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Jonathan Harris
Founder @ Total Portfolio Project
April 2023

Hi Tom and Paddy, I also can’t resist chiming in.

Tom, you raised concerns about the practicality of ‘measuring’ investor contribution. I’ve noticed some investors using the term ‘assessment’ instead of ‘measurement’, and I’ve started to use it too. Assessment seems like a better term to use when high-quality measurement work (like you do at 60 Decibels) is not possible. Not to suggest that there are no measurable indicators related to investor contribution…

It seems strange to use traditional financial practices as a default reference point for impact investing, as your message seems to imply. Impact investing is, by definition, different and needs committed investors who tackle its unique challenges. I know great investors who promote their ability to get into ‘hot’ oversubscribed rounds, but they also recognize that impact is different and it would be ridiculous to claim a (financial) contribution when they invest in such rounds.

To riff on Paddy’s point, you’re only an impact investor if, in expectation, you’re making something happen that would not have occurred if you didn’t care about impact. So, if you’re an impact fund manager that is making things happen that traditional managers wouldn’t, why not be transparent about it? And if you’re a bold manager who invests in net negative impact companies in order to make them more positive, isn’t investor contribution your entire story?

Regarding your concern that focusing on additionality might be a distraction, I see improving practices across all dimensions of impact as a positive-sum game. I would think that being more thoughtful, transparent, and rigorous about assessing investor contribution would be correlated with equal passion for helping companies measure the outcomes they produce (and their enterprise contribution). Indeed, helping companies measure their impact is a form of investor contribution. Additionally, as work on investor contribution becomes more refined, I believe the tools and techniques for managing it will become more effective and easier for all investors to use.

Looking forward to hearing more thoughts and ideas from both of you and the rest of the community.

Paddy Carter
Director, Research & Policy @ British International Investment
March 2023

Tom … I can’t resist a quick response to you! I agree that “measurement” is a hiding to nothing, and we don’t try to measure the impact of investments relative to the counterfactual of what would have happened if we’d declined to participate. But that is the question we think about.  I don’t think you are an impact investor unless in expectation (i.e. probably) you are making something happen that would not have if only non-impact investors had the field. And being prepared to finance something that other would not is one of the most direct ways of doing that – so we rate investments where we are confident that capital would not be offered at all as “high contribution”. In the context of being an LP, sometimes we think we are anchoring a fund and its subsequent fund raising would likely not have happened (or done as well) without us; sometimes we are coming in late to a fund that has not been able to reach close – in both cases we have financial additionality some (and in the extreme, all) of the fund’s impact would not have occurred without us. We also think about the non-financial things we do with GPs and what impact that has. But we don’t try to measure our contribution to impact as distinct from other LPs. In principle we might attribute outcomes amongst LPs, although we don’t think there is an agreed method yet – it would probably look like the PCAF carbon accounting method. Here is a blog about the distinction between attribution and contribution:

Paddy Carter
Director, Research & Policy @ British International Investment
March 2023

Hello Impact Frontiers.

There is a great deal here that chimes with how we think at BII.

I have a couple of niggles:

Page 4: “an action qualifies as investor contribution if the investor can provide a plausible narrative connecting their specific action(s) to specific changes in outcomes that would not have likely occurred otherwise.”

To an uncharitable reader (and they exist!) this wording sounds like asking people to spin a story. I suggest a change to:

“action qualifies as contribution if there is good reason to believe that their actions resulted in outcomes that would not have occurred otherwise”

Becasue contribution is something that cannot be proven, we are after a standard of evidence more like civil law, where I think the standard is the balance of probabilities, rather than criminal (beyond reasonable doubt).

Once the problem is seen in terms of having weaker or stronger reasons to believe the investor is making a contribution, that introduces the idea that confidence in additionality varies from case to case, which something we find useful to explicitly recognise in our contribution ratings at BII.

I am also not sure what the distinction between “”internal firm management” and “non financial engagement” is, and whether two categories are necessary.  I suppose one might separate influence over what a business plan is (including things like whether you plan on reducing GHGs) from influence over business practices that are part of how that plan is executed? Page 7 suggests the distinction has to do with the commitment of resources, but I am not sure how to draw that distinction in practice. For example if you take a seat on the board and use it to press for a change in business plan,  or a change in internal business practices, such as the adoption of DEI, which buckets do you place those in? The resources allocated are the same. I think GHG reductions appears as an example of “direct engagement impact” and of “internal firm management”

Tom Adams
Co-Founder & CSO @ 60 Decibels
March 2023

Hi Impact Frontiers. I have been struggling with the concept and relevance of measuring Investor Contribution.

Let me state at the start that I have no doubt that impact investors DO contribute to the impact that their underlying portfolio companies have. Through capital, advisory and more they enable those companies to grow and build for impact. Does that mean we necessarily need to measure that contribution?

Specifically, the Operating Principles for Impact Management require that investors track their contribution to the underlying impact performance of their portfolio companies. But, this requirement seems at odds with the expectations of an investor to track their contribution to their portfolio companies’ financial performance.

Put another way, when it comes to financial returns any contribution of the investor to the performance of the underlying asset is simply assumed to be part of the IRR of that asset; we make no attempt to work out how much of that IRR the investors advice, contacts, interventions etc. represent. Moreover no LP will request its GP to consider whether there would have been greater or lesser financial performance had another GP invested in that portco in its place.

Even for those investors that genuinely make investments where no alternative capital is available (those that might claim to have the greatest investor additionality) my concern is that requiring investors to think about their impact additionality in this way may distract from a focus on helping/requiring portfolio companies to measure their actual impact performance.
Thus the focus on additionality seems at best an interesting sideshow at worst a significant distraction when it comes to helping the sector measure and manage its collective impact.

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.

About this discussion
Investor Contribution 2.0
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 Forum

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