Frontline insights: How Impact-Linked Finance helps reach the last mile
Working in underserved markets, we’ve seen Impact-Linked Finance reward companies for deeper outcomes, aligning capital with impact where traditional markets fail.
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- Renewable energy
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Reaching last-mile customers has always been the biggest challenge in energy access. The economics are tough to make work. Compared to their urban counterparts, the average hard-to-reach household is 1.5 times more expensive to serve. That’s the reason more than 600 million people remain without power today, while traditional capital looks the other way.
It’s also the reason why Acumen launched our Hardest-to-Reach (H2R) initiative, which officially went live last month with $246.5 million in secured capital across two vehicles. One of them, H2R Amplify, is scaling solar businesses across 17 frontier markets using a new tool: Impact-Linked Finance (ILF). Its sister vehicle, H2R Catalyze, has already deployed three ILF investments, offering early insights into how this innovative approach can drive deeper, more inclusive impact.
What is Impact-Linked Finance?
H2R has adopted impact-linked finance to offer impact-indexed loans that are structured to reduce the interest rate based on achievement against specific targets: poverty reach, first-time access rate, portfolio quality, and others. The core idea behind ILF is simple: The more social good a company does, the lower the cost of debt.
Importantly, ILF corrects for structural cost barriers that often make deep impact commercially unattractive. By linking better terms to harder-to-reach outcomes, H2R aims to bring the economics of impact delivery back into balance.
Currently valued at $35 billion, ILF is a rapidly growing field of social finance. This field is distinct from Sustainability Linked Bonds and Development Impact Bonds, which reward investors for social achievement, often working through non-profit implementers. In contrast, company-level ILF rewards enterprises themselves, creating greater impact and additionality per dollar deployed.
As Jules Samain, managing director of H2R Amplify, notes, “If we want companies to scale impact, not just scale operations, we need capital that rewards the difference.”
ILF in practice
In June 2021, Acumen H2R Catalyze issued a $125,000 loan to Qotto, a French distributor of energy products with a growing footprint in Benin. Prior to disbursement, H2R Catalyze hired 60 Decibels to survey Qotto’s customer base; 41% lived on less than $3.20 a day, and for 34%, it was their first time accessing a similar modern lighting product.
Qotto used the loan to purchase several thousand solar home systems, which they sold at a discounted price to customers in more remote regions of Benin. Six months later, 60 Decibels conducted a follow-on survey. The poverty reach of Qotto’s portfolio rose to 61%. The share of customers with first-time access hit 77%.
Based on this performance, H2R lowered the interest rate significantly, reducing their debt burden in line with their performance.
As Qotto’s co-founder and President Jean Baptiste explained:
“Hardest-to-reach energy access is tough to execute, hard to make profitable, and even harder to finance. In this context, Acumen’s financing was in the right direction in two respects: It took the risk of financing the hardest to reach markets when many others are shy, and it reduced the cost of finance by lowering it when impact is proven.”
The lesson: For ILF to meaningfully incentivize companies, rewards must be large enough and predictable enough to move the needle.
What can go wrong
Impact-Linked Finance is not without its challenges. It can be costly, operationally complex, and difficult to budget for at scale. But perhaps the biggest constraint, and the greatest enabler, is data. Impact-Linked Finance lives or dies on the veracity of the data you can access. Without credible, timely, and cost-effective data collection, it’s nearly impossible to structure incentives, assess performance, and distribute or withhold impact rewards with confidence.
All this data comes at a cost, particularly in contexts where customers are literally hard-to-reach. The cost of collecting that data is likely to be prohibitively high. While investors are more able to foot the bill for gathering certain data, transaction costs also need to be managed. We have experimented with reducing the number of data points and removing mid-line assessments for shorter-term loans. The goal is not to abandon rigour, but to right-size it.
Early lessons from ILF
We are early in this process, but we’ve tried enough and seen enough to know that this can work. We also know that it can be immensely tricky. A few principles are clear.
