04 Aug 2020

How can investors have the most impact?

By Paul Miller

Impact investing is a rapidly growing sector – both in depth and sophistication. But in many ways its still finding its feet with regards to standardisation. In the meantime, investors need to figure out for themselves whether an investment will be genuinely impactful. We get it, it can be overwhelming.

But if you’re already looking for impact investing opportunities, then it’s clear – you want your money to do more than just make more money. Whether you’re passionate about supporting sustainability or education, the concept of ‘additionality’ can help.

Understanding additionality

Additionality separates real impact investors from the managers who are simply branding themselves as such. It comes down to: did your investment achieve something that wouldn’t have happened without you, or were you just along for the ride?

This is a problem for many so-called impact investors in public markets. If you invest in an impact fund which simply tracks an index of very large companies that ‘do no harm’, then your money isn’t doing anything new. Your investment isn’t having any impact other than signalling to the market that you think those companies are a better bet than those in coal or tobacco.

However, if you look to the other end of the ‘stage’ scale – where BGV sits – we don’t have this problem. Our investment is almost always the first money into the ventures we back. The additionality is extreme in that the companies we support almost certainly wouldn’t exist without that crucial early stage cash injection.

Providing venture capital to tech for good companies gives ambitious impactful solutions an opportunity to launch and grow which may not have been possible otherwise.

Through the lens of additionality, an investment in our funds is very much an impact investment. It has an immediate benefit on the companies we back, enabling them to go on to create positive impact for millions of people.

Investment as a tool of influence

There is of course a spectrum and some managers are better than others at using your money to make a difference with large companies. However, shareholder action can be limited in scope compared to the influence we’re able to have on the founding teams of small ventures. We’re able to help shape their strategy from the get-go. We take money and use it as a tool to improve the chances of success of a small business to become a big business. But we also to do that in a way that maximises the likelihood of a positive impact on the environment, society or health.

In our impact report each year, not only do we report on the impact of our portfolio but also on the impact we as investors have on our portfolio. Additionality is what makes a true impact investment.

So when you’re assessing your next impact investment, ask yourself – will my money do something that wouldn’t have happened otherwise? If the answer is yes, you’ll know that as an investor, you’re making an impact.

 

This piece was first published in the July issue of our monthly investor newsletter – ‘The Practical Optimist.’ Sign-up here to receive the latest thinking on tech for good and curated resources from the world of impact straight to your inbox.