foundations, it might be an interesting approach
in a slightly modified form. As part of a funding agreement it could be
determined that the foundation takes a certain share of the equity in a
subsequent capital increase at a specified price and thus can secure a share
of a company’s positive development.
An optimal life cycle funding would also provide for debt in the early
stage to promote innovation donations and in the later phase scaling
equity when there is a viable business model. There are some investors
who participate in this financing in two phases. Acumen Fund and LGT
Venture Philanthropy, for example, have in some cases awarded first a
donation and later a loan.
Bibliography
Beal, Diana, and Michelle Goyen. 1998. Putting Your Money Where Your Mouth
Is? A Profile of Ethical Investors. Financial Services Review 7 (2): 129.
Beetz, Peter. 2018. Social Impact Incentives/Social Success Note.
Bolton, Emily, and Louise Savell. 2010. Towards a New Social Economy: Blended
Value Creation Through Social Impact Bonds. London, UK: Social Finance.
Capelle-Blancard, Gunther, and Stéphanie. Monjon. 2014. The Performance of
Socially Responsible Funds: Does the Screening Process Matter? European
Financial Management 20 (3): 494–520.
European Commission, Social Affairs and Inclusion Directorate-General for
Employment, L. Klimavičiūtė, V. Chiodo, B. De Pieri, and V. Gineikytė. 2021.
Study on the Benefits of Using Social Outcome Contracting in the Provision of
Social Services and Interventions: A Cross-Country Comparative Assessment of
Evolving Good Practice in Cross-Sectoral Partnerships for Public Value Creation:
Annexes. Publications Office. https://doi.org/10.2767/412285.
Glazier, Kyle. 2016. DC Water Closes Historic Deal. The Bond Buyer. http:/
/www.bondbuyer.com/news/washington-infrastructure/dc-water-closes-his
toric-deal-1114647-1.html.
Global Alliance for Banking on Values. n.d. Thinking People Before Profit.
Global Alliance—For Banking on Values. Accessed November 2, 2016. http:/
/www.gabv.org/.
Heister, Peter. 2010. Finanzierung von Social Entrepreneurship Durch Venture
Philanthropy Und Social Venture Capital. Springer. https://doi.org/10.
1007/978-3-8349-6309-3.pdf.
John, Rob. 2006. Venture Philanthropy: The Evolution of High Engagement
Philanthropy in Europe. Oxford: Skoll Centre for Social Entrepreneurship.
Lehner, Othmar M. 2013. Crowdfunding Social Ventures: A Model and Research
Agenda. Venture Capital 15 (4): 289–311.
Letts, Christine W., William Ryan, and Allen Grossman. 1997. Virtuous Capital:
What Foundations Can Learn from Venture Capitalists. Harvard Business
Review 75: 36–50.
Lewis, Alan, and Craig Mackenzie. 2000. Morals, Money, Ethical Investing and
Economic Psychology. Human Relations 53 (2): 179–191.
McLachlan, Jonathan, and John Gardner. 2004. A Comparison of Socially

Responsible and Conventional Investors. Journal of Business Ethics 52 (1):
11–25.
New Economy. n.d. Unit Cost Database. New Economy. Accessed October
28, 2016. http://neweconomymanchester.com/our-work/research-evalua
tion-cost-benefit-analysis/cost-benefit-analysis/unit-cost-database.
Nilsson, Jonas. 2009. Segmenting Socially Responsible Mutual Fund Investors:
The Influence of Financial Return and Social Responsibility. International
Journal of Bank Marketing 27 (1): 5–31. https://doi.org/10.1108/026523
20910928218.
Nofsinger, John, and Abhishek Varma. 2014. Socially Responsible Funds and
Market Crises. Journal of Banking & Finance 48: 180–193.
Orlitzky, Marc, Frank L. Schmidt, and Sara L. Rynes. 2003. Corporate Social
and Financial Performance: A Meta-Analysis. Organization Studies 24 (3):
403–441. https://doi.org/10.1177/0170840603024003910.
Osborne, Sarah, and Emily Gustafsson-Wright. 2022. A Review of the Global
Impact Bonds Market in 2021 and What to Expect in 2022. Brookings
(blog), January 6. https://www.brookings.edu/blog/education-plus-develo
pment/2022/01/06/a-review-of-the-global-impact-bonds-market-in-2021-
and-what-to-expect-in-2022/.
Revelli, Christophe, and Jean-Laurent. Viviani. 2015. Financial Performance
of Socially Responsible Investing (SRI): What Have We Learned? A Meta-
Analysis. Business Ethics: A European Review 24 (2): 158–185.
Rosen, Barry N., Dennis M. Sandler, and David Shani. 1991. Social Issues and
Socially Responsible Investment Behavior: A Preliminary Empirical Investiga-
tion. Journal of Consumer Affairs 25 (2): 221–234.
Schiff, Hannah, and Hannah Dithrich. 2017. Scaling the Use of Guarantees in
U.S. Community Investing. Global Impact Investing Network. https://the
giin.org/assets/GIIN_Issue_Brief_Guarantees_final%20for%20web.pdf.
Spiess-Knafl, Wolfgang, and Stephan A. Jansen. 2013. Imperfections in the Social
Investment Market and Options on How to Address Them. Ex-Ante Evaluation
for the European Commission. Germany: Zeppelin University.
Spiess-Knafl, Wolfgang, and Barbara Scheck. 2019. Social Enterprise Finance
Market Analysis and Recommendations for Delivery Options. Luxembourg:
Publications Office of the European Union.
Waddock, Sandra A., and Samuel B. Graves. 1997. The Corporate Social
Performance-Financial Performance Link. Strategic Management Journal 18
(4): 303–319.
Williams, Geoffrey. 2007. Some Determinants of the Socially Responsible Invest-
ment Decision: A Cross-Country Study. The Journal of Behavioral Finance 8
(1): 43–57.
Wood, Donna J. 1991. Corporate Social Performance Revisited. The Academy of

Management Review 16 (4): 691. https://doi.org/10.2307/258977.
Ziegler, Tania, E.J. Reedy, Annie Le, Randall S. Kroszner, Bryan Zhang, and
Garvey Kleran. n.d. Hitting Stride: The 2017 Americas Alternative Finance
Industry Report. Accessed June 28, 2017. http://polsky.uchicago.edu/sites/
polsky.uchicago.edu/files/uploads/05242017_AltFin_V5%5B1%5D.pdf.
CHAPTER 5
Financing Instruments and Transactions
5.1 Introduction
Impact investing is different to other investment fields as investment
professionals not only consider risk and return but also the impact dimen-
sion. The impact dimension is incorporated in different layers. Figure 5.1
shows illustratively the layers for the capital structure, the operating
structure, and the revenue structure.
At the core of the impact investing arena is the dealflow pipeline of
deals. Investors can rely on different sources to find their deals. Some
investors have the opportunity for social enterprises to apply directly.
There is usually an option on the website where social enterprise can
submit their business plan or a concept paper. Some investors also actively
search for deals. Good sources are competitions, incubator programs, or
reports in newspapers or magazines. There is also the possibility that other
organizations refer deals. Other investors might be interested in having a
co-investor. Social investment advisors might propose deals and founda-
tions might have provided seed funding for social enterprises and then
help them to find commercial investments afterward.
It is also interesting to see how investments are performing financially.
Performance measurements in impact investing are always restricted by
small sample sizes, a survivorship bias, and self-selection problems.

Switzerland AG 2023
https://doi.org/10.1007/978-3-031-32183-2_5
Fig. 5.1 Layers in the financing structure of social enterprises (illustrative)

(Source Own illustration)
Table 5.1
Vintage year Number of Fund size Number of
Characteristics of funds
funds funds
1998–2001 6 $1–10 MM 6
2002–2004 5 $10–25 14
MM
2005–2007 15 $25–50 11
MM
2008–2010 17 $50–100 22
MM
2011–2014 25 $100–200 20
MM
2015–2019 20 >$200 MM 15
Source Cambridge Associates (2020)
Cambridge Associates (2020) measures the performance of 88 funds

which invest with an intent to generate social impact and a total volume of
$14.5 billion. A large of their investments is in the United States (54.1%),
followed by investments in Africa (28.0%). Most of the remaining funds
are invested in global emerging markets (12.9%). Most of the funds are
invested in multiple industries (84.0%) and with information technology
as the most relevant single sector (9.4%).
5 FINANCING INSTRUMENTS AND TRANSACTIONS 99
Table 5.2 Fund index summary
1-quarter 1-year 3-year 5-year 10-year 15-year
Cambridge Associates PE/CV −5.88 −0.13 5.14 4.96 5.86 5.34

Impact Investing Index
Bloomberg Barclays Capital 3.37 9.82 5.17 3.54 4.15 4.49
Government/Credit Bond Index
MSCI World ex US Index (net) −23.26 −14.89 −2.07 −0.76 2.43 3.06
MSCI World Index (net) −21.05 −10.39 1.92 3.25 6.57 5.33
MSCI Emerging Markets Index −23.57 −17.36 −1.25 0.01 1.04 5.8
(gross)
Russell 1000 Index −20.22 −8.03 4.64 6.22 10.39 7.63
Russell 2000 Index −30.61 −23.99 −4.64 −0.25 6.9 5.71
S&P 500 Index −19.6 −6.98 5.1 6.73 10.53 7.58
Source Cambridge Associates (2020)
Table 5.1 shows the funds classified with vintage year and fund size.
Analyzing the performance of those 63 funds it is interesting to
compare the performance with other funds. On a 15-year horizon they
have an annual return of 5.34% which compares favorably to other asset
classes (Table 5.2).
5.2 Financing Instruments

There is little research on why certain financing instruments are
used. There are many factors which need to be taken into account.
Entrepreneurial flexibility and agency topics remain other factors which
need to be taken into account. Debt capital requires a mature business
model and stable cash flows. Equity capital gives the investor control and
voting rights and might give rise to agency conflicts. Grants or financing
instruments with a grant component might limit the entrepreneurial flexi-
bility of social enterprises. A typical case in the social sector is that a donor
demands the opening of a new branch or office in his local home town
although it might not be in the best interest of the social enterprise.1
1 In the non-profit literature, there is a research strand which deals with the capital
structure and the financing instruments of non-profit organizations. Financing of non-
profit organizations different from for-profit companies through the equity limit. Being
limited to non-profit legal forms, non-profit organizations cannot rely on external equity
funds for financing.
In the choice of the financing instrument, there are two classical

theoretical approaches which are based either on the agency theory or
considerations of information asymmetries. In the theories that are based
on the agency theory, debt plays a central role. It revolves around trade-
off considerations which is why they are also known as trade-off theories
(Harris and Raviv 1991). A major advantage of borrowed capital is the
tax deductibility of interest. Through this tax benefit the company value
can be maximized to a certain degree of debt.
In the case of conflicts between capital providers and management
borrowed capital brings advantages in resolving agency conflicts. As
Fedele and Miniaci (2010) conduct a study of 504 Italian companies in
the field of social housing and the use of leverage. They show that the
leverage of the for-profit companies in this area is 6% higher than for non-
profit companies and name two possible effects. The commitment of the
non-profit entrepreneur reduces the risk of moral hazard compared to a
for-profit entrepreneur and the profit distribution restriction increases the
company’s equity and reduces leverage through retained earnings.
There are, however, also trade-off considerations between the share-
holders and lenders. From the equity point of view, it would be attractive
if the lender provided the entire capital but received only a portion of
the operating profits in the form of interest payments. For these reasons
lenders fear that the management is pursuing particularly risky projects.
However, this theory is not directly applicable to the choice of financial
instruments for social enterprises. Although it would be conceivable that
there would be an optimal capital structure for a financially viable finan-
cial return expectation, this theory considers the multidimensional returns
expectations of the investors only to a small extent. While a borrower is
also keen to invest in safe investment projects, it is difficult to determine
social return expectations in this context. In addition, it is not unusual for
the same investors to provide equity and equity at the same time.
The second classical theory from the for-profit sector in addition to
trade-off theory is the so-called pecking order theory (Myers 1984). It
relates to information asymmetries between investors and management.
Basically, the management of a company is much more informed about
planned investment projects than external investors. For example, new
shareholders demand a higher return because they have less information
about possible investments than the management and therefore take a
higher risk. In this context, one can speak of a clear preference order of
financing options. The financing options are internal financing through
capital reserves or operating cash flows, external borrowed capital, and

external new equity as the least preferred option.
In the case of social enterprises, this theory approach is not directly
applicable to possible information asymmetries and proportional return
requirements. It is driven by the fact that there is no corresponding
link between the risk and the return on the financing of a social enter-
prise. Thus, depending on the investor’s expectation of return, the return
on an equity instrument can be very low, negative, or at market levels.
However, an extension of the existing pecking order theory, taking
account of control, could contribute to a better understanding of the
decision-making criteria in the choice of financing instruments.
Control is another variable which has to be considered in this area.
In the case of donations, it can be assumed that a social enterprise is
limited in its entrepreneurial flexibility. The social enterprise must usually
meet the expectations of the donor. Donations can usually only be used
for specific purposes and mostly for project expenditures. In the case of
equity, the investor receives voting rights and will usually only provide
equity for a growth strategy. Although debt increases the financial pres-
sure on the social enterprises, the participation rights of lenders are usually
rather low.
Social enterprises in the choice of financing instruments must consider
a possible trade-off between growth financing and company account-
ability. The course of the beam indicates how pronounced the respective
dimension is. The flexibility in the use of funds for donations is low, for
example, while flexibility in the use of funds with repayable debt is very
high.
The different financing instruments are suited for different forms
of investments. Financing instruments are equity capital, debt capital,
mezzanine capital, hybrid capital, and donations.
They can be described according to the repayment requirements and
the interest-bearing characteristics. For impact investors, all instruments
except for donations are of interest (Fig. 5.2).
5.2.1 Equity Capital