1. Set targets collaboratively and appropriately reward upside
Impact-linked finance does not work without clear baselines and targets. Per Roots of Impact, a trailblazer in this field and advisor to H2R: “In impact-linked finance, setting effective targets means collaborating to keep the process simple while accounting for each company’s unique situation.”
For instance, where an investee already has a very high baseline for first-time energy access, setting stretch targets (i.e., pushing well beyond current trends) would be inappropriate. Conversely, for a company starting from a much lower baseline, limiting them to maintenance targets (i.e., sustaining current performance) would be unambitious. In both cases, tailoring the targets is essential to creating meaningful incentives. Over time, a healthy distribution of outcomes is a sign that targets are being appropriately set; if every company hits every target, the bar may not be high enough.
2. Be as simple as possible
The ILF structure itself is complex, so everything else must be simple. Payouts must be closely and clearly linked to a direct signal of impact from the company, so everyone understands what to track and what to do.
At the same time, simplicity means not over-designing for each individual borrower. Every company operates differently, within a unique context. There is an inexorable tendency to over-design in order to perfectly isolate the impact that everyone wants. Fight it. Complexity and customization have costs, both in terms of transaction and monitoring, but also in terms of whom you can actually fund with more complex structures. H2R now operates with a small menu of metrics, and each loan has 3-4 tied to it. The baseline is gathered through an initial survey. The targets are then finalized through negotiation.
Reporting must be simple as well. As our colleague Julia Mensink has written, one of the perversities of impact measurement is that the best companies are often the most punished with reporting burdens. We have tried to avoid this by gathering necessary financial and ESG reports at pre-agreed intervals and using third-party customer survey data for two out of four impact linked indicators. More importantly, ILF gives us an unparalleled chance to work with the company to help them manage their impact, for example by complementing financing with technical assistance to help companies strengthen their operational capacity..
3. Know where ILF works and where it doesn’t
Not all H2R countries are alike; operating in Chad is not the same as operating in Zambia. And not all companies within the same country are alike. A large multinational with a long track record in a market faces very different strategic choices from a smaller, more capital-constrained start-up. The stakes for how they balance commercial priorities with impact objectives can therefore diverge widely, leading to greater variance in where they might sit on the impact spectrum.
The task, then, is to be precise: to deploy ILF in places where there is a true range of possible outcomes, and therefore where impact-linked incentives can truly help a company choose its most impactful path. In this sense, ILF prioritizes specific impact objectives within a hierarchy of aims, focusing scarce catalytic resources on the places where they can move the needle most. In some cases, ILF will not be appropriate and impact incentives should take a back seat to providing capital to meet the company’s most pressing needs.
As Sandra Halilovic, who leads Acumen’s H2R Catalyze vehicle, put it, “Being catalytic means using the right tool for the context. Sometimes that’s an impact-linked loan, and sometimes it’s equity or local-currency debt. The point is to make capital truly fit for purpose.”
“This principle also applies to thematic areas like gender. Our current portfolio consists of companies that are highly gender-conscious in their approach, with approximately 90% of capital invested meeting 2X Challenge criteria. In such cases, gender isn’t the margin where we have seen major variance or gaps, so we haven’t used ILF incentives to drive gender outcomes. Again, the key is knowing where the additionality lies and where incentives can truly move the needle.”
“Take Yellow in Malawi. They’ve grown successfully in one of the toughest off-grid markets. Through Catalyze, we recently supported them with a local-currency loan. Given Malawi’s realities — severe currency devaluation and convertibility challenges — delivering local-currency debt is already highly additional and directly addressed the company’s core constraint, so we opted not to deploy ILF.”
Conclusion
Impact-Linked Finance is not a silver bullet. But when applied well, it can shift behaviour, align incentives, and unlock capital to serve the customers and communities who need it most. This goes beyond energy access. We are also applying these lessons in education, where Acumen is piloting results-based finance structures. Looking ahead, we expect ILF to expand into new sectors and new instruments, such as discount rates on convertible notes or Simple Agreements for Future Equity (SAFEs). For now, we are still learning, iterating, and hope to share more lessons in future.
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