I have spent the past few days working on what is becoming a very long post about the corrosive myth of the market rate impact investor. I hope you will like it. It has become so long that I have decided to carve out a couple of definitional sections as their own posts. So, if you get to the end of this and you think, “So what?” well, just wait. It is in service of what is coming: The greatest blog post in the history of blogs giving profanity laden advice to foundation boards who are interested in impact investing and are not too put off by the aforementioned profanity. That’s right. I am pointing at the fence. Let’s hope I do not disappoint. And with that . . . . additionality.
Additionality is an annoying word. Like most annoying words, it has two fundamental traits:
Additionality is a term that I believe was first widely used in the carbon markets. It describes the concept of specific attributable added benefit of doing something versus not doing that thing. In the carbon markets this is very important as they are assigning monetary value to projects based on the specific calculable carbon impact of the funded activities.
Let's use a simple example. Say you need a fence, and I have some money with which to help that fence get built. Consider three options:
The concept of additionality doesn’t work perfectly for everything: as you can see field building grants do poorly versus direct programmatic support, but it is generally a good way to weigh the relevant merits of different ways of spending your money. High additionality? Good. Hazy additionality? Let’s keep talking. No additionality? Get lost. Simple, right? But there is a point that some people don't get.
You Can Invest Money in a Project that Demonstrates Additionality and Still Have an Investment with ZERO Additionality
Maybe you are rolling your eyes at how obvious this is, but it is a concept that seems to blow past many people, especially with regard to impact investing. Let’s consider another hypothetical, this time an impact investment. Let’s say you care about increasing the supply of affordable housing in your home town of Cheboygan, and you have a million bucks burning a hole in your pocket. You can do one of three things with that money- build, buy or lend.
If you want clear additionality, invest in projects that wouldn’t happen without you and/or provide your investment on better terms than others are willing to provide. Easy peasy Alouisey, as we say in Cheboygan. But what if you have been tasked with producing a “market rate” of return as well? Why didn't anyone else want to lend her the money?
That’s my cliff hanger. And, um, sorry there wasn’t more profanity.
Patrick Maloney lives in Portland, OR where he helps nice people working on cool stuff. He tries to limit his blogging to things about which he knows something.