Equity capital is the most suited financing instrument to finance long-
term investments, start-up costs or to cover short-term losses. Contrary
to other forms equity capital is not repayable and the capital provider has
several benefits. The capital provider gets a proportional part of the profits
Fig. 5.2 Financing instruments (Source Based on Achleitner et al. [2011a])
and has voting and control rights. The right to sell the shares or the stake
in the company is often restricted by the company and depends on the
clauses of the contract (Ben-Ner and Jones 1995; Brown 2006).
Impact investors need to consider legal restrictions. Many social enter-
prises use a non-profit form which do not allow the use of equity capital
as there is a profit distribution constraint. Often, there is a hybrid struc-
ture in which a non-profit entity owns a for-profit entity. Those entities
can be used for equity investments.
Equity capital is the form most often used by business angels, social
venture capital funds. At the beginning, there are also often investments
by friends or family (Mac an Bhaird and Lucey 2010). Equity capital is the
riskiest form of investments and therefore has another range of investors.
Within equity capital, there are further differences which are driven by
the return expectations of the investors. Patient capital refers to equity
capital which is provided without the expectation of any profit distribu-
tions. Normal equity capital is used by traditional investor which expects
a return on the investment.
The return can be realized when the shares are sold or when the
company pays a part of their profits as profit distribution to the share-
holders.
Among social enterprises the use of equity capital is not well estab-
lished. There is often the fear of a mission drift which refers to the fact
that an investor might push the enterprise to focus on the financial instead
of the social goals (Achleitner et al. 2013; Brown and Murphy 2003).
5.2.2 Debt Capital

Debt capital is a form of financing used for long-term projects with stable
and predictable cash flows. Debt capital is most often provided by banks
but also by investors who search for safer investments than equity capital.
It therefore requires a low-risk financial model.
Debt capital is repayable at the end of the period and the investee has
to pay an interest payment in certain pre-defined time intervals. It is also
possible that the interest payment is paid in the form of a balloon or bullet
payment at the end of the period. Debt capital providers are preferred in
case of an insolvency and have the first right to any liquidation payments.
Compared to equity capital debt capital has a fixed exit mechanism but
requires a more stable business model. Looking at the use of debt capital
among non-profit organizations there are interesting figures. 60% of the
US-based non-profit organizations use a form of debt capital (Yetman
2007).
The pricing of the debt capital is often not linked to the risk but to
the affordability. It may be that individuals donate the interests earned in
so-called linked deposits (Varga and Hayday 2016).
Debt capital can be unsecured or secured. They also have different
ranks in the financial structure and it can be junior or senior. Debt capital
can also come as mortgage, working capital, bonds in the capital market,
or simple overdrafts.
For debt capital (Fedele and Miniaci 2010) find that for-profit compa-
nies have a higher leverage than social enterprises. They argue that there
is a reduced moral hazard problem with social entrepreneurs which would
potentially allow for more leverage. On the other side, the nondistribution
constraint reduces the leverage.
5.2.3 Other Forms

Other forms include mezzanine capital, recoverable grants, forgivable
loans, convertible grants, revenue share agreements, and two financing
instruments which can be used as additional or supplementary tools
(Achleitner et al. 2011a, b).
Mezzanine Capital
Mezzanine capital combines the benefits of equity and debt capital. It has
a repayment and interest component but can also benefit from a positive
equity valuation of the company. It is a relatively popular financing instru-
ment as it gives structuring flexibility to build the financing around the
needs of the investee.
Recoverable Grants
Recoverable grants are grants which are repayable if certain milestones are
reached. The investor carries the total risk of the investment and it might
create unattractive incentive structures.
Forgivable Loan
Forgivable loan is debt capital which is reduced when the investee reaches
certain milestones. It is well-known from the employee funding where the
employee needs to return for a certain time period after the company paid
for an executive education. It can be used to prevent a mission drift as the
investee has to follow the social mission.
Convertible Grant
Convertible grants are a financing instrument which are only converted
into equity capital if the company is successful. This might be attractive
for industries which are in their early stages but have the potential to be
attractive. Industries which might serve as an example are the renewable
energy sectors.
Revenue Share Agreement

Revenue share agreements are another attractive financing instrument.
The investor is providing a certain amount of capital and receives his
repayment in the form of a pre-defined proportion of the overall revenues.
This gives the social enterprise a flexible cost structure.
Grants
Grants are rather used as supplementary and additional financing instru-
ments. Grants are the most widely used financing instrument in the social
sector and especially popular among foundations. Grants are not repayable
and carry no interests or dividends. They are therefore not part of the
impact investing universe but investors can use them to provide grants
for capacity building or for a certain social project.
5.3 Investments
5.3.1 Structure of the Investments
One of the early studies on the structures of deals was done by Spiess-
Knafl and Aschari-Lincoln (2015).
This study was based on the analysis of 342 social investments. They
were done in a rather narrow field which excludes microfinance, social
banking loans, or clean tech. The investments were done by Aavishkkaar,
Acumen, African Agricultural Capital, Bamboo Finance, Beyond Capital
Fund, BonVenture, Big Issue Invest, Bridges Venture, CAN Break-
through, Core Innovation Capital, d.o.b. Foundation, E+Co, Equitas,
Ferd Social Entrepreneurs, Good Capital, Grassroots Business Fund, Gray
Ghost Ventures, Impetus, Ignia, LGT Venture Philanthropy, New Profit,
Noaber Foundation, Oltre Venture, Phi Trust, Private Equity Founda-
tion, REDF, Social Venture Fund, Tony Elumelu Foundation, Venture
Some, and Willow Tree (Table 5.3).
It shows that grants are still important. Grants are the backbone of
many social enterprises and help them develop the business model and
fund the program. More than 76% was commercial capital.
Equity was the most important financing instrument which was used
in 58.9% of the investments. Given the difficulties in selling shares in a
company, there is also a high degree of debt capital in the industry. 19.6%
are pure debt capital and another 12.6% were combinations of equity and
debt capital.
8.6% of all commercial investments were structured with other financial
instruments such as revenue share agreements or similar other financing
instruments.
Interestingly, 47.5% of all financial transactions are less than $500,000
while financial transactions exceeding $1,000,000 compose 31.1%.
Table 5.3 Use of

Financial Number of Relative Median
financing instruments
instrument deals proportion investment
(%) size
Philanthropic 80 23.4 768,000

Capital
Commercial 262 76.6 500,000
Capital
Thereof:
Equity 96 58.9 600,000
Debt 32 19.6 335,385
Equity and 21 12.9 580,796
Debt
Other 14 8.6 624,543
Source Based on Spiess-Knafl and Aschari-Lincoln (2015)
Table 5.4 Age

Age Observations Share Median investment
distribution of
(years) (%) size
investments
0–2 134 41.0 467,677
3–5 72 22.0 600,000
6–8 44 13.5 397,562
9–14 50 15.3 734,000
15–19 12 3.7 702,359
20–29 10 3.1 200,185
30+ 5 1.5 217,905
Total 327 100
Another interesting distribution is the age structure of the investments.

41% of all financial transactions involved social enterprises which were
between 0–2 years. The remaining investments were distributed among
the other age groups.
Analyzing the probabilities of receiving commercial or philanthropic
capital it was interesting to note that the odds of a social enterprise aged
5 years or older obtaining grant financing are three times higher than the
odds of such an enterprise receiving commercial capital. Possible reasons
may include self-selection or reputational considerations. That means that
a foundation is more willing to invest in older social enterprises with a
proven track record (Table 5.4).
Table 5.5 Focus groups in different regions
Focus groups Western countries Non-Western

countries
Observations Share Observations Share
(%) (%)
Farmers + rural 2 1.1 110 72.8

Disabled + sick, disadvantaged, children 152 82.2 38 25.2
+ youth + young adults
There is also an interesting pattern when the investments in Western

and Non-Western countries are compared. In Western countries, there
is a focus on specific and identifiable target groups whereas in Non-
Western countries there is a focus on more general population groups.
This relationship is shown in Table 5.5.
5.3.2 Exits
There are basically three different exit options depending on the form of
the investment.
Equity investments necessitate a form of transaction. In the case of a
management buy-out (MBO) the management buys the stake usually by
taking on a loan provided by banks. It is also possible that another fund is
paying the stake or that a strategic partner is willing to take over the stake.
The strategic partner is usually an industrial partner who is interested in
taking over the brand, technologies, or customer base.
Debt investments are easier to handle as the two financing streams are
easy to manage. The interest payment has to be made every year and the
principal needs to be repaid at the end of the financing period. There is
also the possibility that the loan is refinanced which implies that the loan
is not repaid but turned over.
Mezzanine capital combines the benefits of both instruments. It is
repayable as debt capital and therefore relatively certain to plan and
it adds some return potential due to some participation of the profit
development.
Especially, equity investments put some pressure on the capital
provider. Private equity investments are illiquid. Funds need to exit their
investments given their limited lifetime and the requirement by investors

to repay the money invested. There are only a few funds which do not
need to repay their investments.
This is also an advantage for family offices or business angels who are
able to hold an investment for longer periods of time.
That means that investors need to think about exit scenarios for their
investments. One analogy can be found in the sector for organic products.
Ben & Jerry’s was founded in 1978 in Vermont and has made its name
for ethical behavior. In April 2000, Ben & Jerry’s was taken over by
Unilever for $326 million. Unilever has decided to leave the foundation
and to pay $5 million to the Foundation and its staff at the same time
(The New York Times 2000). It is not clear which impact the acquisition
had on the company but it is often considered as a valuable starting point
for the sustainability strategy of the company.
This acquisition also illustrates why those brands are attractive.
Customer’s willingness to pay a premium for these products is higher. It is
also likely that social enterprises have more loyal customers and a younger
generation of customers and employees demand a more society-centered
approach to doing business.
Additionally, some authors talk about a moralization of markets (Stehr
2008). Customer campaigns in products such as palm oil, cotton, coffee,
furniture, toys, or leather are an example for a shift in the consumer
markets.
Another point is that many innovations are increasingly coming from
the social sector. Peer-based concepts in the sharing economy were first
established by social enterprises. There is a focus on companies with a
strong brand and customer narrative. Potential targets could be ethical
fashion brands, social tourism providers, social finance intermediaries,
supply chain technologies providers, or urban mobility concepts.
One of the trends which will be there over the coming years is the
acquisition of social enterprises by mainstream companies.
We see various shifts. Consumers are increasingly willing to pay for
products with an added social value (Engelke et al. 2014). There are
also public procurement directives which enable the purchase of products
and services of social enterprises. Students and graduates are increasingly
looking for job opportunities with companies following a social mission.
Other logics arise against the backdrop of steady consumer pressure
with a view to the production conditions for coffee, tea, palm oil, cotton
and textiles, electronics, toys, furniture, and the social impact of tourism
or financial services.
All those changes in the consumer motivate companies to consider
their positioning. One way can be the acquisition of social enterprises.
Acquisitions are mostly seen in the context of sales-enhancing
purchases, especially with regard to new market access. However, such
transactions also play an essential role, for example, when certain skills are
acquired (Neely et al. 2015).
An interesting industry is the microfinancing industry. Many for-profit
banks have a background as an NGO. Additionally, profitable companies
have purchased non-profit organizations.
The acquisition of a social enterprise usually involves the transfer of
equity in the form of company shares or shares. This possibility exists
also for social enterprises, which use a profit-oriented company form.
Otherwise, there might be other possibilities like asset deals.
The transactions of ethical brands can be a good indicator (Table 5.6).
These were the acquisitions which took place in the space for ethical
brands. It is thus an emerging trend and only a few examples exit so far.
In addition, social enterprises build loyal customer bases, which are
interesting for many other companies, not just because they are more
willing to pay. In addition, up to an expertise in areas such as social tech
or healthcare that are interesting additions. Transactions are conceivable
in many areas. Tourism, banking, or consumer goods are future possible
investment targets.
Table 5.6 Acquisition of ethical brands
Target Industry Buyer Purchase price, year of acquisition
Seeds of Organic Food Mars Not publicly disclosed, 1997

