Part 2: Intentionality, additionality and impact measurement
In the previous article on impact finance, we mentioned the Responsible Investment Forum to introduce impact finance with a simplified definition based on three main characteristics of impact finance: intentionality, additionality, and impact measurement.
In this article, we will dive deeper into these three characteristics.
Intentionality
- Intentionality corresponds to the intentional will of the investor to contribute to generating a measurable social or environmental benefit.
The explicit objective of the impact investor must be to respond to a sustainable development issue. This perspective is a significant difference between impact investing and other “responsible investment” approaches based on Environmental, Social, and Governance criteria, with potential consideration of impact.
The investor thus pursues a dual objective of financial performance and impact, and this intention must be systematic, i.e., concern all of the fund’s investments, and occur at the time of the investment decision (ex-ante).
Therefore, to meet these criteria, it is necessary to establish a framework of trust that makes it possible to record intentionality upstream of investments irrefutably. To prevent impacts from being claimed ex-post without having first affirmed the intention to generate these impacts. Therefore, a financial institution can’t launch an impact fund that covers only part of the portfolio.
This principle leads to an emergence of a new market for impact funds. That allows the development of new typologies and tools to prove the impact of projects such as those proposed by SmartB.
Additionality
- Additionality is the specific and direct action or contribution of the investor that allows the company or project financed to increase the net positive impact generated by its activities.
It can be summed up by the question: “What would have happened if the investor had not funded the project or company? Additionality is a way of putting a value on intentionality. It can be financial, in the case of financing projects that are poorly or not covered by traditional financial tools, and extra-financial, for example, in the case of active support for companies to achieve more significant social and environmental impact.
This additionality approach is essential and described by a protocol established in advance relating the intention and the means of measurement necessary to prove the achievement of the targeted objectives. Additionality thus represents the value of the impact and not a simple extra-financial contribution similar to that intended to improve the ESG criteria of companies. It is imperative to prove its precise intentionality and to demonstrate factually the capacity of the investment made to generate a real impact by achieving the objective set.
Impact measurement
- Impact measurement corresponds to evaluating the social and environmental externalities of investments, compared with the impact objectives intentionally set by the investor.
Whether a company aims to increase a positive externality or significantly reduce a negative externality over time or concerning a baseline scenario, these impacts are positive.
Evaluating these positive impacts is based on a shared and transparent methodology described upstream, and the impact measurement results must be communicated and used by the investor in their investment decisions. Generally, impact measurement is based on an analysis of the life cycle of the company’s products or services. Therefore, it can be qualitative or quantitative, integrate the impact of these processes if they are significant, and specify a reference time horizon.
The definition and traceability of additionality and the relative contribution of investments will become an essential element of impact measurement. In particular, the indicators must provide the necessary clarity for funders to avoid taking excessive credit for the impact measured.
Coming soon…
Now that these concepts are defined, we will discuss the most frequently-used impact analysis frameworks in the following article and their main characteristics.
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The additionality.wtf summit organised online on October 26 aims to bring the topic of additionality to the forefront ahead of COP26. Experts, impact funds, NGOs, and committed entrepreneurs will share their concrete achievements and experiences with all participants.
Are you interested in impact finance? A deep dive session will be dedicated to it in the event. Contact us at: team@additionality.wtf for more info or receive a free invitation to the event!
