What is impact?

“Additionality, to whatever extent it is estimated, is an essential criterion for impact.”

Brest & Born 2013⁶

A buzzword for capital

What “innovation” is for products, “impact” has become for capital. Hardly a fund or start-up fails to advertise its impact. The market is large: the Global Impact Investing Network (GIIN) estimated assets managed as impact investments worldwide at around USD 1.57 trillion in 2024².

But what is impact? The GIIN defines impact investments as investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return¹. Two words carry this definition: intention and measurable. Intention can be declared; measurability has to be demonstrated. This is exactly where impact parts ways with marketing.

Where the term comes from

Thinking in terms of impact comes from development cooperation and evaluation research. Its core is the impact chain: resources (input) become activities, which produce measurable deliverables (output), which lead to changes for people (outcome) and ultimately to change in society (impact). A “theory of change” explains why one step should lead to the next.

For investors, the Impact Management Project translated this thinking into five dimensions: What impact occurs (What)? For whom (Who)? How much of it (How Much)? What is the investor's own contribution (Contribution)? And how great is the risk that the impact does not materialise (Risk)?³ With IRIS+, the GIIN provides a catalogue of metrics to go with it¹.

Since 2021 the term has also had a regulatory side in Europe. The Sustainable Finance Disclosure Regulation (SFDR) distinguishes funds that promote environmental or social characteristics (Article 8) from those that have sustainable investment as their objective (Article 9)⁴. Article 9 has since been treated by the market as an “impact label”, even though the regulation itself is not meant to be one.

Where it falls short

How thin the label can be became clear at the end of 2022. As disclosure requirements became more specific, asset managers downgraded 307 Article 9 funds with around EUR 175 billion in assets to Article 8 within a single quarter, about 40 per cent of the category⁵. The funds had not changed, only their claims.

Three problems run through practice:

• Output instead of outcome. What gets reported is what is easy to count: users reached, devices sold, sites opened. Whether people are better off afterwards remains open.
• No comparison. Impact is always a difference from what would have happened anyway. Without a comparison group, you measure the trend, not the contribution.
• No additionality. Paul Brest and Kelly Born distinguish the impact of an enterprise from the impact of an investment⁶. Financing a good company that would have raised capital anyway changes little. Impact arises where the capital makes a difference.

And in medicine?

Medicine already has what impact investing is still looking for. For decades it has worked with control groups, randomisation and hard endpoints. In Germany, new medicines have had to demonstrate an added benefit over an appropriate comparator therapy in an early benefit assessment since 2011⁷. The yardstick is the patient-relevant effect: better health, shorter duration of illness, longer survival, fewer side effects or better quality of life⁸. For medical devices, the European Medical Device Regulation (MDR) requires a clinical evaluation based on clinical data⁹.

Even so, many impact reports in health stop at output. The standards every medicine has to meet often play no role in assessing health investments. Why not?

Our understanding of impact in health

For us, impact in health is not a label but a hypothesis that can and must be tested. Its yardstick is the same as in medicine: demonstrable benefit for patients, measured against what would have happened without the investment.

This leads to three questions every investment in health should be able to answer:

1. Which problem in patient care is being solved? Not which technology is used, but which need exists in care.
2. Which endpoint demonstrates the improvement? Patient-relevant outcomes rather than reach, compared with current care.
3. What does this capital change? Honesty about additionality: where does the investment make the difference?

Impact, regulation and financing belong together from the start. An evidence plan that anticipates the path through the MDR or benefit assessment is not only proof of impact but also a value driver. Those who know early which benefit they must demonstrate build better products and more robust financial models. This is why our Fund Advisor turns these questions into an open standard anyone can use, and supports public-interest ventures in meeting it.

Sources

1. Global Impact Investing Network (GIIN). What is impact investing? and IRIS+. thegiin.org
2. GIIN. Sizing the Impact Investing Market 2024. Report: ImpactAlpha
3. Impact Frontiers. Five Dimensions of Impact (developed in the Impact Management Project). impactfrontiers.org
4. Regulation (EU) 2019/2088 on sustainability-related disclosures in the financial services sector (SFDR). EUR-Lex
5. Morningstar: EUR 175bn of Article 9 funds downgraded in Q4 2022. Paperjam, 2023. paperjam.lu
6. Brest, P. & Born, K. When Can Impact Investing Create Real Impact? Stanford Social Innovation Review, 2013. ssir.org
7. Section 35a German Social Code Book V (SGB V) – benefit assessment of medicines with new active substances. gesetze-im-internet.de
8. Section 2 German Ordinance on the Benefit Assessment of Medicines (AM-NutzenV). gesetze-im-internet.de
9. Regulation (EU) 2017/745 on medical devices (MDR). EUR-Lex