Change
Cascadian Organic Food General Mills Not publicly disclosed, 1999
Farm
Ben & Social Unilever 326 million USD, 2000
Jerry’s Consciousness
Kashi Organic Food Kellogg’s $33 million, 2000
Lightlife Vegetarian food ConAgra Not publicly disclosed, 2000
Foods
(continued)
Target Industry Buyer Purchase price, year of acquisition
Odwalla Organic Food Coca-Cola 181 million USD, 2001

Stonyfield Organic Danone Not publicly disclosed, 2004, sold
Farm Products in 2017 to Lactalis for 875 million
USD
Green & Organic Food Cadbury 20 million GBP, 2005
Black
Tom’s of Organic Colgate-Palmolive $100 million, 2006
Maine Products
Body Shop Organic L’Oreal GBP 652 million, 2006
Products
Burt’s Bees Organic Clorox 925 million USD, 2007
Products
Innocent Organic Coca-Cola Total sum unknown, 76 million
Products GBP for 38%, 2009, 2010, 2013
Bionade Organic Food Radeberger Na, 2009, 2012
(Oetker Group)
Source Jansen and Spiess-Knafl (in press)
Table 5.7 shows an overview of social enterprises which were acquired

in recent years. Singapore-based Start Now was created in the Enterprise
Social Venture Lab and creates software solutions for social sector organi-
zations. UK-based Roadio develops online tools for people interested in
learning how to drive.
Another UK-based social enterprise is Slivers of Time. The social enter-
prise recruits, places, and evaluates volunteers. It as acquired by Brook-
field Rose which can take advantage of these skills in the management of
temporary employment relationships.
Charles Printing was a small company employing 8 people with intel-
lectual disabilities. The acquirer promised to keep the social mission of
the company for at least one year.
In 2014 Bain Capital acquired 50% of the shares in Toms Shoes. The
company was valued at a valuation of 625 million USD.
HessNatur was founded in 1978 and is a pioneer of the fair-trade
industry. Neckermann took over the majority in 2001 and sold the
company in 2012 in a secondary deal to Swiss financial investor Capvis.
Hess Natur has annual revenues of 73 million euros and a customer base
of one million customers.
Table 5.7 Acquisition of social enterprises
Target Industry Buyer Value
Start Now Software for social Goodtizens 381,000 USD

(Singapore) contractors Technologies
Roadio (UK) Software a2om Not publicly disclosed
Slivers of Time Recruitment Brookfield Rose Not publicly disclosed
(UK)
Charles Print services Groupe convex Not publicly disclosed
Printing
(Canada)
Toms Shoes Shoes Bain Capital 50% stake at a company
valuation of 625 million USD
Hess Natur Fair Trade Trade Neckermann Not publicly disclosed
(2001)
Capvis (2012)
JustGiving Charity Blackbaud 95 million GBP
Crowdfunding
Platform
Source Own research, Jansen and Spiess-Knafl (in press)
An interesting case is JustGiving which was acquired in 2017 by

Blackbaud for 95 million GBP. JustGiving is a leader in the crowd-
based fundraising for charities. Since 2001 they have helped charities and
individuals raise 4.5 billion USD. The acquirer is a company providing
software solutions to non-profit and social sector organizations.
There are different motivations for those transactions. Social enter-
prises have a loyal customer base which are willing to pay higher prices.
There might be some conflicts once the transaction becomes public and
could possibly damage the brand.
Social enterprises also have a different skill set managing a diverse set
of stakeholders. They are also better in being a purpose brand and being
attractive for employers. Especially, the younger generation is looking for
ways to engage with the social mission of a company.
The microfinance sector has seen some institutions. These institutions
include Compartamos (Mexico), Equitas Micro Finance India (India),
Equity Bank (Kenya), Janalakshmi Financial Services (India), MiBanco
(Peru), and SKS Microfinance (India). Those institutions provided at least
5× or greater returns to their investors (Bannick et al. 2015).
5.4 Technical Aspects

5.4.1 Structure of the Fund Industry
The fund industry is mostly following the same model. A team of invest-
ment managers set up a management company which is referred to as
General Partner (GP). The GP is raising funds from insurances, banks,
family offices, or wealthy individuals which are called Limited Partners
(LP). The investment managers are then investing the capital of the LPs
often across different funds in target companies.
A new management company usually starts with a small first fund
which is often in the range of $10–20 million. Over time, the manage-
ment company builds a track record and is able to attract additional
investors and thus increase the fund size. A second fund might already
be in the range of $20–40 million, and a third fund might again be larger
than the first two funds as shown in the illustration.
Increased fund sizes are important as the investment managers charge
fees which are usually in the range of 2% of the committed, respectively
the invested capital. Smaller funds are thus not sustainable in the long
term as they barely cover the operating expenses (Fig. 5.3).
The creation of a new fund is rather costly with many uncertainties.
The fundraising process takes 18–24 months as the investment team
might have to speak with hundreds of investors. Potential investors expect
detailed information about aspects such as the management team, the
investment strategy, the track record, the target market, expected returns,
and terms. The preparation of these documents takes time.
Fig. 5.3 Fund structure (Source Own illustration)

In addition, legal advisory is needed to set up the entities and contracts

which govern the investment process and the distribution of cash flows
between fund management company and the limited partners.
A typical fund might use the following description for the management
fee:
2.00% of committed capital during the investment period, 1.75% of

invested capital for two following years, thereafter the greater of 90% of
the annual management fee for the immediately preceding year and 0.25%
p.a. of aggregate Invested Capital.
Most investment funds have an impact component to determine

the performance fee. The performance fees are usually covered in the
following way:
First, 100% to Limited Partners until they receive their Realized Capital
and Costs and an 8% per annum cumulative annually compounded internal
rate of return on their Realized Capital and Costs. Then, 100% to the
General Partner until the General Partner “catches up” to an overall 20%
Carried Interest, followed by 20% to the General Partner and 80% to
Limited Partners.
It is also clear that some LPs have higher financial return expectations,
while others have lower return expectations. In practice, we see a range of
5% to 15%. These financial return expectations also impact the investment
strategy as there is a trade-off between social and financial objectives.
5.4.2 Valuation of Social Enterprises

The valuation of a social enterprise is a key element of the investment
process. A high valuation might negatively impact the fund return and
the long-term sustainability of the fund. A low valuation could cause
social enterprises to reject the investment proposal and look for alternative
sources of capital.
There are many different ways to value companies (Koller et al. 2020).
In principle, the valuation only depends on the underlying financials such
as revenues, costs, profitability, and projected cash flows. These cash flows
are then discounted to calculate a net present value as shown in Fig. 5.4.
Fig. 5.4 Principles of valuation (Source Own illustration)
Impact considerations impact the valuation on two levels. The first level
is the structure and sustainability of the financials, and the second level is
the cost of capital which is used to value a social enterprise.
Impact considerations can influence the underlying financials of the
social enterprises. Social enterprises might have customers with a higher
willingness to pay or might have lower operating costs as they are able to
mobilize third-party resources. Customers are also considered to be more
loyal. There are many examples to illustrate this tendency. Sustainably
sourced minerals or food can be sold for higher prices, while there might
be lower risks for corporate scandals.
The impact considerations also reduce the cost of capital. Investors
are willing to reduce their risk-adjusted return of capital to support the
impact of the company. It means that different investors have different
return expectations which obviously has an impact on the valuation.
These considerations are also at the core of the social enterprise itself
in the form of trade-offs. For fair-trade companies lower sourcing prices
mean higher margins but less income for the local communities. Microfi-
nance companies might charge higher interest rates but would reduce the
available capital for the clients at the same time. Theaters and museums
might offer inclusive pricing options such as open Tuesdays which reduce
the total revenue they can generate.2
Bibliography
Achleitner, A.K., A. Heinecke, A. Noble, M. Schöning, and W. Spiess-Knafl.
2011a. Unlocking the Mystery: An Introduction to Social Investment.
Innovations 6 (3): 145–154. https://doi.org/10.1162/INOV_a_00090.
Achleitner, Ann-Kristin, Andreas Heinecke, Abigail Noble, Mirjam Schöning, and
Wolfgang Spiess-Knafl. 2011b. Unlocking the Mystery: An Introduction to
Social Investment. Innovations 6 (3): 145–154.
Achleitner, Ann-Kristin, Eva Lutz, Judith Mayer, and Wolfgang Spiess-
Knafl. 2013. Disentangling Gut Feeling: Assessing the Integrity of
Social Entrepreneurs. VOLUNTAS: International Journal of Voluntary and
Nonprofit Organizations 24 (1): 93–124. https://doi.org/10.1007/s11266-
012-9264-2.
Bannick, Matt, Paula Goldman, and Michael Kubzansky. 2015. Frontier
Capital—Early Stage Investing for Financial Returns and Social Impact in
Emerging Markets. https://www.omidyar.com/sites/default/files/file_arch
ive/insights/Frontier%20Capital%20Report%202015/ON_Frontier_Capital_
Report_complete_FINAL_single_pp_100515.pdf.
Ben-Ner, Avner, and Derek C. Jones. 1995. Employee Participation, Ownership,
and Productivity: A Theoretical Framework. Industrial Relations: A Journal
of Economy and Society 34 (4): 532–554.
Brown, Jim. 2006. Equity Finance for Social Enterprises. Social Enterprise
Journal 2 (1): 73–81.
Brown, Hilary, and Emma Murphy. 2003. The Financing of Social Enterprises: A
Special Report by the Bank of England. London: Bank of England Domestic
Finance Division.
Cambridge Associates. 2020. Private Equity & Venture Capital Impact Investing.
Engelke, Henning, Stefanie Mauksch, Inga-Lena Darkow, and Heiko von der
Gracht. 2014. Heading Toward a More Social Future? Scenarios for Social
Enterprises in Germany. Business & Society. https://doi.org/10.1177/000
7650314523096.
Fedele, Alessandro, and Raffaele Miniaci. 2010. Do Social Enterprises Finance
Their Investments Differently from For-Profit Firms? The Case of Social Resi-
dential Services in Italy. Journal of Social Entrepreneurship 1 (2): 174–189.
2 Some are referring to the “lockstep model” which postulates that impact and returns
are increasing at the same time. This might be true for growing companies but is hard
to imagine for stable businesses.
Harris, Milton, and Artur Raviv. 1991. The Theory of Capital Structure. The
Journal of Finance 46 (1): 297–355.
Koller, T., Marc Goedhart, and D. Wessels. 2020. Valuation: Measuring and
Managing the Value of Companies. McKinsey & Company.
Mac an Bhaird, Ciarán, and Brian Lucey. 2010. Determinants of Capital Struc-
ture in Irish SMEs. Small Business Economics 35 (3): 357–375. https://doi.
org/10.1007/s11187-008-9162-6.
Myers, Stewart C. 1984. The Capital Structure Puzzle. The Journal of Finance
39 (3): 574–592.
Neely, J., John Jullens, and Joerg Krings. 2015. Deals That Win. http://www.
strategy-business.com/article/00346?gko=47f36.
Spiess-Knafl, Wolfgang, and Jessica Aschari-Lincoln. 2015. Understanding Mech-
anisms in the Social Investment Market: What Are Venture Philanthropy
Funds Financing and How? Journal of Sustainable Finance & Investment 5
(3): 103–120.
Stehr, Nico. 2008. The Moralization of the Markets in Europe. Society 45 (1):
62–67.
The New York Times. 2000. Ben & Jerry’s to Unilever, with Attitude. The New
York Times, April 13. http://www.nytimes.com/2000/04/13/business/ben-
jerry-s-to-unilever-with-attitude.html?_r=0.
Varga, Eva, and Malcolm Hayday. 2016. A Recipe Book for Social Finance—
A Practical Guide on Designing and Implementing Initiatives to Develop
Social Finance Instruments and Markets. Luxembourg: Publications Office
of the European Union. http://ec.europa.eu/social/main.jsp?catId=738&lan
gId=en&pubId=7878.
Yetman, R.J. 2007. Borrowing and Debt. In Financing Nonprofits, ed. D.R.
Young, 243–268. Lanham, MD: AltaMira Press.
CHAPTER 6
Impact Measurement and Management
6.1 Introduction
In the final section of this book, we would like to address the crucial
topic of assessing impact as well as the various tools used to measure and
manage the impact of the investing strategy.
Impact measurement and management (IMM) is paramount for impact
investors to ensure that they are indeed delivering on their claim to
generate a positive impact with their investments. In general, any invest-
ment can be said to have a social impact; different from other forms
of socially responsible investment, the most prominent feature of impact
investing is a focus on demonstrating the social or environmental return
that it generates. Hence, IMM is fundamental for the entire concept of
impact investing.
Furthermore, IMM helps impact investors mitigate the risk of mission
drift—that is, the possibility that investees will prioritize financial objec-
tives over social ones—and exploitation, which are legitimate concerns
with regard to impact investing. It is therefore not surprising that IMM
is regularly mentioned as a focal element of impact investing defini-
tions. However, traditional performance measurement involving the mere
gathering of financial indicators is insufficient in the case of social enter-
prises. The possibility of generating income at all depends on which social
problem the organization is tackling (Dees 1998; Foster and Bradach

