Part 4: Proving and sharing your impact
Once fund managers have chosen the standard methodologies and indicators for measuring impact, it is necessary to design and implement the overall impact approach.
Implementing the approach
According to France Invest, a fund must formalize its impact approach throughout the investment cycle. This approach must be adjusted to the companies’ type of activity, with impact objectives defined upstream (intentionality), and specify the means to be implemented. The fund’s impact approach takes the form of a proactive selection of companies based on the expected impacts of the investments. To do this, the managers carry out preliminary mapping of the impact themes and externalities. They then engage in monitoring positive and negative externalities to ensure that the objectives of the investments are consistent.
The impact strategy deployed implies implementing a governance system with evident mobilization of teams and governance bodies. The impact strategy must also define the resources needed for implementation (impact committee, presence of an impact expert on the board of directors of the management company or fund), planned and allocated.
A final key point for the success of an impact approach is to clearly express the intensity, scope, and beneficiaries of the impact.
The impact thesis must be clearly defined and understandable to all. It should thus result in an investment policy aligned with the impact objectives sought, contributing as much as possible to the Sustainable Development Goals or other recognized categories of goals.
Long-term support
Once the investment approach is defined, a long-term investment horizon allows us to aim for the sustainability of the company’s activities. This horizon is assessed concerning the practices of each asset class.
It then translates into the involvement of the management teams alongside the managers to help them maximize the impact, reduce any negative externalities and help the company progress in its impact generation. The involvement of the management teams is a critical point in the investment strategy. It ensures that the approach is aligned with the initial objectives, that the context changes, that the means of measurement evolve, and that the results obtained produce (at least) the expected additionality.
Therefore, confidence in the measurement of additionality is a critical element of the investor’s relationship with the company. In particular, it makes it possible to implement mechanisms to align financial interests with the impact approach. It becomes possible to set up a variable remuneration based on a means by which the criteria of additionality (resulting from the impact measurement) determines all or part of the remuneration of the investor and the manager. In the same spirit, the investor can propose to create a financial incentive plan for company management directly linked to the production of additionality inspired by the clean development mechanism (carbon credits).
For example, one could design a significant stock option plan directly linked to achieving impact results. In this scheme, the allocation of stocks could be done in exchange for proof of the additionality produced, a kind of Stock Credits.
Another example is the exchange of proof of additionality, allowing for sharing management fees or financial incentives with philanthropic actions.
The effectiveness of impact fund management can therefore only be considered in the long term, and in this case, the rigorous measurement of additionality and the production of proof of achievements through impact reporting open up the prospect of new ways of creating and distributing the value financed and produced.
Proving your impact
The development of robust, honest, and transparent impact reporting is based on compliance with the measurement constraints set out in this protocol. These constraints include:
- Documenting the deployment of the impact strategy at each stage of the investment process
- Document the deployment of the impact strategy at each stage of the investment process: company selection, portfolio life, and portfolio exit.
- Demonstrating the relevance and accuracy of the indicator results according to the context: according to the place of the impact in the value chain (effects, activity), the investor’s contribution to the achievement of the impact (attribution of additionality), the robustness of the data (scope, justification of the choice of quantitative, qualitative), the period covered by the impact measurement, the rationale for the selection of consolidation or not, the sharing of calculation methodologies, the assumptions, uncertainties, and margins of error and the limits/difficulties encountered in the execution of the projects.
- To have an independent review of impact performance and associated reporting (by experts or by a body with independent governance).
- Ensure that indicators in a portfolio are comparable: it must be possible to compare the impact achieved with a baseline (additionality) linked to a similar context,
Valuing additionality
The impact approach must be integrated into the fund’s investment process and cover most of the assets in the portfolio. Additionality is often considered a complex risk factor to cover, which could be expressed by the market questioning the value of the assets in the portfolio or the intrinsic value of the fund. This complexity lies in the definition of additionality and the transparency of the evidence collected to demonstrate it.
Unlike intentionality, a standard additionality approach cannot cover 100% of the portfolio. Often challenging to implement, the protocol for producing impact results must be adapted on a case-by-case basis and be subject to a rigorous methodology supported as much as possible by academic work.
Therefore, the capacity for additionality must reflect active management with resources allocated to measuring the portfolio and the nature of the sub-management.
However, the complexity of this calculation is decreasing more and more. As work is published, experience is shared, and impact measurement benchmarks and accounting networks are pooled (to avoid double-counting). Examples include the ADEME, European Commission databases, and SmartB.
In some cases, the additionality criterion is presumed to be met quite easily. For example:
- When the company’s R&D investments have a social or environmental impact objective and do not produce marketable externalities and are therefore difficult to finance through the market.
- Or when the investor decides to invest in emerging markets or seed capital for unlisted companies. Allocating to projects in sectors or geographical areas that are little or not financed makes it possible to justify additionality by increasing financing that would otherwise not find other funding sources.
Our additionality will condition the world of tomorrow.
This series of articles have attempted to raise awareness of the significant role of additionality in the development of impact finance.
Coordinating the investment intent of funds and companies at scale and measuring and accounting for additionality accurately at scale will require global cooperation and coordination. Beyond greenwashing, the actual achievement of the Sustainable Development Goals will only be possible if a consensus is reached on additionality measures.
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!
