In the rapidly evolving private markets impact space, ‘additionality’ is emerging as a key criteria in judging what is ‘impact’ and what is not.

The concept of additionality refers to whether a positive external outcome, such as increased access to healthcare services, would have happened without the investors’ involvement.

“There’s been an evolution in what stakeholders want to see with their assets,” Jon Dean, head of impact investing at Paris-based firm AXA Investment Managers, tells New Private Markets. “When we make an impact investment, we set an objective of what we want to achieve using key impact performance indicators.”

For starters, Dean says, an impact investment should go beyond an investor being “passively exposed” to a company’s growth simply by providing capital. He adds that a manager should be intentional about “disaggregating exactly which pieces of the growth story you want to invest for in order to achieve the impact”.

Dean explains: “I’m intentionally investing in this company because I’ve seen that there is a problem and I believe this company has a solution to the problem and will be a material contributor towards solving it.”

AXA has raised $641 million of impact capital over the last five years, according to New Private Markets’ inaugural Impact 20 ranking of the market’s top fundraisers.

Dean says AXA’s impact strategy has been to identify “companies that are growing” and help to develop and commercialise the solutions they provide to reach scale because “that’s where the rate of impact that’s being created is the highest”.

“When assessing a more mature company, you have to look closely at the source of revenues to ensure there’s a material impact contribution,” he explains. “Ideally, you need to be able to prove that your capital is creating an impact and you’re not just replacing other capital in the same mature state of company. Otherwise, it’s difficult to claim impact generated additionally to your investment.”

Tom Mitchell, a managing director at Cambridge Associates, who advises endowments and foundations, agrees that investing to scale companies providing solutions to society’s problems is “where the greatest impact will come over the long term”, and that backing more mature companies through an impact platform requires more due diligence.

“If you [had invested] in a large, well-capitalised company and felt it was an impactful company for a variety of reasons, will that persist?” Mitchell asks. “Is there value-add or strategic addition to that deal that ensures a continued strategy with good ESG integration or positive impact attributes?”

‘Impact’ or ‘thematic’?

Tideline, a consulting firm with deep expertise in the impact space, published a guide this year to help new market entrants work out whether their fund is “impact”, “thematic” or something else.

“While many market participants may think of impact investing as a distinct strategy,” the report stated, “our experience has shown that the key pillars of impact investing – intention, contribution and measurement – can help distinguish among all approaches to sustainable investing, bringing the elusive goal of market standardisation within reach.”

In Tideline’s view, an “impact” fund combines a high level of contribution (ie, active engagement as a shareholder to help the investee company increase impact) with a high level of intentionality (ie, selecting investment opportunities that align to its stated impact objective).

Cambridge Associates’ Mitchell describes impact investing as “trying to influence something beyond just your financial bottom line”. He says the increase in investor demand for such strategies is leading to a broader definition of impact investing that may not meet the goals some investors are seeking.

“What’s challenging is that the market is moving quickly, and money is moving fast,” Mitchell says. “That puts pressure on people [to try] to get to a point where they feel they can verify that authenticity.”