Switzerland AG 2023
https://doi.org/10.1007/978-3-031-32183-2_6
2005); Furthermore, reaching financial goals is only of secondary impor-

tance for social entrepreneurs (Brinckerhoff 2000; Kramer 2005; Nicholls
2005).
However, demonstrating impact is complex and impeded by method-
ological difficulties, such as the measurement of often intangible effects
or the collection of field data. As a result, IMM so far has often remained
largely focused on costs and outputs (i.e., direct measurable results, such
as the number of lives touched by a program).
Assessing the social and/or environmental effects of business activities
has been subject of wide discussions in the corporate world: Analyzing the
relationship between corporate social performance (CSP) and corporate
financial performance (CFP) is a major research topic in the area of corpo-
rate social responsibility and is reflected in concepts such as shared or
blended value. And although the empirical results clearly point toward a
highly significant, positive, robust, and bilateral correlation between CFP
and CSP (see Busch and Friede 2018), traditional businesses focus on
financial performance first. Social enterprises, however, primarily aim at
achieving a social return and thus need to focus even more on assessing
the effects their actions have.
A variety of frameworks and tools to capture social value creation has
been developed over several decades. But although the non-profit sector
has made significant progress in developing metrics and is becoming
increasingly data rich, the status quo of evaluation practices can still be
described as extremely fragmented as well as limited in scope and scale,
with no mandatory requirements or standardized scientific concepts,
methods, or objective criteria for social impact evaluation and reporting.
This chapter will therefore demonstrate the relevance of and necessity
for IMM and will then illustrate various methods that have been applied
in order to determine the effects of impact investing.
6.2 Purpose of IMM

For investors as well as investees in impact investing, IMM provides
various benefits.
6 IMPACT MEASUREMENT AND MANAGEMENT 119
Investors and fund managers:
● Improving impact performance:
Impact investors make financial investments foremost to create social

impact and secondly to generate a financial return. Thus, assessing the
social impact of the investments is fundamental and constituent to this
investment strategy. Better evidence on results can help ensure that scarce
resources are allocated where they can have the most impact.
● Making more informed investment decisions:
Integrating IMM before the investment, already in the screening and due
diligence stage, enables a better allocation decision, channeling resources
toward the most (socially) promising organizations. During the invest-
ment, IMM supports investment managers in their collaboration with the
investee. Furthermore, some investors use impact-related data to deter-
mine the conditions under which tranches of capital will be released.
At the end of the investment cycle, IMM can inform the exit decision
in terms of identifying possible and appropriate exit channels as well as
potential buyers.
● Improving financial performance of the portfolio:
By better understanding the beneficiaries of the funded social organiza-

tion (e.g., social context, socioeconomic status, access to services, pref-
erences), revenue growth can be optimized, for example, by developing
more effective marketing, accessing new market segments, developing/
refining products and services, or better informing the product and
pricing strategy. Practical examples can be found at the website of the
Global Impact Investing Network (GIIN 2016).
● Benchmarking of investments:
IMM across portfolios enables investors to establish benchmarks, either

for certain organizations against each other or for investments over time.
Besides a more effective portfolio management and better prospective
investment decisions, this would contribute to more transparency in the

impact investing field and, hopefully to the mobilization of additional
capital.
● Avoiding mission drift:
It is possible that social organizations develop in a way where they are

confronted with a trade-off between increasing financial returns versus
achieving additional social change. Opting for the former is termed a
mission drift and would contradict in most cases the investment objec-
tives of impact investors. IMM can thus ensure that the venture remains
accountable to its social mission.
Social Enterprises:
● Enabling strategic alignment and risk mitigation:
For social enterprises, pursuing impact is at the core of their operations

and constitutes their reason for existing. Thus, assessing the progress
toward these objectives helps ensure that the operations are aligned with
the strategy of the organization. Likewise, a deviation from this course
can be detected earlier and more easily when consistently assessing the
social progress achieved and allows for spotting early warnings.
● Increasing operational effectiveness and efficiency:
Besides strategic value, IMM also contributes to enhancing operational

potential: Determining the most effective form of solving the addressed
issue, identifying what works and what doesn’t as well as detecting areas of
improvement can strengthen business operations in terms of effectiveness
as well as efficiency.
● Complying to external requirements:
IMM has gained importance recently due to an increased external demand

for demonstrating results. IMM thus enables the social enterprise to fulfill
its contractual obligations toward stakeholders such as funders or public

authorities to assess social and/or environmental performance.
● Supporting communication and marketing:
Demonstrating the benefits an organization has achieved can be a differ-

entiating factor from other players when marketing the social organization
toward investors, funders or volunteers. Showing good impact infor-
mation can help building a positive reputation, and by going beyond
telling positive stories, trust and goodwill with key stakeholders, e.g., local
authorities or communities, can be earned. A trustful relationship then
often leads to less transaction costs and fewer conflicts.
6.3 Terminology
While the word “impact” is ubiquitous in the impact investing field, not
everyone understands or uses it similarly: The terminology on the subject
is very heterogeneous as a variety of terms (such as social performance,
outcome, or blended value) is being used interchangeably by different
stakeholders to describe the intended positive societal change. One of the
most accepted and widely used definitions has been coined by the Devel-
opment Assistance Committee (DAC) of the Organization for Economic
Co-operation and Development (abbreviated with the acronym OECD/
DAC [Organisation for Economic Cooperation and Development/The
Development Assistance Committee (OECD/DAC) 2000]). The Devel-
opment Assistance Committee is an international forum of many of the
largest funders of aid and has the mandate to promote among others the
development of cooperation and policies for sustainable development.
The focus on impact and the evaluation of interventions has a long
tradition in the field of development cooperation and since its establish-
ment, OECD/DAC has sought to clarify concepts, terms, and definitions.
According to the OCED/DAC understanding of impact, the social effect
an organization has achieved can be illustrated by the so-called impact
value or results chain which comprises the following element (Organi-

sation for Economic Cooperation and Development/The Development
Assistance Committee [OECD/DAC] 2000):
● Inputs: These comprise all types of resources an organization

employs in order to bring about social change. They can be cate-
gorized as monetary inputs, in-kind support, and time invested by
volunteers.
● Activities: These are the actions, programs, or projects the organiza-
tion carries out.
● Outputs: These are the direct and immediate consequences or results
of the activities. They are often clustered into number of lives
touched, number of activities conducted, and number of institutions
where the organization is active.
● Outcomes: These are the short- and medium-term changes the
organization achieves at the beneficiary level. Outcomes thus coin-
cide with the objectives of the organization and can causally and
quantitatively be attributed to the intervention.
● Impacts: These are the long-term effects that occur during or
after the intervention. Impacts go beyond the primary group of
beneficiaries aiming at the institutional and societal macro level.
The logical flow and the connection of these terms is often illustrated by
means of a so-called impact value chain (Fig. 6.1).
In other words, the long-term effects of interventions that go beyond
the primary beneficiaries and reach additional target groups such as
communities and families or that lead to changes on an institutional level
are termed impacts. In this context, the terms “non-financial returns”
and “social and environmental returns (SER)” are often used simultane-
ously or interchangeably. In being consistent with the above definition
of impacts and outcomes, these terms can best be compared to impacts
denominating benefits accruing to beneficiaries without direct link to the
primary target group and/or the investment (Reeder and Colantonio
2013).
Furthermore, different levels of outcome can be distinguished (see
illustration “The results staircase” below). These include the develop-
ment of new attitudes and/or skills among members of the target groups,
changes in their behavior, and changes in their living conditions. Each
step constitutes a prerequisite for the next level of change (Fig. 6.2).
Input Activity Output Outcome Impact
Definition Resources used Interventions Tangible, direct Social effect Long-term

for the inter- carried out by the results of the activities (change), both effects of
vention (time, social enterprise that can be measured, long-term and interventions that
money or in-kind e.g., in terms of short-term go beyond the
resources) number of lives achieved for the primary
touched, number of target beneficiaries beneficiaries and
activities carried out, as a result of the reach additional
number of institutions intervention target groups
reached undertaken. such as
communities and
families or that
lead to changes
on an
institutional
level.
Examples Financial Actions, tasks, Number of clients Higher self-esteem Lower crime rate
investment by an programs, served by the of the beneficiaries within the
impact investor projects, compaigns organization community.
Fig. 6.1 Impact value chain model OECD-DAC (Source Jackson and Harji
[2016])
Fig. 6.2 The results staircase (Source Own depiction based on Phineo gGmbH
[2016])
However, there are other, differing definitions of the terms used in the
impact value chain, specifically with regard to meaning of impacts and
outcomes. Whereas the terminology set by OECD/DAC is widely used

in Continental Europe, actors from Anglo-Saxon countries often define
impact as the overall change occurring on a societal level and outcome
as the change resulting from a specific intervention. In order to deduce
impact, it is therefore necessary to determine the so-called base case or
counterfactual position (at best resorting to a control group, Sect. 7.2.4).
The base case identifies what would have happened without the interven-
tion and serves as a starting point for determining the additionality of an
intervention. The concept of additionality considers the question whether
an investment had impact on the addressed issues that would otherwise
not have happened and thus aims at providing evidence for the success
of an investment. The extent to which an observed effect would have
occurred regardless of the intervention concerned is called deadweight.
This includes effects attributable to interventions by other actors (Simsa
et al. 2014) (Fig. 6.3)
Other influencing aspects often discussed in the literature in the
context of determining the specific impact of an intervention address
displacement and drop-off: Displacement aims at assessing of how much
of the outcome has displaced other outcomes, e.g., labor moving from
- What would
Input Activity Output Outcome
have happened
anyways
Impact
Definition Resources used for Interventions Tangible, direct Changes to social Specifc change
the intervention carried out by the results of the systems within the
(time, money or in- social enterprise activities that can be primary taget
kind resources) measured, e.g., in group do the
terms of number of specific
lives touched, intervention
number of activities
carried out, number
of institutions
reached
Examples Financial Actions, tasks, Number of clients Lower crime rate Higher self -
investment by an programs, served by the within the esteem of the
impact investor projects, organization community. beneficiaries due
campaigns to the
intervention
Fig. 6.3 Impact value chain model Clark et al. (Source Own illustration, based
on Clark et al. [2004])
one firm to another rather than new employment being created. Drop-off
takes into account the deterioration of an outcome over time.
Impact would thus be calculated by adjusting outcome for the effects
achieved by others (alternative attribution), for effects that would have
happened anyway (deadweight), for negative consequences (displace-
ment), and for effects declining over time (drop-off) (Social Impact
Investment Task Force 2014). For alternative definitions and differing
concepts see Wörrlein and Scheck (2016).
Regardless of the model, it is important to notice that all the steps in
the impact value chain have to be connected by a causal link between
the intervention and the results (Sect. 7.3). Establishing this relation is
often described as a theory of change, impact thesis, or logic model. A
theory of change maps the underlying assumptions about how impact
will result from planned interventions by focusing on the link between
what a program does (its activities or interventions) and how these lead
to the desired societal change (impact and outcome). This can be done
by first identifying the desired impact (long-term changes beyond the
primary target group) and then working back from these to identify
necessary antecedents such as outcomes and outputs. This is accompa-
nied by a clear articulation of the underlying assumptions connecting the
different steps. A theory of change thus increases the visibility of a change
process and provides the basis for testing the investment assumptions
about intentional impacts (Reisman and Olazabal 2016).
As different as the various objectives of social organizations are, as
different are depictions of their theory of change. In addition to a graphic
illustration, verbal explanations are added in order to make the logic
model transparent and comprehensible to third parties (Fig. 6.4).
Table 6.1 gives an overview of the most frequently used terms in IMM
and their meaning.
Reduced problem behaviour Overarching objectives

