‘Additionality’ and public debt market impact investing

May 25, 2023

Environmental, social and governance (ESG) expert My-Linh Ngo, Head of ESG Investment, BlueBay Portfolio Manager, RBC BlueBay Asset Management discusses ‘additionality’ and the importance of providing a positive impact in building a sustainable future through public debt markets.

With impact investing in fixed income markets, there is always an intentionality goal in that it seeks to invest in issuers and issuances that measure the contribution towards addressing many of the world’s major environmental and social challenges. But we recognise that for many traditional impact investors, beyond having intentionality, contribution and measurement, there is a need to also evidence ‘additionality.’

What is additionality?

Additionality is the ability to prove that the positive outcome would not have occurred without the investor’s specific investment. This is much more easily demonstrated in private markets rather than public markets; as in the case of the latter, transactions generally occur between investors rather than between issuers and investors for new financing needs. It is also more likely to occur in circumstances where investment attractiveness is low. Additionality is commonly linked with philanthropic endeavours and while these are important activities, they are not the only activities that should be considered to have a positive impact.

Public sector funding gap

We strongly believe there is a need to further explore how additionality should be defined and evidenced in the context of public markets. Particularly because of the public sector funding gap that exists and given the need to scale up and accelerate action. Impact investing offers an alternative to philanthropists who reject the notion that there is a binary decision between investing for profit and giving money to a social cause. We believe that both are equally valid, they are just different and ultimately complementary.

A more holistic approach in debt markets

When investing in public debt markets, we believe that there is the need for a more holistic approach. We believe that the relative size of the debt market itself, as measured by assets under management, when compared with others, such as equities, is evidence of the scope of positive impact the asset class can have if directed appropriately. Certainly, the risk/return profiles of some of the investments that require funding and that are critical to the low carbon transition are ones which are more attractive to debt investors than they are to equity investors. Fixed income also affords investors the opportunity to directly fund non-corporate entities such as sovereigns, supranationals and agencies (SSAs), which themselves play a critical role in determining policy and regulation of systemic risks such as climate change.

The emergence of the ESG-labelled bond market

Given many environmental assets have the nature of ‘public goods,’ there are limits to what the private sector can reasonably do alone to address such challenges. The emergence of the ESG-labelled bond market has enabled investors to explicitly signal where and how they want to allocate their capital, making it clear what they prioritise and are willing to support. Whilst ours is a public debt strategy, we do have opportunities to participate in primary market issuances, and so provide access to new funding for issuers that are playing a positive role in enabling and facilitating the sustainability transition to achieve the global sustainability goals.

Valuable outcome for all

Where engagement activities with issuers or other stakeholders are particularly focused on strategically important matters that can be transformational as opposed to incremental, this can be an enormously valuable outcome. The year 2023 has the potential to see a more meaningful, and much needed, allocation of assets towards this area. However, data and analytics are essential to help companies and investors show credible evidence of their contribution to real-world outcomes. We believe attention will remain on contributing positively to outcomes in the ‘real economy’. With the increased push to shift capital towards more sustainable activities and greater demand from consumers and investors.

This is part five of a five part series on impact investing in public debt markets.

Learn more about our approach to responsible investing.

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