Impact investing grows up: from intentionality to additionality (Part 4/5)

Falko and Harald discuss the current state of impact investing: where we are, why we’re here, and where we need to go. They draw on recommendations that commentators made as far back as 2012, and introduce new frameworks that help investors who are looking for “additional impact” to identify the most effective tools. 

This is part four in a series of five articles. In part one Falko and Harald argue that a shift in focus is needed in impact investing: from the strong emphasis on intentionality and identity – which requires asking: “can this impact investment be attributed to me?” – to an emphasis on additionality and systems – which requires asking “how do we ensure adequate funding of needed solutions to global problems?” And: “how do we effect the system change that is often needed for this?” 

In part two they dig a little bit deeper into their CC2 concept: "Causing Change That Wouldn’t Otherwise Occur." This is not to coin a new phrase, but to explain why there might have been more attention to pinpointing the "change" element, than the elements "causality" and "additionality". They also discuss the implications for impact labels - can we develop labels that capture causality and additionality? - and for monetisation of impact - can we put dollar values on the generated impact?

In part three they attempt to answer the question “do impact and return go hand-in-hand?” For this they introduce the SDG Venn Diagram to argue why it can be interesting to look at the overlap between what companies do and what we need to achieve the SDGs, but that the overlap is not that large, and why it is much more interesting to think about how the overlap was created in the first place. They also explain why there is very little 'impact-generation' to be achieved in listed equity companies. They conclude that we should be skeptical about propositions promising both impact and return, and even more skeptical if they promise higher than market-rate returns, especially if propositions relate to secondary markets investments. Part five can be found here.

For this series they lean heavily on a series of articles published by Stanford Social Innovation Review, that are referenced throughout the text, and four academic papers co-authored by Falko. These sources are also listed at the bottom of this article.

Part 4: Intentionality & identity

In this brief, but important, article in the series we discuss “intentionality”, its links to values-alignment, warm glow, identity and the desire for “attributability”; and why it may often stand in the way of CC2-like impact.

From the early days of impact investment, intentionality has been identified as a key requirement for impact investments. And we agree that intentionality is important. Brest says: “While social impact can be achieved unintentionally, this does not mean that intention is unimportant. In business, as in philanthropy and all other spheres of life, people are more likely to achieve results that they intentionally seek.”

Nonetheless we argue that intentionality is far from sufficient to achieve social impact, and that it receives too much attention. Lee & Singh warn that because of its link to “warm glow”, a disproportionate emphasis on intentionality can even be detrimental: “warm glow (these pleasant, fuzzy feelings we associate with doing good) can also lead impact investment decisions astray. This is because its cognitive rewards are based on acting on our good intentions, not the impact that those actions produce. Because our experience of doing good does not perfectly mirror the impact that they produce, warm glow often leads to decisions that create some positive impact, but not as much as they could.”

In the paper Do Investors Care About Impact, Falko and co-authors conclude that many impact investors should be seen as “warm glow optimisers”, rather than “consequentialists” who optimise the impact (additionality) of their investments. On this, Lee & Singh say: “When impact investors respond to such appeals (for charitable donations), the outcome can be satisfying, but superficial: Investors feel good about helping the world, while enterprises and funds avoid the costly headaches of collecting and analysing data on outcomes. But this effectively rewards those enterprises that excel at creating good feelings. To counter this phenomenon, impact investors must always ask if warm glow might be clouding their evaluation of impact performance.”

In an interview with Ezra Klein, the author Ted Chiang talked about alchemy. He said, "One of the things people often associate with alchemy is the attempt to transmute lead into gold... But for alchemists, the goal was not so much a way to create wealth as it was a kind of spiritual purification, they were trying to transform some aspect of their soul, from base to noble. So, you would get gold, which is cool, but purifying your soul was in many ways the primary goal. The idea was that the intentions or the spiritual nature of the practitioner were an essential element in chemical reactions; you needed to be pure of heart, for the reaction to work. And it turns out that's not true – chemical reactions work independently of what the practitioner wants or feels. So the parts of alchemy which ignored the spiritual component eventually became chemistry. And the parts that relied on the spiritual components of the practitioner were proven to be false."

We feel there is a clear parallel with impact investing: here too, the assumption is that investors’ intentions are an essential element in the process. But, just like in alchemy, we know that the impact mechanisms ultimately operate independently of the intentions of the investor: addressing SDGs requires theories of change, evidence-based approaches, data & analysis, and “feet in the mud” implementation, and – if there is to be impact investment – ensuring that there are real revenues and profits.

We also note that the focus on intentionality and identity may lead to an overemphasis on the question of attribution – can a specific outcome be attributed to a specific investor or investment? After all, the warm glow and identity are only attained if the investors can consider the impact “ours”. But we would say that investors who truly care about CC2 impact should be more concerned with ensuring that a certain outcome is achieved than with determining whom it can be attributed to. Instead – perhaps because of the commercialisation of impact investment – impact measurement tools, labels and the article 9 SFDR classification seem to be designed to provide investors with “attributability”. The goal appears to be to “score impact points”, rather than to redirect capital to where it can effect change.

Ten years ago, Brest said presciently: “Social impact is notoriously difficult to measure, and it could well be that many investors are satisfied with the good public relations and warm glow of doing a beneficent act. But we are optimistic that there are impact investors with significant resources who actually care whether their investments are making a difference.”

This brings us to our final article: what can investors, who shift emphasis from intentionality to additionality, and recognise that impact and return often do not go hand-in-hand, do to make a difference?

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