Reduced likelihood of
substance abuse
Children develop new skills

Family functioning is improved Intermediate outcomes
Communication within the family is
improved
Parental skills are improved
Seven weekly sessions of 2 hrs
Activities
Activities with moderator – parent, children separate
Activities with moderator – parent, children together
Coaching on speciﬁc skills and areas of family life
Fig. 6.4 Theory of change, planning triangle for a substance abuse initiative
(Source Own illustration based on Harries et al. [2014])
6.4 IMM Along the Investment Process

6.4.1 The IMM Process
The goal of IMM is to maximize or optimize (relative to cost) the
process of generating social impact. The European Venture Philanthropy
Association (EVPA), a community of venture philanthropy investors,
recommends five steps of IMM, namely.
1. setting objectives,
2. analyzing stakeholders,
3. measuring results,
4. verifying and valuing impact, and
5. monitoring and reporting (EVPA 2013).
The European Commission’s GECES Sub-group on Impact Measure-

ment recommendation for a social impact measurement process is based
on this concept (GECES Sub-group on Impact Measurement 2014).
Phineo, a German rating and consulting agency for social impact
distinguishes three overarching steps in IMM:
Table 6.1 Overview terminology
Activities Actions, programs, or projects the organization carries out

Additionality Referring to the extent to which an investment has made a
difference and has resulted in change
Attribution Deducting the effect achieved by the contribution and activity of
others
Base case Identifies what would have happened without the intervention and
serves as a starting point for determining the additionality of an
intervention
Counterfactual Measures what would have happened to beneficiaries in the absence
of the intervention, often by means of a control group
Deadweight Changes that would have happened anyway, regardless of the
intervention
Displacement Assessment of how much of the outcome has displaced other
outcomes
Drop-off Allowing for the decreasing effect of an intervention over time
Impact Long-term effects of interventions that go beyond the primary
beneficiaries and reach additional target groups such as communities
and families or that lead to changes on an institutional level
Impact value Illustration and logical link between inputs, activities, output,
chain outcome, and impact
Input Resources used in delivery of the intervention, can be time, money,
or in-kind
Materiality Data that is of such relevance and importance that it could
substantively influence the assessments of providers of financial
capital with regard to the organization’s ability to create value over
the short-, medium, and long term
Outcome Social effect (change), both long term and short term achieved for
the target beneficiaries as a result of the intervention undertaken
Output The tangible results from the intervention, effectively the points at
which the services delivered enter the lives of those affected by
them, expressed e.g., in terms of people reached, products or
services
Theory of The means (or causal chain) by which activities achieve outputs and
change outcomes, and use resources (inputs) in doing that
Source Own depiction based on Social Impact Investment Task Force (2014) and GECES Sub-group
on Impact Measurement (2014)
1. Planning results comprises understanding the social problem, setting

objectives, and developing the logic model;
2. Analyzing results includes the preparation of the analysis, the formu-
lation of indicators, data collection, and data analysis;
3. Improving results focuses on learning and improving as well as on
reporting (Phineo gGmbH 2016).
Fig. 6.5 IMM along the investment process (Source Own depiction)
IMM can thus be conceived as an umbrella term for a combination of

planning, assessment, documentation of outcomes, and reaction to the
assessed outcomes. The specific steps comprised in IMM, independent of
the concept or author, should not be understood as linear but rather as
a continuous development, in which steps might to some extent happen
simultaneously (Wörrlein and Scheck 2016).
In order to understand the theory of change as well as to link the
intended changes to the overall scale and scope of the societal problem
as well as the strategy of the organization, it is essential to not think
about IMM as a stand-alone activity but rather as an integrated tool
accompanying the entire investment process (Fig. 6.5).
6.4.2 Pre-investment Analyses

When searching for potential investments during the sourcing process,
impact investors need an easy-to-use first screening mechanism to assess
the general fit of the potential opportunity with their own investment
strategy. For this purpose, investors often communicate their general
investment criteria broadly and sometimes use simple questionnaires to
be filled out by potential investees. This quick check covers basic parame-
ters such as geography, impact sector, funding volume, or legal structure
filtering for potential deals.
Investees that would potentially align with the investor‘s strategy are
then explored in more detail during the due diligence process. Regarding
the impact due diligence, an investor usually aims at verifying the compa-
ny’s theory of change, meaning, it aims to determine if the chosen
approach has yielded impact yet. In addition, the impact potential for the
duration of the investment is determined as well as potential impact risks
and opportunities. There is no standardized approach when it comes to
the impact due diligence. Investors use individual or standardized ques-
tionnaires, conduct interviews with experts in the field, and sometimes
engage external consultants to conduct impact analyses.
The result of the impact due diligence can then be used for the
presentation of the investment in investment committees, as well as
for structuring the investment with regard to impact milestones to be
reached.
6.4.3 Post-investment Analyses

Having invested in a company, impact investors then continue with IMM
during the holding period of the investment. Selected indicators on the
output as well as on the outcome level are used to monitor the develop-
ment of the investment on an ongoing basis. Impact data is collected and
regularly reported to interested stakeholders, often together with financial
data in a monthly rhythm.
When an impact investor chooses to exit an investment, impact data
becomes especially important when selling a stake to a strategic investor
who would like to expand its impact. The impact created during the
investment period can then serve to estimate a unit price for impact.
6.5 Challenges in IMM

Many investors still focus on the financial return of their investments;
social return is still a secondary priority (NPC/Clearly So report on
investment readiness). This is mostly due to a variety of challenges and
difficulties linked to IMM: An unmanageable multitude of tools exists
and conceptual, methodological as well as practical issues hinder further
standardization and transparency in the field. The following list is most
likely not comprehensive but aims to provide an overview of the most

critical challenges as well as possible solutions:
● Attribution:
The problem of attribution relates to the problem of linking interventions

to results and establishing causal relations between them. Often, a wide
range of interventions from very explicit activities aimed at single objec-
tives to complex bundles of activities ranging across different sectors and/
or geographies with multiple actors and projected outcomes are under-
taken. Although it may be highly unlikely to attribute certain changes
in a definite way to an organization’s interventions (or to other stake-
holders’ activities, respectively) this issue can best be addressed by clearly
articulating the theory of change, by stipulating underlying hypotheses,
mapping potential cause-and-effect relationships, and systematically prior-
itizing stakeholders and objectives.
● Counterfactual:
Along the same lines, the problem of the counterfactual comprises the
question of what would have occurred in the absence of the intervention
and a comparison with what has occurred with the intervention imple-
mented. Similar to the issue of attribution, by disclosing the interventions’
assumptions, the recipient of the impact information can close in on the
ambiguity about the counterfactual.
● Subjectivity:
The assessment of social impact almost always includes a value judgment

about what is deemed to be social, right, or ethical to do. Thus, deter-
mining the achieved impact and allocating a certain (monetary) value to
it is often not possible everywhere for everyone to the same degree. The
subjectivity thus significantly hinders the comparability of impact data.
● Lack of common language and terminology:
Not all actors understand especially outcome and impact in the same way,
and the single steps of impact management are interpreted and applied
differently across the sector. This hinders a common understanding about
what outcome/impact should be and how impact assessment might be
implemented. It is thus crucial for impact investors to be transparent
about their use of terms and have a common understanding of them
between all actors involved.
● Choice of methodology and metrics:
It has proven to be impossible so far to set a common methodology

including a universal set of fixed indicators top-down for all sectors and
social enterprises due to (among others):
– The variety of the social impact sought by social enterprises,

– quantitative indicators often failing to capture essential qualitative
aspects,
– the trade-off between achieving comparability between activities
through using common indicators and utilizing indicators that are
useful and relevant.
Independent from the approach an organization chooses for describing its

impact, it is therefore advisable to include the beneficiaries in the process
from the very beginning in order to understand all aspects of impact
as well as define metrics in collaboration with the investees in order to
provide the most accurate and successful assessment system.
● Data quality:
Adequate data in terms of quality as well as quantity is often hard to

obtain. Furthermore, historical data often does not exist. In general, three
different types of “evidence” can be used to imply causal connections:
Logical chains of argument, anecdotes, and statistical reasoning. In the
field of impact assessment, these three approaches are more usually known
(respectively) as theory of change, qualitative analysis, and quantitative
analysis of impact (Reeder and Colantonio 2013). The three approaches
constitute different levels of evidence, depicting the theory of change
having the lowest threshold for implementation but also the lowest level
of proof. Depending on the development stage of the organization, the
resources available as well as the possible access to and quality of data, it
might be reasonable—while striving for the highest level of evidence—to
consider different levels of evidence when assessing impact and to disclose
the respective approach in the assessment documentation (Fig. 6.6).
Credibility
Anecdotes / Structured Pre and post Standardized

Case Studies RCTs
Quotes interviews tests Tests
Basic Advanced
Fig. 6.6 Levels of evidence in IMM (Source Own illustration based on Harries
et al. [2014])
● Unintended social consequences:
Most planned interventions—although striving for positive change—

entail some unintended, even negative effects, not envisioned or consid-
ered when designing the original intervention. Such detrimental conse-
quences not only need to be identified and assessed but—in the context of
full disclosure—need to be managed in a way that the positive effects can
be maximized and the unintended, negative externalities associated with
them can be minimized or even off-setted (Centre for Good Governance
2006).
● Assessment capabilities and proportionality:
Even if done at a minimum level, IMM requires the deployment of

resources in terms of time or financial investment needed for the eval-
uation. However, the amount of time spent and the degree of accuracy
sought and achieved in any assessment exercise must be proportionate to
the size of the social enterprise and the risk and scope for the intervention
being delivered. Furthermore, a certain level of expertise and knowledge
about social impact assessment should be available within the organiza-
tion in order to conduct a meaningful analysis. It can be thus advisable
to align impact assessment requirements with incentives in order to allow
the social enterprise to devote resources to it (So and Staskevicius 2015).
● Aggregation on a fund level:
Impact investments address a variety of social and/or environmental chal-

lenges. As it is impossible to compare the social return of, for example,
a deforestation program in Asia with an education initiative in Europe,
experts have since long been looking for a possibility to aggregate social
performance across sectors as well as on a fund level. One approach
trying to tackle this issue is the so-called gamma factor (Grabenwarter
and Liechtenstein 2012): It aims at setting a target value for several indi-
cators—on the output, outcome, and (if desired) on the impact level and
then comparing the actual achievements against these target values. The
result can be expressed in a relative manner and thus aggregated on an
enterprise as well as portfolio level. The approach comes with certain
disadvantages as the process of setting the target value can be manipu-

lated by the investees as well as the funders and could be set deliberately
low in order to achieve a high gamma factor. However, to the best knowl-
edge of the authors, this is the only possibility at the moment to quantify
and aggregate social performance on a fund level.
Bibliography
Brinckerhoff, P.C. 2000. Social Entrepreneurship: The Art of Mission-Based
Venture Development. New York: Wiley.
Busch, Timo, and Gunnar Friede. 2018. The Robustness of the Corporate Social
and Financial Performance Relation: A Second-Order Meta-Analysis. Corpo-
rate Social Responsibility and Environmental Management 25 (4): 583–608.
https://doi.org/10.1002/csr.1480.
Centre for Good Governance. 2006. A Comprehensive Guide for Social
Impact Assessment. http://unpan1.un.org/intradoc/groups/public/docume
nts/cgg/unpan026197.pdf.
Clark, C., W. Rosenzweig, D. Long, and S. Olsen. 2004. Double Bottom Line
Project Report: Assessing Social Impact in Double Bottom Line Ventures. New
York: Columbia Business School.
Dees, J. Gregory. 1998. The Meaning of ‘Social Entrepreneurship.’ http://www.
redalmarza.cl/ing/pdf/TheMeaningofsocialEntrepreneurship.pdf.
EVPA. 2013. A Practical Guide to Measuring and Manaing Impact. Brussels:
European Venture Philanthropy Association.
Foster, William, and Jeffrey L. Bradach. 2005. Should Nonprofits Seek Profits?
Harvard Business Review, February. https://hbr.org/2005/02/should-non
profits-seek-profits.
GECES Sub-group on Impact Measurement. 2014. Proposed Approaches to
Social Impact Measurement in European Commission Legislation and in
Practice Relating to EuSEFs and the EaSI.
Global Impact Investing Network (GIIN). 2016. The Business Value of Impact
Measurement. New York: Global Impact Investing Network.
Grabenwarter, Uli, and Heinrich Liechtenstein. 2012. In Search of Gamma.
An Uncoventional Perspective on Impact Investing. Barcelona: IESE Business
School.
Harries, Ellen, Lindsay Hodgson, and James Noble. 2014. Creating Your Theory
of Change. NPC’s Practical Guide. London: New Philanthropy Capital.
Jackson, Edward, and Karim Harji. 2016. Setting Standards for Evaluating
Impact Investing: What Does Africa Want?
Kramer, M. 2005. Measuring Innovation: Evaluation in the Field of Social
Entrepreneurship. Boston, San Francisco, Geneva: Foundation Strategy Group.
Nicholls, A. 2005. Measuring Impact in Social Entrepreneurship: New Account-

