Additionality: What It Is & How We Approach It
Our impact framework
Last September, we introduced our new impact assessment framework for the first time: a framework that is applicable to an early-stage VC like ours and that is rooted in our climate and sustainability-focused investment thesis.
Part of this framework is our impact screen, informed by established impact assessment frameworks like the Impact Management Project (IMP) and the Global Impact Investing Network (GIIN)’s IRIS+. Developed in partnership with Malk, this impact screen guides our assessment of companies we’re considering investing in across 5 key dimensions.
While these dimensions are all relatively straightforward, one of these is less intuitive than the others. We’re talking about additionality — a term wielded by many an impact investor but that has no universal definition. Multiple forms of additionality exist (e.g. “financial” vs “non-financial” additionality).
For the purposes of this blog post, we’re interested in the environmental additionality of our investments. We like this definition, from Project Frame: “Additionality is the degree to which a proposed climate solution causes GHG/environmental impact that would not have otherwise happened in a no-intervention baseline scenario.”
Baselines in additionality
By definition, this counterfactual baseline scenario cannot be directly observed because it did not happen, so it can only be estimated or inferred based on contextual information.
An investment is considered additional when it demonstrates a strong deviation from a counterfactual or business-as-usual scenario. Assessing additionality, therefore, requires comparing indicators in a portfolio company (environmental impact in our case) against a baseline. An investment can be considered additional if it yields outcomes different from its baseline.
However, it is common for organisations to define the project as being both the cause and effect for the assessment of additionality and baselines, leading to a circular definition of additionality:
An improved definition would look something like this:
Adapted from the GHG Institute
Applying this to our portfolio company TreeDots, we could say “The amount of food waste being saved is additional if it is different from what would happen without TreeDots’ food redistribution service”. If a proposed activity (e.g. saving food from being wasted) would take place even in the absence of the intervention (e.g. TreeDots’ service), then there is no change in behaviour and the proposed activity is actually the baseline scenario and therefore not substantively different.
Establishing a baseline is crucial in determining additionality, and this baseline should of course be specific to the company’s intended impact.
Baselines in themselves are tricky to establish; we make estimations based on as much contextual information as is available to us. In general, investments with the following characteristics tend to be additional or make additionality easier to justify:
In sectors or geographic areas that are little or under-financed
Benefits underserved segments of the population
Leads efforts to encourage governments/regulatory bodies to facilitate investments in underserved communities
In an environment with significant investment barriers (i.e. policy, institutional, market, value chains and human capital). E.g. renewable energy projects tend to be additional in unfavourable policy environments for renewable energy; projects tend to be additional in countries with undeveloped value chains, a lack of qualified human capital, and a weak institutional environment).
How does Amasia approach additionality?
A standard additionality approach cannot cover 100% of the portfolio as additionality looks different in different contexts — so we adapt our protocol for producing impact results on a company-by-company basis.
The two aspects that we look at, captured in our impact screen, are: (1) Absence of direct competitors or alternative products/services readily available; (2) The insufficiency of market trends, such as consumer preferences, to change behavior alone.
Our assessment of these two aspects comes in during our due diligence process in which we assess the current market, competitors, the novelty of the technology, and market trends. We then assign a company a score of 1-3 according to the rubric in our impact screen.
But we aren’t concerned with a company’s additionality only at the point of investment — additionality informs how we think about our companies’ impact approach and what impact metrics we choose to measure. It’s embedded in our long-term impact strategy.
For example, with Clarity, measuring additionality entails measuring how Clarity’s air quality monitors have enabled climate action. To do so, we must understand clients’ individual use cases and how Clarity’s monitors have informed their decision-making. We gain insight into this through surveys and conversations with clients.
Additionality can be a tricky concept, and it’s easy to misunderstand and misuse it — and as stated in its definition, additionality is impossible to definitively validate. However, it does still offer a valuable lens through which impact can be assessed. This blogpost outlines how we at Amasia apply it to our thinking, and so it is closely tied to our thesis and theory of change. As our approach to impact evolves, so will our application of additionality.