Tips for Obtaining Impact Finance
We often get questions about how so-called Impact Investing is different than traditional investing, what impact investors look for, how they usually work, and what you can do to qualify for the best financing terms.
Impact investors are diverse, but they tend to have a few things in common, including a focus on purpose-driven investments, typically going well beyond financial considerations to include Social, Environmental, and/or Governance criteria, and measuring associated impacts, such as avoided carbon (from increased use of electricity for transportation or renewable energy). or sequestered carbon (into forests and agroforestry or other natural systems), social benefits such as health and prosperity indicators, decreased waste, increased materials recovery, environmental indicators like habitat restoration and regeneration, conversion of land use from unsustainable and polluting activities to healthier soils, and many more. Some also pay special attention to innovative ways of monetizing these usually “non-finance” benefits, such as via investment tax credits, carbon credits, or other means.
Here are some of those frequently asked questions:
- What are the unique characteristics and motivations of most impact investors?
- How important is it to measure the social/environmental impacts relative to financial performance?
- Does the desire to “do good” outweigh the need for financial returns?
- What are some of the resources available to attract and secure impact funding?
- Key impact investment themes for 2025 and beyond?
- What are the “hot” industry sectors right now?
- Can a greenfield project still obtain 100% financing, even with no credit history?
- What are the key do’s and don’ts when approaching Impact Investors?
- How do we put our financial (business) case in the proper light?
Questions 1-5 will help with summarizing a project seeking capital (called “pre-qualification“), and Questions 3-9 are some of the most frequently asked questions and detailed answers for preparing a complete application or proposal for financing.
Got more questions? Review this Capital Guarantee Program (CGP) FAQ, this set about How We Work, or take steps to qualify … then if still unanswered, ask us!
1. What are the unique characteristics and motivations of most impact investors?
Although the theme, or “investment thesis” of Impact Investors does vary widely, all have a purpose such as climate, health, sustainability, or other ESG metrics (more at glossary). We seek social and/or environmental returns alongside economic results. Sometimes those themes are not made explicit, but instead remain broadly open or deliberately agnostic (or slightly mysterious) with gatekeepers using more thematic, intuitive, or hard-to-pinpoint “we’ll know it when we see it” rationale.
The widest variables of direct relevance to companies seeking impact capital include:
1) Measures considered meaningful — there has been a lot of “churn” over the years between RECs, ITCs, Carbon Credits (presently mostly voluntary) and numerous other schemes, without a single dominant standard. These tend to be industry specific, related to the strengths of each sector, or in some cases the local venue, such as for tax equities.
2) “Sweet spot” focus or underlying purpose of placing capital — the real goal of what changes they wish to see in the world, and why
3) Style of investing as indicated by the asset class (debt, equity, both, or variations), tolerance for risk, and expectations for returns. Returns are easily measured as IRR, while assessing, measuring and interpreting risk ties to stage of readiness, and is usually the key maker/breaker.
This set of variables should give you pause … ask a lot of questions to do proper research (such as deal history, stated focus, and size/stage preferences) before introducing your particular deal. You might even want to summarize key parameters of your proposed investment to demonstrate to the gatekeeper that they line up with the investor’s main considerations. This method is much more likely to lead to success (or at least being taken seriously) than the scatter-shot approach — throwing spaghetti against the wall to see what “sticks”. No point rushing to failure. Take time to prepare and you will greatly streamline the process, what we call “go slow [at first] to go faster.”
2. How important is it to measure the social/environmental impacts relative to financial performance?
Per the GIIN’s annual surveys, 90%+ of impact investor want to measure the impacts their portfolio companies are having, so carefully construct that story or intention as a proposed set of measures as well as your best guess about the anticipated measurable results.
Systems of tracking performance and results are an increasingly important driver for impact investment decision-making in order to fight “impact washing” — the bad behavior by some firms due to overstating the social/environmental benefits realized by their company.
3. Does the desire to “do good” outweigh the need for strong (or any) financial returns?
Sometimes, with some investors, yes, it does. GIIN studies and sheds light on expectations for returns. This has changed over the years. Mainstream private and institutional funders are financial “returns first” investors that won’t overlook basic financial feasibility, seeking close to zero commercial risk as their main consideration, and within that category, expectations for returns are usually on par with standards for the project’s industry sector. Others are willing to accept below market rates, which is generally true for In3CAP funding’s family office, willing to accept lower returns (as measured by Internal Rate of Return or IRR) than most, such as with US-based, utility-scale solar/PV projects.
Other impact investors, as well as most traditional investors, will not support an industry that is only marginally profitable, like solar/PV usually is, or that cannot show low enough risks to qualify. CAP funding can accept unlevered IRRs as low as 4.5 or 5%, just not below accepted standards for that industry.
That said, there are non-profit impact investors that offer grants or forgivable loans that have different considerations, making financial returns a distant second, only required to sustain the project, with expectations for returns. We represent one such philanthropic impact investor, which usually involves public-private cooperation to build “social” housing, food systems for self-reliance, affordable electricity for all, clean water or other basic human needs. Such financing still requires guarantees and has lots of strings attached to qualify, bridging the gaps in the continuum of funding for such essential infrastructure and services.
Concessionary (below market rate) for-profit financing is often available for projects that deliver strong social and environmental benefits (ESGs), while expectations for returns varies widely from on par with single-bottom-line investments to philanthropic. This is the case with In3’s Completion Assurance Program™ (CAP funding) as well as some of our lending programs.
See CAP funding’s Proposal Builder or request an available package of materials (a presentation, sample contracts, and mutually beneficial safety procedures) if you wish to gain access to this funding by involving a project sponsor.
