How Impact-Linked Finance Can Accelerate the SDGs

BCG collaborated with Roots of Impact, a German advisory firm and pioneers in impact-linked finance, to define and accelerate the concept of “impact-linked finance” solutions.

Even as organizations continue to address and actively contribute to the Sustainable Development Goals (SDGs), their impact is often neither priced, nor compensated, adequately. In many cases, funding through traditional channels is extremely challenging.

Overall, there is a strong need for alternative funding mechanisms to close the enormous funding gap for achieving the SDGs and create incentives for effective change. One promising solution: impact-linked finance.

What Is Impact-Linked Finance?

Impact-linked finance refers to financial solutions for market-based organizations that directly link financial rewards to the achievements of positive social outcomes. It’s a tool for positively incentivizing private sector investment in social impact work with financial rewards.

BCG and Roots of Impact’s Collaboration on Impact-Linked Finance Solutions

BCG and Roots of Impact—a German impact finance advisory firm working with public funders, philanthropists, and impact investors globally to finance private sector innovations and enterprises with strong potential for positive impact—kicked off a project to mobilize additional private sector investments for social impact. Together, over the course of seven weeks, the joint team interviewed more than 20 experts across relevant stakeholder groups (impact investors, philanthropists, charities, social entrepreneurs, and academia), and utilized agile ways of working to:

Define and Position the Innovative Funding Concept of Impact-Linked Finance

Impact-linked finance shares characteristics with impact investing, blended finance, and results-based finance, but has three distinct differences:

  1. Focusing on market-based enterprises
  2. Functioning with simple contractual structures
  3. Disbursing incentives directly to the enterprises driving positive social outcomes

Identify Potential and Current Limitations of Impact-Linked Finance

  • Experience. Stakeholders are not fully aware of impact-linked finance and its characteristics.
  • Knowledge. Impact-linked finance requires an understanding of the concept, processes, solutions, and implementation practices. But most importantly, it requires a change in stakeholders’ mindsets.
  • Regulatory. External and internal regulations will affect how easy or difficult it is for capital providers to leverage innovative impact-linked finance solutions.
  • Attractiveness. The outcomes impact-linked finance approaches deliver need to be attractive in delivering additional impact and efficiently make use of capital and efforts invested
  • Capacity. There may be limited resources with expertise on how to plan and execute impact-linked finance deals.
  • Data. Financial and impact-related data needs to be made available for investors and outcome payers to analyze the underlying business model and (additional) outcomes delivered.

Design a Five-Step Roadmap to Unlock Impact-Linked Finance's Full Potential

  1. Showcase proof of concept and engage further stakeholders.
  2. Design simple, powerful solutions and introduce sector-specific pooling.
  3. Build identity and establish open standards for practice.
  4. Engage in knowledge dissemination and capacity building.
  5. Leverage technology and continuously evolve over time.

What’s more natural than linking rewards directly to positive impact and providing them directly to the enterprise creating it? This is how we came to social impact incentives, which developed into the broader concept of impact-linked finance.

—Björn Struewer, Founder & CEO, Roots of Impact

Impact-linked finance is a promising solution, as it directly links financial rewards for market-based organizations to the achievement of positive social outcomes. We believe that impact-linked finance solutions are vital to overcome the funding gap of $2-3 trillion per year that the SDGs currently face.

Learn More About Impact-Linked Finance

Meet BCG’s Experts in Impact-Linked Finance

  • Social and public sector
  • Nonprofits
  • Impact Measurement
  • Social Entrepreneurship
  • Bank privatization process, recovery, and resolution
  • Transformation
  • Postmerger integration in banking
  • Regional banking in Germany
  • Emerging markets
  • Economic development
  • Renewable energy and infrastructure
  • Public sector
  • Impact finance
  • Analytics in automotive
  • Technology roadmapping
  • Robotics and automation
  • Social impact and global development
  • Impact-linked finance
  • Social impact measurement and reporting
  • Social entrepreneurship
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