By global standards today, impact investments are defined as “investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return.” Here at Givfunds, while we agree that the intention to create impact is important when making investments, we argue that additionality is more important. After all, intention doesn’t really feed mouths, does it?
Here, additionality “refers to a contribution beyond what is available in the market”. In social interventions, this usually involves calculating the effect size of intervention compared against a counterfactual baseline. In doing so, we are able to estimate the marginal impact of an intervention and determine attribution. Traditionally, this is done using RCTs or other evaluation methods (experimental and non-experimental designs like DiDs, ITSs) – a resource consuming affair that requires lots of expertise. As a result, calculating it well is hard… like really hard. Hence, very few impact investors bother thinking about additionality, writing it off as too “academic” or “not practical”.
Hearteningly, things are changing with more excitement in the movement towards measuring impact better and holding stakeholders to this impact. The TPG Rise Fund’s approach of incorporating some academic evaluation work into forecasting impact in social enterprises pre-investment is one such example. Newer impact measurement approaches such as the IMP and Acumen’s Lean Data Methodology have also made such evaluations more accessible and less resource intensive. Unfortunately, even for adopters in many of these newer approaches, most impact investors only consider social enterprises’ additionality.
Barely any actually evaluate their own additionality or impact. At the far flung fringes of the impact investing community though, there has been increasing interest in this issue. Dubbed investor contribution, it tests investors’ impact mettle against the investments they make. In summary, there are 4 main ways that an investor can create additionality:
Signal that impact matters: A kind of fluffy, feel-good, catch-all term that all impact investors can adopt by saying their impact investments signal that impact matters. It hopes to influence enough consensus in markets, creating behavioural change at the systems level to price impact into capital markets. We rate it a nice try.
Engage actively: This typically refers to non-financial help that comes along with the investment by impact investors. This could come in the form of advice, technical expertise, connections, or anything else really. This is kind of easy to fluff, incredibly useful when actually helpful, but also almost impossible to measure consistently – pretty much something all investors say they do, but only some do properly.
Grow new or unsupplied markets: Now this refers to the actual additionality of the investment itself. If the investment would not have otherwise happened without the impact investor investing in it, the investment would be classified as growing new or unsupplied markets. Take it like this, if everyone wants a piece of Tesla, you investing in Tesla isn’t going to make much of a difference in their access to capital. Now, this is where we believe an investor’s primary difference maker can be – Afterall, if they’re only going to make a difference with their advice, shouldn’t they just be called advisors? Such additionality could come in by investors investing in areas that are otherwise mispriced by other investors (deal hunting in illiquid, complex, or mispriced markets) or providing capital at lower rates of returns.
Provide flexible capital: A subset of growing new or unsupplied markets (or subsubset of signalling impact matters), this refers to impact investors providing some form of concessionary/patient capital to enable their investments. This is also another plus point, though merely concessionary capital does not necessarily translate to additionality.
At Givfunds, we’ve always considered our impact and additionality carefully. Surprise, surprise, we’d like to share it. From inception, we’ve provided flexible and concessionary catalytic capital (0 - 4% interest) to neglected social enterprises using a data-driven approach (we note the dispute in terms here). This has led to us almost always being the first investor in our social enterprises, having much more diverse founders (>50% are women-led), and social enterprises operating mostly in tier 3-4 cities or rural areas. This checks boxes 1, 3, and 4. While we have a light-touch approach to engaging actively, only providing services like connecting to follow-on funders or impact evaluation, we work closely with existing market builders who have expertise in providing non-financial support (think incubators, accelerators, ecosystem non-profits, and market access providers).
Despite such actions, evaluating our additionality is tough – especially when we have cost considerations at the scale we work. Since inception, we’ve prototyped various methods to do so. To avoid boring you since this article is approaching the 3-4min length, perhaps this might be covered in a future article!