ability to Stakeholders and Investors? ESRC Research Seminar, April, Local
Government Research Unit, London (Unpublished).
Organisation for Economic Cooperation and Development/The Development
Assistance Committee [OECD/DAC]. 2000. Results Based Management in
the Development Co-operation Agencies: A Review of Experience. http://
www.oecd.org/dac/evaluation/dcdndep/31950681.pdf.
Phineo gGmbH. 2016. Social Impact Navigator—The Practical Guide for
Organisations Targeting Better Results. Berlin: PHINEO.
Reeder, Neil, and Andrea Colantonio. 2013. Measuring Impact and Non-
Financial Returns in Impact Investing: A Critical Overview of Concepts and
Practice. London: London School of Economics and Political Science.
Reisman, Jane, and Veronica Olazabal. 2016. Situating the Next Generation
of Impact Measurement and Evaluation for Impact Investing. The Rock-
efeller Foundation. https://assets.rockefellerfoundation.org/app/uploads/
20161207192251/Impact-Measurement-Landscape-Paper-Dec-2016.pdf.
Simsa, Ruth, Christian Schober, Clara Moder, and Ruth Rauscher. 2014.
Methodological Guideline for Impact Assessment. Working Paper No.
01/2014. http://thirdsectorimpact.eu/site/assets/uploads/post/methodolo
gical-guideline-impact-assessment/TSI_WorkingPaper_012014_Impact.pdf.
So, Ivy, and Alina Staskevicius. 2015. Measuring the ‘Impact’ in Impact
Investing. Harvard Business School.
Social Impact Investment Task Force. 2014. Measuring Impact. Subject Paper
of the Impact Measurement Working Group. Social Impact Ivnestment
Taskforce. Established Under the UK’s Presidency of the G8.
Wörrlein, Lena, and Barbara Scheck. 2016. Performance Management in the
Third Sector: A Literature-Based Analysis of Terms and Definitions. Public
Administration Quarterly 40 (2): 220–255.
CHAPTER 7
Assessment Tools and Methodologies
7.1 How to Choose a Method

7.1.1 Introduction
According to a survey by JPMorgan Chase & Co. and the Global
Impact Investing Network (GIIN), 95% of impact investors assess the
social impact of their investments (Saltuk and El Idrissi 2014). At the
same time, an enormous variety of impact assessment methods has been
developed: The database for tools and resources for assessing social
impact (TRASI) by the Foundation Center (https://measureresults.issuel
ab.org), for example, lists over 150 tools, methods, and best practices.
None of these methods can be singled out yet as the best for assessing
social impact as they all address different questions and aspects that consti-
tute a part of impact evaluation. Rather, methods or tools complement
each other in providing a more complete overview of the societal effects
an intervention has achieved.
The choice of method is influenced by various parameters and
depending on the specific context, some methods have a comparative
advantage over others. Determinants for choosing an impact assessment
method are above all the following.

Switzerland AG 2023
https://doi.org/10.1007/978-3-031-32183-2_7
7.1.2 Target Audience of Impact Assessment

Recipients of impact information can be external as well as internal.
External stakeholders comprise investors, clients, beneficiaries, or the
general public. Internally, management, boards, employees as well as
volunteers could be interested in the results of impact assessment. It is
recommendable to engage in a dialogue with the prime audience of the
IMM in order to better understand their information needs. If various
stakeholders should be reached with the impact assessment at the same
time, it could be useful to prioritize them in order to set a focus and
clarify possible contradictory expectations.
7.1.3 Objectives of Impact Measurement and Management

In order to design the appropriate assessment framework, it is crucial
to identify the motivation for using impact information. This decision is
naturally linked to the target audience: External stakeholders might need
impact information to meet certain reporting requirements or support risk
management and/or investment decisions. Especially finance-first impact
investors might prefer more quantitative data in this context. Other
motivations might stem from marketing and/or fundraising purposes
requiring more qualitative information, pictures, or stories (Asian Venture
Philanthropy Association 2016). Internal stakeholders might strive for
strategic insights in order to become more effective in addressing social
problems. IMM thus would rather focus on organizational capacity and
logic models.
7.1.4 Reporting Determinants

In order to be able to allocate scarce resources as efficient as possible,
stakeholders need transparent and standardized information about the
organization in question. Otherwise, the cost of information procure-
ment might be too high and can be the reason for an investment
(time, money, or in-kind support) to not being undertaken (Richter
and Furubotn 1999). This so-called decision-usefulness paradigm assumes
that resource allocation will be more efficient when rational economic
decisions are made possible and is based on agency theory (for a
general discussion of decision-usefulness and stewardship frameworks in
reporting see Coy et al. [2001]; for agency theory see Eisenhardt [1989],
7 ASSESSMENT TOOLS AND METHODOLOGIES 139
Fama and Jensen [1983], Hoskisson et al. [1999], and Jensen and
Meckling [1976]). Classic accounting literature has thus developed over-
riding reporting principles as foundation and prerequisites for providing
consistent and useful information (Financial Accounting Standards Board
2008). Although these principles have been developed for financial
reporting, they can be applied to the case of social impact reporting
as the underlying objective—providing stakeholders with information
influencing their decisions on investments—is the same.
This conceptual framework consists of two primary reporting princi-
ples, namely relevance and reliability. These are further specified by the
secondary reporting principles of comparability and cost-benefit. Rele-
vance means that only information should be reported that significantly
influences the recipient’s decision. Reliability addresses the concern about
the correctness and arbitrariness of information in order to allow for
objectivity and intersubjective verifiability. The principle of comparability
comprises so-called vertical comparison for one organization over time
as well as horizontally for different organizations in similar situations at
the same time. The cost-benefit principle at last is intended to ensure
that costs and benefits of reporting remain in an appropriate proportion
(Financial Accounting Standards Board 2008).
It is important to consider that it will never be possible to completely
fulfill all principles within the scope of an impact report simultaneously:
There always is a trade-off between the different dimensions and it might
be accepted to neglect one principle in order to achieve another one. For
example, to completely accomplish the criterion of comparability between
different organizations is particularly challenging in the area of impact
investing and might be deferred in order to take into account the specific
theories of change of all investees and therefore apply the principle of
relevance. Therefore, the choice of a particular IMM method also depends
on the optimal individual specification of these principles.
7.1.5 Scope of Impact Measurement and Management

In addition to the different forms and types social impact can have (e.g.,
with respect to sector, target group, time horizon, intentionality), impact
also happens on different levels of society. Thus, it needs to be decided
what the scope of IMM should be. Possible levels are
– The micro level: these are the changes on an individual level or on a

program level.
– The meso level: this represents the wider community or an organi-
zational level.
– The macro level: these are changes on societal level, e.g., within an
entire population or industry.
These levels should not be confused with impacts or outcomes which

define the primary beneficiaries (impacts) that also could be situated on
a meso or macro level as well as the changes that go beyond the primary
target group (outcomes) which could also be on a micro level (Fig. 7.1).
7.2 Existing Impact Measurement

and Management Methods
7.2.1 Introduction
The plethora of IMM tools and methods is hardly manageable: The
majority of the concepts have arisen for a specific purpose in the invest-
ment process or have been intended to solve a particular problem in one
particular organization. Often, they have been developed by practitioners
and consultants (The Rockefeller Foundation and The Goldman Sachs
Foundation 2003). Furthermore, the huge variety can be explained by
the diverse objectives and recipients of IMM (Sect. 7.1) as well as the
various sectors, topics, and types of organizations active in the field. The
development of most of the methods has often been effected without
comprehensive grounding in theory and has in the further course been
transferred to various other organizations. Moreover, existing concepts
are aimed at different lifecycle stages of organizations, demand differing
deployment of resources and qualification of the users and are aimed at
different audiences. In addition, they only capture partial aspects of social
performance (Clark et al. 2004; Wei-Skillern 2007).
Macro (e.g.
society,
industry)
Meso (e.g.,
organisation,
community)
Micro (e.g.,
individual,
program)
Fig. 7.1 Possible scope of impact assessment (Source Own depiction)
Despite the broad offering, an overarching trend in terms of focus and

application of the methods can be observed: Methods to assess impact
are becoming more sophisticated and complex suggesting that the impact
investing market is maturing as investors and social businesses begin to
recognize the value of proactively managing and measuring impact (Olsen
and Galimidi 2008).
7.2.2 Differentiating IMM for Different Financial Instruments

Simultaneously to the development of IMM in terms of rigor, depth, or
scope, a differentiation of IMM according to the financial instrument used
can be observed. Specifically, when assessing the effects of equity and debt
investments, investors approach IMM differently.
Equity investors usually invest through highly individualized large
transactions in a comparatively small number of investees. For IMM this
translates into tailor-made impact analyses and a quite in-depth impact
due diligence. As capital is often disbursed in tranches and payments
are linked to pre-defined impact milestones, ongoing extensive impact

monitoring, and reporting processes are implemented post-investment.
A lender/debt investor typically provides a rather standardized product
to a large number of organizations. The focus of IMM is thus rather
set on the pre-investment phase and is conducted in a standardized way
due to the large amount of borrowers to be assessed. Post-investment,
normally not many IMM activities take place as there is no incentive for
the borrower to report as long as the repayments to the lender proceed
as defined.
7.2.3 Categorization of IMM Methods

In an attempt to categorize existing IMM methods, the authors have tried
to structure existing IMM tools according to the purpose they serve and
to the stage of the investment process where they are applied. These
methods constitute the “core” toolbox impact investors are currently
using. In addition, a variety of tailor-made solutions has been devel-
oped serving single investor’s specific purposes. Investors previously or
simultaneously engaged in traditional ESG-investing also use tools from
the sustainability field, such as the Global Reporting Initiative’s (GRI)
guidelines (Fig. 7.2).
As depicted in Chapter 2, the United Nation‘s Sustainable Develop-
ment Goals (SDGs) have become established as the overarching frame-
work of objectives impact investors try to tackle. Standards promoting
best practice processes how to conduct IMM are the IFC‘s Oper-
ating Principles for Impact Management (https://www.impactprinciples.
org/) and the European Commission’s guidelines on impact measure-
ment as proposed by the GECES Subgroup on Impact Measurement
. These standards provide a reference point to ensure that impact
considerations are integrated throughout the investment life cycle.
In order to ensure the independent verification of the IMM results,
there have been attempts to establish external certification mechanisms.
GIIRS was intended as a fund rating system but it is not being further
developed as of now. The B Corp Certification is a label demonstrating
that a business is meeting certain standards of performance, account-
ability, and transparency on different social and environmental criteria.
It is not targeted specifically at social enterprises or impact investors
and does not certify IMM processes or the actual measurement results.
Fig. 7.2 Categorization of IMM tools (Source Own depiction)
However, some actors in the sector use it for signaling the sustainable
set-up of their operations.
The most widely adopted methodology on actual impact measurement
and the initiative that has convened the largest number of stakeholders is
the impact management platform (IMP: https://impactmanagementpl
atform.org/). The forum has developed guidance as well as a vast collec-
tion of best practice cases and peer-learning material. Its five dimensions
of impact encourage investors to address the following questions in their
impact assessment:
– What outcomes does the effect relate to, and how important are
they to people experiencing it (usually described with the SDGs an
investor is working towards).
– How much of the effect occurs in the time period.
– Who experiences the effect, and how underserved are they in relation
to the outcome.
– How does the effect compare and contribute to what is likely to
occur anyway.
– Which risk factors are material, and how likely is the effect different
from the expectation.
This methodology is being used by impact investors as well as by some

ESG-investors and is applicable across asset classes.
Regarding actual metrics being used in IMM, some investors use classic
cost-benefit analysis or some version of it (such as social return on invest-
ment) in order to monetize social or environmental changes. Another
resource that is being continuously further developed is the GIIN‘s
Impact Reporting and Investing Standards (IRIS+: https://iris.thegiin.
org/). It provides investors with a free catalog of generally accepted and
tested performance metrics across SDGs.
The following chapter will illustrate some of these tools and others that
investors have developed for their own use, in more detail.
7.2.4 Methods for Assessing and Evaluation of Social Impact

