Additionality has been on my mind lately. Although the term is most commonly used in an emissions context, I believe the concept is helpful in many domains.
Let’s start with definitions. Additionality occurs when a particular action will provide a benefit in “addition” to a “baseline” alternative of taking no action.
For example, let’s say that I invest in a solar energy project. I’ll pat myself on the back because I’m generating a financial return AND a positive environmental impact. However, if there were other investors competing to allocate to the project, then:
- The project would’ve been built anyways, regardless of whether I invested.
- If I didn’t invest in the project, another investor would have.
- Taking action (investing in the solar project) would not have generated any more environmental impact than the baseline of not taking action (not investing in the solar project).
- In this example, there would have been no additionality from my investment.
The above is a textbook example, but we find similar situations in both investing and philanthropy.
- Within impact investing, the above example is a common situation that occurs when an impact strategy is capacity constrained or a fund is oversubscribed.
- For portfolios of public companies/stocks, I believe the concept of additionality implies that ESG integration is more about alignment of values than effecting change. In aggregate, ESG investors may lower a responsible company’s cost of capital or vote proxies in a unique way, but even the largest investors are typically very small minority shareholders in most public companies. Thus, the additionality of individual investor decisions is either theoretical or infinitesimally small.
- Investors invest to generate financial returns (and some may consider additionality). Philanthropists donate to generate additionality. This creates a powerful incentive for non-profit organizations to promote the appearance of additionality even if it does not exist. Some organizations generate tons of additionality and some probably generate negative additionality, so caveat dator (Latin for “let the donor beware”).
Although this post is thematic and the examples are more illustrative than practical, I hope to write more detailed posts about how investors and donors can actually evaluate the balance of need, capital, and capacity in order to get a better sense of additionality.