10.1 Structure of NTMA and ISIF

FIGURE 10.1

Structure of NTMA and ISIF

State Claims Agency NewERA NTMA

NTMA business divisions

ISIF

National Development Finance Agency National debt management

Discretionary Portfolio

Irish Portfolio Global Portfolio Directed Portfolio

Public policy investments in Allied Irish Banks Plc, Bank of Ireland and loans to the Strategic Banking Corporation of Ireland and Home Building Finance Ireland

Source: World Bank. Note: Dark blue boxes denote the units most relevant to ISIF’s capacity as a strategic investment fund. ISIF = Ireland Strategic Investment Fund; NewERA = New Economy and Recovery Authority; NTMA = National Treasury Management Agency.

commercial basis in a manner designed to support economic activity and employment in the State.”

The economic impact side of the mandate is based on three criteria against which ISIF evaluates all investment decisions:5

1. Additionality refers to the economic benefits to gross value added (gvA) and gross domestic product (gDP)6 likely to arise from the investment under examination above what would have taken place in any case.7 Elements of economic additionality at the investment level include gvA, employment creation, and qualitative features such as contribution to Ireland’s enabling infrastructure, innovation capacity, and efficiency (for example, through sector consolidation).8 ISIF investments may generate additionality in the medium to long term, through participation in existing or newly established businesses. Social and environmental considerations are specifically not embedded in the additionality test, which focuses on economic impact, but are covered by ISIF’s Sustainability and Responsible Investment Strategy and adherence with the UNPRI and the Santiago Principles (as discussed in the subsection on economic impact and ESg reporting). 2. Displacement refers to instances when an investment’s additionality is reduced at the overall economy level because of a reduction in economic benefits elsewhere in the economy. For example, an investee company that competes with other Irish companies would reduce the investment’s overall impact on gvA of the whole economy. ISIF’s investments seek to avoid displacement.

3. Deadweight refers to instances whereby the economic benefits of an investment would also have been achieved in the absence of such investment. ISIF focuses especially on avoiding financial deadweight—participating in investments that would have attracted private capital regardless of ISIF’s participation.9

ISIF has a holistic approach to impact evaluation: investments must exhibit high additionality and low displacement and deadweight. Additionality is the necessary condition. ISIF has minimal tolerance for deadweight: it avoids competing with other sources of private capital and also requires potential investees to survey potential sources of commercial funding before an ISIF investment. Displacement can be harder to assess, especially in fragmented domestic sectors with many SMEs operating, some of which may suffer because of ISIF’s investment in competing businesses. Compliance with the displacement criteria tends to skew investments toward export-oriented businesses and fast-growing sectors such as technology (information technology, pharmaceuticals, and biotech), and away from the domestic service and retail sectors.

ISIF sets no hard thresholds for any of the three criteria. Rather, ISIF applies a portfolio management approach to economic impact. Some investments are ruled out because of noncompliance with the criteria. Other investments may meet the criteria but have, for instance, relatively low economic additionality. In this scenario, ISIF may choose to invest only a small amount, keeping firepower for other investments with greater additionality. ISIF has targeted an 80 percent/20 percent split of its capital commitments between high-impact and low-impact investments; it defines high impact as producing sustainable, longterm benefits for the Irish economy and low impact as producing short-term benefits such as a temporary boost in employment or when additionality may be offset by displacement.

Meeting the three economic impact criteria is a precondition for any investment to be submitted to the Investment Committee for the final investment decision, under a precisely defined process. First, the investment professionals with the ISIF team who are focused on economic impact develop an economic impact scorecard, filling in basic data such as revenue and employment potential. In parallel, the investment team produces a full investment proposal for the Investment Committee. The economic impact scorecard is sent for review to the Economic Impact Implementation group, which comprises ISIF’s head of investment strategy, NTMA’s chief economist, and other members of the ISIF Investment Strategy team and the NTMA Economics Unit. After the Economic Impact Implementation group’s review, the economic impact scorecard is submitted to the Portfolio Management Committee10 as part of the overall investment proposal. If approved by that committee, the proposal is submitted to the Investment Committee for consideration and, if thought fit, approval.

ISIF collects and publishes economic impact data on a semiannual basis to measure the economic impact of investees and underlying investees (when ISIF invests in funds). The assembly and assessment of this data can be somewhat challenging given that economic impact is a relatively new concept (in the context of investing), but ISIF believes it has adopted a structured and consistent approach to the collection and analysis of such data.