Implied Impact describes in economic terms the financial discount or premium relating to the pricing of capital, investments, options, or derivatives when such a pricing variation specifically relates to the degree of social or environmental impact intended or achieved through the underlying transaction.
Evenett and Richter describe this concept as the Implied Impact of an investment, noting that as a mathematical coefficient within financial calculations, it is subtly but fundamentally different to the actual measurable social or environmental impact achieved.
“Implied Impact” or “Implied Social Return” is a term developed for the Impact Investing market and describes the investor and investee expectations of impact – the expected impact or expected social return – that are embedded in the investment terms of individual impact investments and of the impact investing market as a whole.
Implied impact or implied social return relates to a comparison of the financial terms of impact investments with the financial terms of mainstream financial market investments as a means of highlighting and quantifying the social return element of the total return of impact investing.
Deriving Implied Impact
Implied impact is derived from the yield spread or capital pricing spread between the financial return on investments that specifically target positive outcomes for society – impact investments – and the financial return on mainstream commercial investments of equivalent maturity and risk.
Taking the mainstream investment as fully pricing the risk and other financial characteristics of the (in those terms equivalent) investments, then this spread between the impact investment and the mainstream investment can be taken as a measure of the non-financial impact expected by investors from the investment.