Aegon AM: Additionality - Secret sauce or snake oil of impact investing?

Aegon AM: Additionality - Secret sauce or snake oil of impact investing?

6 februari 2024

Impact beleggen
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Much has been written and discussed recently on impact investment, and an increasing number of investors have become interested in the idea of ‘putting their money to good use’. The Global Impact Investor Network (GIIN) estimated the global impact investing market to stand at USD 1.164 trillion in 2022.

When discussing impact investments and what defines them, a certain common mantra tends to be repeated: intentionality, additionality and measurability, as explained by Brunno Maradei, Global Head of Responsible Investment.

What is impact investing?

Impact investing is anchored on the concept of intentionally trying to maximize the net positive social or environmental impacts of investment decisions. In its most widely accepted definition, from the GIIN, ‘Impact investments are investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return’.

How do we evidence an intention?

The consensus is that, at a minimum, an investor should be transparent about their impact objective prior to making the investment. To be credible, such a documented intention should include the assumptions being made about how the investment will lead to the intended impact. This is usually called a ‘theory of change’.

What is additionality?

Assumptions are made at each step of this process, the first of which is that an investment enables the economic activity in question. The term ‘additionality’ is usually referenced with regards to this assumption, or in other words, it questions whether the activity would have taken place without the investment proposed.

As a test based on a counterfactual scenario, additionality can never be proved beyond reasonable doubt: there may always be an investor somewhere willing to have made the investment if you had not. Intuitively many impact investors use liquidity as a proxy for additionality under the assumption that the more liquid an investment, the larger the number of investors willing to make that investment and therefore the lower the additionality of their investment

But this assumption may not hold true in every scenario and may be difficult to test. Furthermore, it is difficult to test whether all investors would be willing to invest on the same terms, further hampering the additionality test. This is an additionality measurement problem often encountered in development finance.

Do we really need to prove additionality to be credible impact investors?

These challenges do not necessarily mean additionality is a useless concept. Many impact investors are keen to demonstrate or be assured that their capital is transformative, and additionality presents the ultimate test as to whether the world changed as a result of the investment made. However, when addressing additionality, claims are hard to verify, and investment liquidity remains an imperfect proxy.

Instead of focusing too much attention on arguing and proving additionality, impact investors are better served by thorough descriptions of the theory of change, including the assumptions made at each stage and the risks to those assumptions playing out, as well as increased efforts to measure outcomes and evaluate long-term impacts.

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