In the following, an exemplary selection of IMM methods and tools will
be presented. It is by far not exhaustive; They have rather been chosen
to illustrate the variety of the methodological spectrum by establishing
diverse categories relevant for impact investors. The clear assignment of
a method to a certain category respectively is sometimes not entirely
possible; many methods rather belong to multiple categories. This will
be depicted accordingly.
The categories chosen stem from the discussion in the previous chap-
ters and address (besides general information about its name, origin, and
short summary) the following aspects:
Target audience:
Different stakeholders dispose of different expectations toward social
impact assessment. The overview will thus distinguish external stake-
holders (investors, the general public, clients, beneficiaries) and internal
stakeholders (management, board, employees, volunteers).
IMM function in the investment process:
Requirements of IMM vary depending on the stage of the investment
process they are being used for: A first instant for IMM constitutes the
question of predicting a potential social impact that could be achieved or
analyzing the results that have been accomplished by the social organi-
zation in retrospect. A second distinguishing factor lies in the use of the
impact information for either internal purposes (e.g., capacity building

of the social organization) or external purposes (e.g., reporting). The
overview thus distinguishes several pre-investment and post-investment
stages, namely screening and due diligence (pre-investment), capacity
building, reporting, and exit (post-investment).
Investee maturity:
As discussed in the previous chapters, IMM requires significant resources
and expertise on behalf of the evaluator. Thus, for each method it will be
mentioned if its application is recommended for rather sophisticated or
for small-scale/early stage social enterprises.
Reporting principles:
As discussed in Sect. 7.1.4, the four main reporting principles (relevance,
reliability, comparability, and cost-benefit) can never be all maximized
simultaneously. Depending on the desired focus, different methods have
to be chosen.
Function:
Depending on their overall purpose prompted largely by their origina-
tors, IMM tools in a narrower sense, can broadly be clustered into three
functional categories:
– Standards/Management systems: Guidelines for ongoing moni-

toring and evaluation processes in order to managing operational
performance as drivers of impact in detail.
– Certifications: Based on screenings, usually by an independent third
party, often represented with a final score or symbol (stars, etc.),
– Assessment methodologies: Summarized, mainly quantitative (some-
times even monetarized) results of social interventions at a certain
point in time, usually without explicitly analyzing operational data
over time
Customizability:
Social organizations operate in diverse settings with different business and
impact models. Similarly, impact investors often have a variety of expec-
tations toward the IMM process. Thus, it might be recommendable to
choose the most adequate method and customize it to the specific need.
This can be done, e.g., by adding additional indicators, supplemental
information in the form of anecdotes or pictures. However, it has to be
kept in mind that this probably entails a decrease of comparability over

time and across organizations.
The following methods and tools can be seen as examples representing
the variety of approaches touching on every aspect discussed previously
and are presented in alphabetical order:
Name Best Available Charity Option (BACO)
Origin Social Venture Capital Fund Acumen, launched in 2007

Summary Instead of seeking an absolute number for social impact
across a diverse portfolio, BACO aims to quantify an
investment’s social impact and compare it to the universe
of existing charitable options for that explicit social issue
Target audience External: Investors and funders
Quantitative x Qualitative Monetization x
Use cases – Screening and due diligence x
– Capacity building
– Reporting x
– Exit x
Investee maturity Sophisticated
Reporting principles High comparability—quantitative measures
High costs—extensive analyses
Medium relevance—quantified social impact disregards
more granular information
Medium reliability—analyses based on assumptions and
choice of alternatives
Function Assessment
Customizability Low to moderate
Name Balanced Scorecard for Social Purpose Organizations
Origin Originally developed by Robert Kaplan and David Norton

(1997), in 2000 its co-developer, Robert Kaplan, adapted
the approach for non-profit organizations
Summary The Balanced Scorecard proposes that companies measure
operational performance in terms of four outcome
perspectives: financial, customer, business process, and
learning and growth. The modified framework for social
purpose organizations comprises a fifth perspective, namely
social impact. All metrics can be set individually and tracked
over time. Special importance must be paid to the
connections between the dimensions and the respective
metrics
Target audience Management
Quantitative x Qualitative Monetization
– Capacity Building x
– Reporting
– Exit
Investee maturity Small scale to sophisticated
Reporting principles Low comparability—quantitative measures but highly
individualized for the specific organization
Low costs—free template
High relevance—impact is captured in a dedicated
perspective with several metrics
Low reliability—usually established as internal management
tool and self-assessment
Function Management System
Customizability High
Name B Rating System
Origin Developed by the American non-profit organization B Lab

Summary The rating system contains two parts: The B Impact
Assessment and the B Impact Report provided by B Lab.
The B Impact Assessment is a free, web-based tool
calculating an overall score based on five impact areas in
order to provide a holistic view of an organization, the B
Impact Report is a one-page report documenting these
results. Furthermore, the score can be compared to the
results of other businesses
(continued)
(continued)
Name B Rating System
– Capacity Building (x)

– Reporting x
– Exit
Investee maturity Early and development stage
Low costs—free online tool
Medium relevance—across several impact areas, but
quantified social impact disregards more granular
information
Low reliability—self-assessment tool without external verify
cation
Function Certification
Assessment
Customizability Low
Name Fair Trade Certification
Origin Fair Trade Labelling Organizations International (FLO), a

non-profit membership organization comprised of separate
non-profit organizations called Labeling Initiatives (LIs),
and regional farmers’ networks representing approximately
1.4 million Fair Trade farmers and workers
Summary Fair Trade certification allows agricultural products to bear
the label “Fair Trade Certified”, which makes the fact that
100% of the product was produced in a manner that meets
minimum standards with respect to environmental impact,
working conditions, and governance. Approved products
can be traded with the Fair Trade brand and logo
Target audience Investors and funders, customers
– Capacity Building
– Reporting x
– Exit x
Reporting principles High comparability—binary decision of yes or no
certification
High costs—detailed certification process, certification, and
inspection fees
Low relevance—all aspects of impact integrated into one
final decision
High reliability—external accreditation and certification
(continued)
(continued)
Name Fair Trade Certification
Function Certification
Customizability None
Name Randomized Control Trial (RCT)
Origin Randomization is a method commonly used in natural

science and clinical trials to test hypotheses by means of
experiments
Summary Experimental or quasi-experimental method using
counterfactual, often in form of control groups to
determine the causal effects and generated impact of the
intervention compared to the status quo: Participants are
randomly allocated to either the treatment or the control
group. Thus, selection bias can be minimized and the
comparison between the two groups allows to determine
treatment effects with other variables kept constant
Target audience External: investors, funders, the general public
Internal: management
Quantitative x Qualitative x Monetization
Use cases – Screening
– Management operations (x)
– Reporting x
– Exit
Reporting principles Medium comparability—quantitative measures but based
on specific intervention
Very high costs—extensive analyses
Very high relevance—can potentially prove cause-and-effect
relationship of intervention
Very high reliability—proven intervention including base
case control group
Function Assessment
Customizability High
Name Social Reporting Standard (SRS)
Origin Developed by a consortium of TU Munich, Universität

Hamburg, Ashoka, Schwab Foundation for Social
Entrepreneurship, BonVenture, Phineo, and PWC
Summary All aspects of performance: social impact, risk, and
organizational capacity
Target audience Investors and funders
Quantitative x Qualitative x Monetization
– Capacity Building x
– Reporting x
– Exit x
Investee maturity Small scale to sophisticated
Reporting principles High comparability—Consistent structure and “comply or
explain” principle
Low costs—Comprehensive templates and exemplary
reports
High relevance—Developed with investors as well as social
entrepreneurs including all aspects of performance
Medium reliability—Proven intervention including base case
control group
Function Standard/Management System
Name Social Return on Investment (SROI)
Origin Developed from social accounting and cost-benefit analysis

Summary Takes into account the anticipated social benefits expressed
in the monetary value of expected social returns of an
investment against its costs, discounted to the value of
today’s value. It can take the form of a relative return on
investment (ROI) expressed in percentage, a ratio, or a
Net Present Value (NPV) number
SROI ratio = (Present Value of Impact) / (Value of
Inputs)
Quantitative x Qualitative Monetization x
– Capacity building
– Reporting x
– Exit
(continued)
(continued)
Name Social Return on Investment (SROI)

Very high costs—extensive analyses
Low relevance—quantified social impact disregards more
granular information
Low reliability—analyses based on many assumptions and
difficult verifiable hypotheses
Function Assessment (SROI calculator)
Management System (SROI framework)
7.2.5 Data collection

The Universe of Data Collection Methods
After having decided on the target audience, the objectives, the scope
as well as the appropriate method for assessing impact, the next steps
usually involve the gathering of the data needed. In this context, a range
of data collection methods can be distinguished. They differ in terms of
expenditure required (time, cost as well as expertise) and reliability of the
evidence. These two dimensions (expenditure and reliability) constitute
a trade-off—i.e., the more reliable a data collection method, the more
resources are needed to implement it. The challenge is to balance these
two dimensions in a meaningful way and to do as much as necessary, and
as little as possible in order to set up a reasonable and practical IMM
process.
For many sectors and social issues, a considerable amount of informa-
tion is already available: Good external sources are, for example, official
statistics or findings from surveys and academic studies. In addition, many
organizations dispose of internal data that can be used, e.g., in project
documentation, evaluation records, or annual reports (Phineo gGmbH
2016).
If the existing data is not sufficient, or no data exists at all, new data
needs to be collected. In general, data collection methods can be differ-
entiated in qualitative and quantitative approaches. Qualitative data have
a descriptive function and can provide a deeper insight into the specific
situation or set of circumstances. Their advantage lies in the ability to
illustrate causal relationships as well as interdependencies and to provide
emotionally convincing details. Qualitative data collection methods are,

for example, interviews, focus groups, observations, anecdotal evidence,
case studies, and photo or video documentation.
Quantitative data collection methods should be used if the informa-
tion needed can be expressed in numeric or monetary terms. They result
in a better comparability of impact information across groups, organiza-
tions, or sectors if proof is required that an organization has achieved
a quantifiable success. Quantitative approaches are rather evidence-based
and can include methods such as measuring, counting, statistics analyses,
and various forms of tests or longitudinal studies with control groups.
Indicators
Indicators are measurable variables that can be used to represent the
change that has been achieved in terms of outputs, outcomes, or impacts.
They are usually linked to the overall objectives of the intervention and
aim to illustrate to what extent these have been reached. There are quali-
tative and quantitative indicators: Qualitative indicators are best suited to
understand changes in attitudes, motivation, or behaviors and explain the
underlying reasons for this (Muir and Bennett 2014). They often provide
a high explanatory value but are relative and subjective. Quantitative indi-
cators aim at explaining an observed phenomenon in a numerical way,
e.g., how many, how much, or how often. The advantage of quantitative
indicators is their objectivity and comparability. However, they often only
are able to capture some aspects of social impact without and it is diffi-
cult to depict e.g., attitudes or feelings without losing much explanatory
value.
Furthermore, direct and indirect indicators need to be distinguished:
Direct indicators can directly depict the phenomenon they should repre-
sent, for example, the number of participants or the increase of income
generated by an intervention. Often, however, it is not possible (or too
expensive) to directly assess or express the observed changes, for example,
if the entire target population cannot be counted and it is necessary to
extrapolate from other data. Another use case would be the description
of changes in attitudes, behaviors, or feelings, such as self-confidence. In
these circumstances, if direct indicators are not available a number of so-
called indirect or proxy indicators might be used in order to adequately
depict the situation.
In general, when developing indicators, it is commonly suggested to
formulate them in a SMART way bearing in mind quality (the kind of
change you want to depict), quantity (the scope of the change), and time
(the time by when the change should have taken place; QQT). Experience
has shown that usually more than one indicator is needed to appropri-
ately reflect societal changes. However, a too large number of indicators
is difficult (if not impossible) to assess and to manage. Thus, it is recom-
mendable to focus on the most important indicators (the so-called key
performance indicators or KPIs) and derive a manageable set of indicators
on the output, the outcome, and, if feasible, on the impact level.
The Global Impact Investing Network (GIIN), along with Acumen,
the Rockefeller Foundation, and B Lab has developed the Impact
Reporting and Investment Standards (commonly known as IRIS), a cata-
logue of standardized financial, operational as well as social metrics that
impact investors can choose to track (https://iris.thegiin.org/metrics).
Lean Data and the Use of Mobile Technology for Data Collection
As illustrated in the previous chapters, IMM is often complex and
resource-intensive hindering a widespread application by investors as
well as investees. Recently, however, an approach termed “lean data”
has gained traction by leveraging mobile technology for impact assess-
ment purposes (Dichter et al. 2016b). The project, launched by the
social venture capital fund Acumen (with grant support from the Aspen
Network for Development Entrepreneurs and the Omidyar Network),
aims at enabling social enterprises to gather high-quality impact data
quickly and inexpensively (Acumen Fund 2015; Dichter et al. 2016a).
The initiative is based on principles that can be abbreviated with the
acronym BUILD (Dichter et al. 2016b):
– Bottom-up: Focusing on the beneficiaries’ needs and interests.

