Do Your Impact Investments Actually Have Impact?

In impact investing, assessing the likely environmental or stakeholder impact of an investment action is challenging. One reason is that it is hard to know what would have happened if an investor did not allocate capital. This is the concept of “additionality,” and it is critical for impact investors; without it there is impact “washing.” Although additionality is impossible to report and measure precisely, we see three characteristics that increase the likelihood of additionality from capital allocation: raising growth capital from investors, investing in inefficient markets that are small and less-researched, and having unattractive expected returns. This suggests that potential impact is relatively low in large public market securities, but high in some segments of private markets, especially venture capital.