Impact investing is emerging as a powerful force in the financial world, blending profit-making objectives with positive social and/or environmental impact. At the heart of a genuine approach to impact investment lies the concept of additionality —a principle distinguished from traditional investment. By examining relevant case studies, we demonstrate the significance of additionality and explain how we can move towards a future where more investments integrate positive transformative change.
The Importance of Additionality
Additionality is the driving force behind impact investing, ensuring that investments generate positive environmental and/or social outcomes that would not have materialized without investor involvement. This goes beyond financial returns, requiring investments to additionally make a tangible and lasting difference to society and/or the environment. The deliberate focus on impact sets impact investing apart in both generating financial returns and addressing pressing global challenges.
Case Study 1 – Limited Additionality
Consider a scenario where an impact investor directs funds towards a large-scale offshore wind farm project. The country's government has granted significant subsidies for new investors to meet their ambitious renewable energy targets; and this has attracted significant capital investment, such that new projects are readily able to source new capital. In practicality, this scenario has played out across several developed offshore wind markets. The combination of public policy and investor support has catalysed positive environmental impact by lowering the cost of capital and helping the renewables industry to grow, whilst also generating financial returns for investor – all of which is laudable. However, in this scenario a new investor is likely to create limited impact additionality, given that capital is inexpensive and plentiful, meaning that quality new projects would likely be readily financed elsewhere.
Case Study 2 – Material Additionality
Investment in markets where capital investment is harder to find and more expensive, can provide greater additionality. For example, M-Kopa Solar, a leading provider of pay-as-you-go smart phone and digital finance solutions, has demonstrated positive impact additionality in Africa. With their innovative business model, M-Kopa has reached 3 million customers, and deployed $1 billion in credit. Notably, they have connected over 400,000 households to the internet for the first time, fostering digital inclusion and economic opportunities. The company's positive impact extends to improved health and well-being of 3.8 million people, who now benefit from clean energy and health services. M-Kopa's success has been supported by a range of impactful investors, including British International Investment, DFC and FMO. These investments have not only resulted in impact additionality, but significant value appreciation. In a recent funding round M-Kopa raised $255m in debt and equity, roughly doubling the total investment raised to date. This combination of impactful outcomes and financial gains demonstrates the power that positive impact additionality can have in driving both societal transformation and investor success.
The Vision for Impact Additionality
Imagine a future where impact additionality becomes the norm in the investment landscape. This transformative shift could lead to remarkable advancements in addressing social and environmental challenges. By actively seeking investments that possess strong additionality potential, investors would play a pivotal role in fostering sustainable development, combating climate change, and promoting social equity.
Increased focus on impact additionality could unlock innovative solutions to global problems, and help catalyse systemic change by inspiring governments, corporations, and individuals to align their actions with sustainable development goals. This in turn could encourage collaboration across sectors, driving the creation of innovative partnerships and the sharing of best practices.
Embracing Impact Additionality
Additionality lies at the core of impact investing, ensuring that investments not only generate financial gains, but also generate meaningful positive impact. The case studies explored the difference between the limited additionality from financing competitive and well capitalised sectors, and catalysing transformative positive change by investing in companies, geographies and sectors where funding would otherwise be unlikely, or prohibitively expensive. By embracing impact additionality as a guiding principle, we can envision a future where business and investment become ever more powerful vehicles for social and environmental progress.
To realize this vision, investors, policymakers, and stakeholders must work together to build ecosystems that value and reward impact additionality. By harnessing the potential of capital for good, we can create a world where investments drive positive change and pave the way for a sustainable and equitable future, where additionality becomes the norm.
This article was also published here: https://www.scoopearth.com/additionality-unleashing-impact-investings-full-potential/