The mission: Scaling impact-linked finance while keeping standards and integrity high

Impact-Linked Finance (ILF) is an approach that provides “better terms for better impact” by linking financial rewards to measurable social or environmental outcomes. Over eight years and more than 50 ILF transactions, Roots of Impact has demonstrated ILF’s ability to steer enterprises toward greater inclusivity and tangible impact. It rewards performance through tools such as interest rate step-downs, cash incentives, and flexible repayment terms. The report emphasises maintaining standards and integrity as the practice scales, noting that successful ILF design depends on strategic alignment, effective implementation, and collaboration among practitioners.

The potential: Positioning impact-linked finance and its prospects to drive systems-level impact

ILF builds on results-based finance, impact investing, and blended finance, expanding their principles to directly reward enterprises for positive outcomes. Originating from the Social Impact Incentives (SIINC) model launched in 2016, ILF now includes a range of instruments such as Impact-Linked Loans, Revenue Share Agreements, and Matching Funds. Unlike other mechanisms, ILF directs incentives to market-based organisations rather than investors, encouraging additional impact creation.

The market for ILF has grown significantly, with 44 transactions completed by 2022 and applications spanning Latin America, Africa, and beyond. Independent evaluations confirm that ILF works best when aligned with its Design Principles—focusing on additionality, outcome measurement, and fairness. The report notes ILF’s increasing relevance in mainstream finance through sustainability-linked loans and bonds but stresses the need to replace ESG-based metrics with tangible outcome goals. It advocates for integrating catalytic capital and outcomes-based incentives into public and private funding to achieve systems-level change.

The practical application: Key insights for use cases and design

ILF should align with an enterprise’s short- and long-term strategies to ensure incentives generate lasting impact. It works best where impact variance is high—such as in healthcare or gender equality—allowing ILF to encourage innovation and manage both risk and opportunity. The report identifies five main use cases: unlocking hidden impact potential, enabling sustainable impact, targeting specific impacts, maintaining mission focus, and kick-starting new solutions.

Quantitative evidence shows gender equality as the most frequently targeted outcome, featuring in 19 transactions up to 2022. ILF instruments are adaptable for early-stage enterprises through features like “golden impact targets” or Impact-Ready Matching Funds that combine technical assistance (TA) with financial incentives. The report highlights that TA funding, when paired with impact incentives, significantly increases the likelihood of achieving measurable outcomes.

The Design Principles for ILF—covering aspects such as additionality, fair pricing, and alignment—serve as benchmarks for effectiveness. A new open-source ILF (self-) assessment methodology based on these principles is being introduced to ensure consistent quality. Baseline creation, evolving impact measurement systems, and adaptive performance targets are identified as key features for effective ILF design.

The report also underscores that pricing impact incentives is both an art and a science. Rewards should follow minimum concessionality principles, encouraging impact without distorting markets. Impact data availability remains a key challenge, prompting the development of three levels of ambition—basic, medium, and superior—for data use and verification. Cash incentives remain the most effective motivator for enterprises, especially when separated from repayable capital to allow flexibility. Long-term sustainability of impact after incentives end is crucial, with enterprises selected for their ability to maintain results post-“ILF exit”.

A glimpse into the future: Inspiring ideas for collaboration
Roots of Impact calls for scaling ILF while maintaining quality and integrity. It proposes that every impact fund include an incentive facility, that impact-linked bonds enter capital markets, and that outcome-based incentives become integral to technical assistance. The report recommends establishing Impact-Linked Funds for each Sustainable Development Goal and cross-cutting innovation themes.

Looking ahead, a global Impact-Linked Finance Community of Practice and a digital platform for ILF transactions will launch in 2024. These initiatives aim to connect practitioners, share learning, and standardise ILF implementation—enabling “better terms for better impact” at scale.