Jonathan Harris
Founder @ Total Portfolio Project
September 2022

One thing we’ve been thinking about recently and discussing with academic researchers: Do investors that are focused on a (naive) definition of additionality / contribution, by wanting to have a direct, observable impact on their investees, cause some enterprises to delay impactful projects until they secure investment from these types of investors? Because why burden yourself as the CEO with an impact project now, when the impact investors will pay for it in the future when they acquire your firm?

It’s plausible to us that this occurs some of the time. But we’re not sure how much it may be occurring. Would love to hear others’ thoughts about this.

Jonathan Harris
Founder @ Total Portfolio Project
September 2022

A negative contribution topic that comes up relatively often with some of our philanthropic partners is negative investor contribution from impact risk. Especially the risk of investors accelerating unintended consequences by accelerating the progress of an enterprise. This can include extreme risks that mostly you wouldn’t think about, but that can be massive in scale if they occur.

For example, consider a biotech company that is developing a product that normally is supposed to make people a lot healthier. But pressure to move quickly leads one of their researchers, with mental health issues, to secretly apply their technology to developing a synthetic pandemic disease. Or some other worst case scenario. Opportunities to invest in companies like this exist. But we admit we don’t have a great answer to how we can mitigate such risks. We would be keen to discuss and hear ideas.

Jonathan Harris
Founder @ Total Portfolio Project
September 2022

We define Additionality as how much of an activity we actually count towards an actor’s impact, given that other actors may have otherwise made similar contributions.

In our work we have begun to assess the additionality of our contributions on two dimensions: Scalability and Neglectedness. This applies to both positive and negative impacts, and to contributions from providing capital and engagement. 

Scalability is the degree to which an enterprise can productively use additional resources. This could be about an enterprise taking on more investment capital and using it to buy additional machines or hire more employees. Or it could be a group of engaged shareholders including us in their campaign. This isn’t a metric that can always be directly measured. So we typically score it heuristically/qualitatively with simple scores. That said, if you know a business very well, you could explicitly quantify scalability by assessing how much more productive it would be with twice its current budget.

Neglectedness is the extent to which the supply of resources to an opportunity is limited. It is assessed as the inverse of the amount of capital the market is willing to invest in an enterprise. 

  • The more investors are aware of and open to considering an investment in an enterprise, the less neglected it is. And, given a fixed market of potential investors, the more risky they perceive the enterprise to be or the more risk averse these investors are (limiting how much they are willing to allocate to it) the more neglected the enterprise is.

  •  As with Scalability, we usually assess neglectedness heuristically. However, useful evidence to support a neglectedness assessment can include how much investment has the relevant industry, geography or asset class historically received. In regards to engagement this would simply be about how many other investors are interested in engaging on this issue and how deeply are they willing to engage.

These dimensions are perhaps different from most of the metrics in the discussion document in that their purpose is to help us assess the ‘additionality’ of our contributions. Whereas most of the metrics in the document seem to be appropriate for assessing contributions before additionality is accounted for. Alternatively, the phrasing on other metrics is rather binary – “that would likely not otherwise occur”. This binary phrasing seems to suggest ignoring contributions below a threshold of “likely”, and including all contributions that are “likely” but not accounting for how some can be much more likely than others (even among “likely” ones). Scalability and Neglectedness help us reason through how likely an effect would have been to otherwise occur. We can then assess our contribution in proportion to how likely it is. 

 

We wouldn’t call these concepts metrics, so we won’t suggest them as such. But we’d welcome inclusion of these concepts in future documents.

About this discussion
Investor Contribution 2.0: Developing Metrics & Addressing Systemic Risks
pre the distribution initiative Impact Frontiers and the Predistribution Initiative invite your feedback on a discussion document and prototype set of metrics by which investors can measure and manage their positive and negative investor contributions.
“What can impact investors learn from evaluators (and vice versa)?”
Impact Ratings Math
Investor Contribution 2.0 Discussion Questions

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