– Useful: Striving for data quality sufficient for decision-making.
– Iterative: Allowing for learning, adaptation, and replication.
– Light-touch: Using cost-efficient tools and technologies.
– Dynamic: Enabling fast data collection within a rapidly changing
environment.
Two main features constitute the core of the approach: a shift from impact
assessment mainly for reporting and compliance purposes toward creating
value for the organization and its beneficiaries and the more efficient
data collection with new technologies. It focuses heavily on the spread
of mobile technology and uses, for example text messages, to ask few
central questions relevant for assessing impact.
Combining mobile technology with a focus on beneficiaries’ (and thus
often customers’) needs constitutes a promising new avenue for gener-
ating impact insights quickly and at a reasonable cost (Acumen Fund
2015).
7.3 Outlook
The last concluding chapter wraps up the previous chapters and gives
a guide to assessing the social impact. This book has shown that social
enterprises have gained prominence and investors are increasingly looking
for ways to invest in products which provide financial returns but also
create social value.
Part of the reason is that the problems of our days are manifold and
increasingly complex. Policies crafted by public authorities are helpful and
foundations are important in getting projects started. Although substan-
tial progress can be observed in addressing severe social and ecological
problems worldwide, an immense degree of social hardship remains:
poverty, hunger, access to clean water, or child mortality are just some
examples of material challenges in large parts of the developing world.
All social innovations need capital to scale their initiative. Thus, impact
investing has been discussed vividly lately as a supplemental funding
source for addressing societal problems. It is driven by the need to fund
social innovations.
This book has shown what is happening in the market for impact
investments. There are still various weaknesses and imperfections observ-
able in the market. Secondary equity markets are slowly developing and
standards are not yet fully established.
There is still potential to involve additional investors in the impact
investing industry. It will need the development of the market and more
deals. There is potential for more innovation. The blockchain technology
is currently being discussed and new approaches have to be tested (Scott
2016). Given that developing countries have access to mobile technology
(Bannick et al. 2015) believe that the near-term opportunities are financial
technology, education technology, and consumer internet.
Bibliography
Acumen Fund. 2015. The Lean Data Field Guide. Durham.
Asian Venture Philanthropy Association. 2016. A Guide to Effective Impact
Assessment. https://avpn.asia/wp-content/uploads/2016/05/AVPN-IA-rep
ort-2016-web.pdf.
Bannick, Matt, Paula Goldman, and Michael Kubzansky. 2015. Frontier
Capital—Early Stage Investing for Financial Returns and Social Impact in
Emerging Markets. https://www.omidyar.com/sites/default/files/file_arch
ive/insights/Frontier%20Capital%20Report%202015/ON_Frontier_Capital_
Report_complete_FINAL_single_pp_100515.pdf.
Clark, C., W. Rosenzweig, D. Long, and S. Olsen. 2004. Double Bottom Line
Project Report: Assessing Social Impact in Double Bottom Line Ventures. New
York: Columbia Business School.
Coy, David, Mary Fischer, and Teresa Gordon. 2001. Public Accountability: A
New Paradigm for College and University Annual Reports. Critical Perspec-
tives on Accounting 12 (1): 1–31. https://doi.org/10.1006/cpac.2000.
0416.
Dichter, Sasha, Tom Adams, and Alnoor Ebrahim. 2016a. Leveraging Lean Data.
Stanford Social Innovation Review, No. Winter 2016.
———. 2016b. The Power of Lean Data. Stanford Social Innovation Review,
No. Winter 2016.
Eisenhardt, Kathleen M. 1989. Agency Theory: An Assessment and Review. The
Academy of Management Review 14 (1): 57–74. https://doi.org/10.2307/
258191.
Fama, Eugene, and Michael Jensen. 1983. Separation of Ownership and Control.
Journal of Law and Economics 26 (2): 301–325.
Financial Accounting Standards Board. 2008. Conceptual Framework for Finan-
cial Reporting: Objective of Financial Reporting and Qualitative Character-
istics of Decision-Useful Financial Reporting Informatoin. No. 1280-001.
Financial Accounting Series.
Hoskisson, Robert E., Michael A. Hitt, William P. Wan, and Daphne Yiu.
1999. Theory and Research in Strategic Management: Swings of a Pendulum.
Journal of Management 25 (3): 417–456. https://doi.org/10.1177/014920
639902500307.
Jensen, Michael, and William H. Meckling. 1976. Theory of the Firm: Manage-
rial Behavior, Agency Costs and Ownership Structure. Journal of Financial
Economics 3 (4): 305–360.
Kaplan, Robert, and David Norton. 1997. Balanced Scorecard - Strategien
Erfolgreich Umsetzen. Schäffer-Poeschel.
Muir, Kristy, and Stephen Bennett. 2014. The Compass: Your Guide to Social
Impact Measurement. Sydney: The Centre for Social Impact.
Olsen, Sara, and Brett Galimidi. 2008. Catalog of Approaches to Impact Measure-
ment. Assessing Social Impact in Private Ventures. Silicon Valley: Social Venture
Technology Group with the Support of The Rockefeller Foundation.
Phineo gGmbH. 2016. Social Impact Navigator—The Practical Guide for
Organisations Targeting Better Results. Berlin: PHINEO
Richter, Rudolf, and Eirik G. Furubotn. 1999. Neue Institutionenökonomik: Eine
Einführung Und Kritische Würdigung. 2., Durchges. U. Erg. Aufl. Tübingen:
Mohr-Siebeck.
Saltuk, Yasemin, and Ali El Idrissi. 2014. Spotlight on the Market. The Impact
Investor Survey. New York: J.P. Morgan, GIIN Global Impact Investing
Network.
Scott, Brett. 2016. How Can Cryptocurrency and Blockchain Technology Play
a Role in Building Social and Solidarity Finance? UNRISD Working Paper.
https://www.econstor.eu/handle/10419/148750.
The Rockefeller Foundation and The Goldman Sachs Foundation. 2003. Social
Impact Assessment—A Discussion Among Grantmakers. New York: The Rock-
efeller Foundation/The Goldman Sachs Foundation.
Wei-Skillern, Jane. 2007. Entrepreneurship in the Social Sector. Los Angeles: Sage.
Index
A Corporate social performance, 118

Alternative Bank Schweiz, 82 Corporate Social Responsibility
Ashoka, 75 (CSR), 7, 18
Assessment tools, 137 Counterfactual, 130
Attribution, 130 Crowdfunding platforms, 82
Crowding-out, 67
B
Balanced Scorecard for Social Purpose
Organizations, 147 D
Best Available Charity Option, 146
Debt capital, 103
Big Society Capital, 76
Developers, 22
BonVenture, 78
Development Impact Bonds, 88
B Rating System, 147, 148
Bridges Ventures, 79 Donors, 54
C
Capital cost restrictions, 62 E
Catalytic investments, 92 Environmental Impact Bond, 88
Categorization of IMM tools, 143 Equity capital, 101
Child labour, 40 Ethical banks, 74, 77
Convertible grants, 104 European Venture Philanthropy
Corporate financial performance, 118 Association (EVPA), 75
© The Editor(s) (if applicable) and The Author(s), under exclusive 157
license to Springer Nature Switzerland AG 2023
https://doi.org/10.1007/978-3-031-32183-2
158 INDEX
F Mezzanine capital, 104

Fair Trade Certification, 148, 149 Mission drift, 120
Financing Agency for Social Motives, 53
Entrepreneurship (FASE), 76
Financing instruments, 99, 102
Forgivable loan, 104 N
Foundations, 55 Negative screening, 84
Networkers, 21
Networks, 74, 75
G Noaber Foundation, 79
GLS Bank, 82
Grant Giving, 7
Grants, 105 O
Guarantees, 91 Oltre Venture, 80
Outcomes, 122
Outputs, 122
I
Impact data collection, 151
Impact indicators, 152
P
Impact management platform, 143
Pay for results models, 86
Impact measurement and
PhiTrust, 80
management, 117, 138
Positive screening, 84
Impact metrics, 144
Pricing strategies, 25
Impact reporting, 138
Private beneficiaries, 64
Impacts, 122
Public beneficiaries, 64
Impact value, 122
Impact Value Chain Model, 124
Impact Value Chain Model R
OECD-DAC, 123 Randomized Control Trial, 149
Income streams, 64 Recoverable grants, 104
Inputs, 122 Results chain, 122
Investors with market-oriented Results staircase, 123
financial return expectations, 57 Return expectations, 54
Investors with reduced financial return Revenue share agreements, 104
expectations, 56
L S
Legal form, 17 Scalers, 22
Localizers, 22 Scaling, 21
Schwab Foundation for Social
Entrepreneurship, 75
M Selection criteria, 77
Merkur Cooperative Bank, 82 Shareholder activism, 84
INDEX 159
Skoll Forum for Social Social Return on Investment (SROI),

Entrepreneurship, 75 150, 151
Social business model innovation, 23, Social Success Note, 89
24 Social venture capital funds, 74, 76
Social Enterprise School, 14 Sustainability conflicts, 63
Social entrepreneurship, 14 Sustainable Development Goals, 27
Social Impact Bonds, 87
Social Impact Crowdfunding
T
Platforms, 74
Terminology of impact measurement
Social innovation, 15
and management, 127
Social Innovation School, 14
Theory of Change, 126
Social investment advisors, 74, 76 Trade-Off Conflicts, 60
Social investment banks, 76 Triodos Bank, 82
Socially responsible investing, 7, 52,
84
Social problems, 26 V
Social Reporting Standard, 150 Venture philanthropy, 5

Impact Investing Instruments Mechanisms and Actors Wolfgang Spiess

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Impact Investing Instruments Mechanisms and Actors Wolfgang Spiess

Uploaded by

Copyright:

Available Formats

PALGRAVE STUDIES IN IMPACT FINANCE

ISSN 2662-5105 ISSN 2662-5113 (electronic)

Cover illustration: VividaPhotoPC/Alamy Stock Photo

Fig. 3.1 Return expectations (Source Based on Spiess-Knafl [2012]) 54

Table 1.1 Potential invested capital to fund selected BoP businesses

Table 5.4 Age distribution of investments 106

© The Author(s), under exclusive license to Springer Nature 1

A new generation of social entrepreneurs is working on new business

1.1.1 Social Enterprises

1.1.2 Societal Challenges and Changes in the Social Sector

Collier (2014) even speculates about an accelerating pace of interna-

1.1.3 Capital Providers

1.2 Impact Investing

Table 1.1 Potential

Source O’Donohue et al. (2010)

In an early study, O’Donohue et al. (2010) estimated the capital

Impact investing is the art of investing with an intended social impact

Table 1.2 Forms of creation of social impact

Socially responsible Impact Corporate social Grant giving

Description Public investing Private Corporate strategies Foundational

Source Own illustration

1.3 Outline of the Book

a summary of the most widely used social impact assessment methods is

O’Donohue, N., C. Leijonhufvud, Y. Saltuk, A. Bugg-Levine, and M. Bran-

Impact investing is the process of funding social innovations. This process

© The Author(s), under exclusive license to Springer Nature 13

2.1 Social Entrepreneurship at the Core

such as fitness centers operated by hospitals, the renting of museum space

2.1.2 Defining Social Entrepreneurship

seven categories. They are focused on (1) human well-being in soci-

Rather unsurprisingly, those definitions are often hard to operationalize

Legal Forms of Social Enterprises

2.1.3 Differentiation from Other Actors

The actors are governments, businesses, charities, commercial enter-

Table 2.1 Institutional actors

Actors Distinct role in economic Dominant Dominant logic

Governments Centralized mechanism Defend Public Regulation

Source Santos (2012)

instance by improving working conditions and environmental protection

exercise discretionary measures to take decisions in the service of their

2.1.4 Scaling Strategies

Table 2.2 Growth strategies

Control of the business model Low Networker Blueprinters

Source Spiess-Knafl and Jansen (2014)

2.2 Social Business Model Innovation

Table 2.3 Categories of social business model innovation

Type of innovation Description

Opportunity creation Creation of new entrepreneurial opportunities for the target

Source Spiess-Knafl et al. (2015)

Six different types of social business model innovation can be classified

2.2.1 Opportunity Creation

2.2.2 Smart Distribution

interesting example for an intersectoral partnership is colafife which uses

2.2.3 Ecosystem Engineering

2.2.4 Cheap Sourcing

2.2.5 Smart Pricing

2.2.6 Inclusive Production

2.3 Thematic Areas for Impact Investing

2.3.2 Sustainable Development Goals

Table 2.4 Categories of non-profit organizations

International classification of nonprofit Social problems

Culture and recreation Permanent or temporary physical

Source Salamon and Anheier (1996) and Scheuerle et al. (2015)