ESG Investing

Expanding Impact Measurement: What Is Additionality?


Across the impact investing spectrum, from catalytic capital to market-rate vehicles, investors want to know that their funds are being used effectively and productively.

To support such validation, some impact investors have added the criterion of “additionality” to their impact measurement and management tool kits. An alternative way of considering factors beyond financing, additionality is challenging to gauge and not universally embraced, but it can offer a level of confidence that an impact investment is truly making a difference.

What Is Additionality?

The Impact Management Project defines additionality as “the extent to which desirable outcomes would have occurred without public interventions.” This could be realized at the input, or funding, stage; measured in outputs that would not have occurred without the additional resources; or in sustained changes in behavior resulting from the project.

More tactically, the Organisation for Economic Co-operation and Development identifies three types of additionality in impact investing:

  • Financial additionality describes a private-sector investment that otherwise would not have happened. For example, financial additionality is realized through a local-currency investment in a startup business within a developing nation where seed capital is scarce, especially in the native currency.
  • Value additionality occurs when the recipient receives nonfinancial assistance along with the funds. For example, funding from impact accelerators and angel investors often includes a component of nonfinancial support, such as mentorship, industry expertise, or networking.
  • Development additionality occurs when a funded project’s impact exceeds initial targets. According to the Carbon Offset Research and Education program, development additionality arises in the market for greenhouse gas offset credits when these credits “play a decisive role” in the project’s viability by ensuring that benefits will be realized above and beyond the base project’s impact.

Additionality may also serve as a criterion for ongoing support, as with the European Bank for Reconstruction and Development. In order for transitional countries located in Central Europe and the Baltics to “graduate” to a market-driven status, the impact of the bank’s assistance must dwindle to minimal levels.

By prompting investors to stretch beyond a purely transactional mindset, additionality supplies a valuable perspective to impact measurement.

Challenges and Benefits

As with many concepts in the world of impact investing, there is no unanimity around additionality. While the Global Impact Investing Network (GIIN) explicitly included the concept in the first edition of The State of Impact Measurement and Management Practice in 2017, the second edition omitted the term, although it did allow those surveyed to indicate whether they evaluated the “contribution to the effect beyond what would have occurred anyway.” The GIIN’s four core characteristics of impact investing do not include additionality.

Measuring additionality is challenging, as it requires quantifying both the impact of an upfront investment where few will tread as well as longer-term benefits. Yet as a worldwide consortium of multilateral development banks defines it, additionality delivers a range of benefits. For example, it may facilitate financing otherwise unavailable for some initiatives; integrate increased risk management; encourage more comprehensive project designs; lead to enhanced outcomes; and align the project with environmental, social, and governance standards.

Ultimately, by prompting investors to stretch beyond the transactional mindset of “X dollars invested today with a Y percent return will result in Z dollars down the road,” additionality supplies a valuable perspective to impact measurement.

Want to learn more about impact measurement? Read:

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