Impact investing—investing with the intention of generating positive social or environmental impact and measuring the impact—was once the domain of nuns and other faith-based investors, who wanted their portfolios to reflect their values. Then billionaire capitalists like Paul Tudor Jones and trillion-dollar financial giants like JPMorgan got in on the game, building a range of impact products and propelling the impact investing market to over $500 billion. While most talk revolves around tilting equity portfolios towards impact, there’s an enormous opportunity for lenders, who are increasingly inserting impact-oriented provisions into credit agreements. There is huge potential: at 26% of impact AUM, private debt is the largest asset class within impact investing.
Early impact investment loan agreements often were virtually indistinguishable from commercial loan agreements. As impact investing has grown over the past decade, impact loan agreements have become increasingly focused on protecting and enhancing impact performance. At a minimum, this has meant including reporting covenants focused on borrower impact performance. Many impact investors go further by modifying common contractual provisions to embed impact considerations, incorporating impact performance requirements into their loan agreements, or both. According to impact investing pioneer Calvert Impact Capital General Counsel Emmeline Liu, Calvert “embeds impact reporting covenants into every loan agreement.” As Developing World Markets General Counsel Edward Marshall explains, “these performance-based requirements give investors both sticks and carrots to achieve specific impact goals.”
This article seeks to provide emerging and seasoned private debt impact investors with a framework for impact provisions in loan agreements. It rests on the foundation of the thought leadership of Professor Deborah Burand, Co-Director of the Grunin Center for Law and Social Entrepreneurship at NYU Law School and her article Contracting for Impact in particular. While most provisions in impact investing loan agreements mirror those in traditional loan agreements, this article and Professor Burand’s work focus on the provisions that are unique to impact investing.