Additionality: a hot but not a new topic
To kick off our conversation, we explore the concept of additionality. Additionality refers to the extent to which an investment enables positive outcomes that would not have happened anyway. This can be financial - for example, when impactful companies or projects cannot obtain financing from other sources on the necessary terms or scale - or non-financial, where the investor adds value to the company beyond just financing.

Nikkie: “Considering additionality in the investment process is essential for Triodos Investment Management. Without it, we cannot argue that our investments are making a difference.” Rebecca adds: “Additionality is a hot topic, but it’s not a new one. It’s part of what distinguishes impact investing from traditional investing.”

Triodos Investment Management (Triodos IM) examines additionality from two key perspectives: investees and investors. Nikkie explains: “Investee additionality focuses on ensuring that the companies and projects we invest in actively contribute to a sustainable future in ways that wouldn’t necessarily happen otherwise. We meticulously screen potential investments based on their sustainability strategies, alignment with the five vital transitions we aim to accelerate and their demonstrated commitment to long-term impact.”

Rebecca continues: “Of course, we have no way of proving what would have happened otherwise. However, we can assess it based on context. It’s not just about showing that our investees are doing good; it’s about demonstrating that our investment helps catalyse that good. In other words, what is our investor contribution? We go beyond simply selecting impactful companies to invest in; we aim to actively optimise impact wherever we can. We engage with portfolio companies to enhance their sustainability commitments, advocating for more ambitious environmental goals and improved social impact measures.”

Triodos IM also aims for a financial investor contribution in some investments by targeting underfunded sectors or regions. This helps de-risk projects and attract additional investors who might otherwise remain uninvolved. Rebbecca explains: “We were early pioneers in wind turbines in the 1990s. Today, investing in wind is well-established in Europe. Therefore, we look to invest in critical enablers for the energy transition that are not as well established or are less served by financial markets. For instance, technologies in battery energy storage systems, grid support and the heat transition.”

Another type of – more indirect – investor contribution is the shaping of a more sustainable financial system. In addition to its efforts in financing change, Triodos IM engages in a wide range of initiatives aimed at transforming finance. As Nikkie explains: “We co-create thematic industry standards on three different levels. Firstly, we address this at the asset class level; for instance, we have developed responsible exit guidelines for private equity investments. We also strive to advance sustainable financing standards that target specific sectors, such as embedding Client Protection Principles to safeguard microfinance clients from harmful lending practices. Lastly, we advocate for meaningful regulations in sustainable finance to support the objectives of the European Sustainable Finance Action Plan.

A pragmatic approach to regulations
This brings us to the next part of our discussion: sustainable finance regulation. Nikkie: “At its core, such regulation can be a powerful tool to redirect investment flows to sustainable economic activities, demand investor transparency and mainstream the integration of sustainability risks. To advance the industry, we need consistency and accountability on these fronts. However, the challenges lie in the execution.”

Rebecca adds: “On the one hand, regulation holds accountable investors who claim to be sustainable, with a clear set of requirements regarding what to measure, assess, report and disclose. On the other hand, the required set of ‘ESG’ reporting metrics can often overburden investees and may not always be the most material to their businesses.”

A big challenge for these regulations to fulfil their potential is the significant lobbying by various stakeholders. A notable example from recent years is the EU Taxonomy, which was designed to classify certain economic activities as ‘green’. However, between the initial proposal and the final regulation, activities that are not considered sustainable by academic standards - such as nuclear energy and natural gas - were still included in the Taxonomy.

More recently, the so-called Omnibus proposal aims to address overlapping and unnecessary rules of three regulations (CSRD, CSDDD and EU Taxonomy). Nikkie: “In practice, this means a substantial reduction of 70% in datapoints. Only private consultations were held for this proposal, and it appears that primarily large corporates participated in that process. In short: what was presented as a simplicifaction is in fact a major deregulation exercise.”

Both recognise that legislation significantly influences how Triodos IM approaches impact management. “Compliance is important, but we need to go beyond just ticking boxes. We advocate for a pragmatic, yet meaningful approach where regulations not only ensure accountability but also uphold original intentions and foster innovation to serve as a catalyst for better practices.”

Ensuring the integrity of impact claims
The impact managers emphasise that as the field of impact investing matures, investors are increasingly aware of the importance of impact integrity: With which intention do you invest? What evidence supports stated impact claims? What methodologies underpin reported results? How can we ensure that impact outcomes are consistent, transparent and unbiased?

Alongside additionality, independent verification can be a valuable mechanism for ensuring the integrity of impact claims. It provides investors with confidence that managers are actively overseeing the impact of their investments. As Rebecca states: “Impact verification is a great way for managers to build credibility and trust with investors.”

Nikkie adds: “However, this is currently still a costly exercise and not necessarily the best option. When considering the most meaningful change in society, verification sits in the final 20% for me, whereas the first 80% is about redirecting mainstream finance to more sustainable companies and projects.”

Rebecca: “As investors we tend to over-focus on data and measurement. There is a temptation to believe ‘if we could just get the measurement right, then we would be able to manage for impact.’ But the truth is that even when data is readily available, it never tells the full story. It needs to be assessed in context and in relation to expectations or shared goals to be meaningful. I would prefer to see a strong impact narrative, clear goals and a rationale for additionality in an investment proposal or review than just the numbers of past or current “impact performance” according to metrics.”

Nikkie concludes: “That said, we still need some consistency to ensure that all stakeholders in the chain, including our investors and portfolio companies, are speaking the same language. This is where globally recognised standards like IRIS+, the Impact Management Project (IMP), and the EU Sustainable Finance Disclosure Regulation (SFDR) come into play. These frameworks serve as cornerstones for setting disclosure standards, making it easier for our portfolio companies to report on impact and for us to verify and assess impact claims.”