CAP funding will not consider any project that causes social and/or environmental harm, which eliminates all projects involving pollution, especially carbon dioxide emissions, but also generation of persistent organic pollutants (POPs) that are hard to contain or eliminate from the biosphere, such as plastics, certain chemicals such as endocrine disrupting pesticides, some pharmaceutical drugs (opioids or tobacco products that tend to be addictive and prone to abuse will not gain our support), weapons, conflict gems, etc.. See list of supported sectors here with a set of those we will not support at the bottom.
No intelligent investor, impact or otherwise, will fund a project with gaping holes in the business case. There must be strong evidence that the project is commercially sound; without that, how do you know the project is even feasible? This starts with securing the supply side (sunlight to solar, waste streams for conversion projects, equipment or other raw materials in other sectors), and ends with the offtake or sale of generated products. If there is no Power Purchase Agreement, for example, how will power be sold? In some cases, nodal pricing and/or merchant rates with historical data will be sufficient.
But that said, we do offer less stringent due diligence (the equity partnership enables us to be more entrepreneurial and flexible), can accept any stage of readiness (beyond the project being just an idea), and we do not use senior debt like most traditional lenders, which means a) there is no lien against the operating assets, enabling more rapid expansion where completed projects can be used to secure guarantees for new ones, and b) that CAP funding’s overall advantages outweigh the additional effort of securing a completion assurance guarantee in the first place.
Why? Because more traditional senior lenders usually require a proposal that is much more detailed, with largely inflexible standards for stage of readiness, as those remaining steps tend to spell trouble (risks that could be mitigated) in getting the project operational, performing per the financial projections and able to reliably repay the loan. Few projects are truly shovel ready, and investors tend to have their “one off” definition of what that means to them. Even projects seemingly ready to turn dirt (when construction is involved) can run into problems during due diligence with so many diverse investor considerations. Everyone but CAP’s family office seeks close to zero risks.
This risk intolerance by traditional investors, including most impact-oriented ones, also means that the management team itself gets scrutinized (prior experience and track records must include success with prior projects), where CAP funding is more open to developers that are entering the field. See more on this topic here.
5. Project Costs/Funding Plan — how to show cash vs. “in kind” contributions of equity?
Summarize the Total Project Costs/Funding Plan (Sources & Uses) in a table with breakdown of major expenditure categories. See the last line of Creating a Sources and Uses Statement, or if applying for a loan from US OPIC, download and use this worksheet (sample table in Sections 6 & 7) for reference. For each category of expenditure, discuss and provide data on bases for estimates, where practical. Discuss sources of cash equity contributions, including cash, prior or new loans, grants, etc., from US or other investors. Generally the expectation is at least 20-25% of the project equity would come from a US sponsor. A US sponsor is defined as either a US citizen or a company that is majority owned/operated by US citizens.
For in-kind (already existing) asset contribution, discuss bases for estimation. Note that valuations acceptable to the lender will be needed, including estimates to support in-kind contributions, during loan application due diligence.
6. What are the acceptable project implementation timeframes?
Most loans originated by In3 reach final maturity (get paid off) in three to twenty years, and can include a suitable grace period — usually up to 36 months — during which only interest is paid on the portion of the loan or credit facility that has been drawn. A planning worksheet is available upon request.
Once pre-qualified, work with In3 to describe the implementation timetable, including construction management, if applicable. Together we will use the business plan narrative (outline also available) to document the identity and qualifications of designers, construction contractors and other major parties involved in the project’s implementation, including possible contractual terms with vendors. Provide details on infrastructure that impacts the project (energy, water, communications), and its sources. This may tie in with the project team’s track record and experience; or at least the contractors that will be hired by the management team.
7. What Country Data and Developmental Aspects are most important?
Highlight macroeconomic country/regional indicators that impact the project. Country credit ratings can be important, and the borrower’s credit can be “enhanced” through loan guarantees, or if necessary, Political Risk Insurance for the equity investors. Identify particular regulations (if any) that will impact the business of the project. Include in the project summary the project’s developmental aspects for the country in question. Who will benefit? How? Provide some narrative on how this project will help with the development of the country in terms of employment, training and managerial capacity transfer, contribution to fiscal health (alleviation of poverty or subsistence wages), environmental aspects such as climate protection, reduction or elimination of toxins, waste, etc.
8. How do we show Market Feasibility?
a) Market Size and Demand: Provide 2 years of historical data on target market/industry size together with 3 years of projected growth. Give bases of estimation for projections and sources of data. Correlate this with projected estimates of demand for the particular products or services (sources of revenue) of your project.
b) Supply/Competition: Provide 1 year of historical data and 3 years of projected estimates on suppliers (as above, identify sources of data and bases of estimation). Identify who will be your primary competitors, competition for what (e.g., market share), and the project’s competitive advantage in relation to competition.
c) Market Share: Provide estimates, in light of market size/demand and supply data above, on what will be the project’s market share and why you expect to achieve this.
d) Prices: Need data on same time frame as above for the prices project will charge for products/services. Analysis on how compare to competition.
Note: All numbers presented in market analysis and feasibility should directly correlate with assumptions in financial model.
9. How do we show the financial (business) base case?
The project’s financial model is typically developed in collaboration with In3 personnel in order to document and verify sufficient cash flows to service the loan. The financial model should be accompanied by written assumptions with explanations on bases for their estimation. We use a proven, GAAP- and IFRS-compliant format for either startup (“greenfield”) or expansion projects. Worksheets are available.