Has Impact Investing Been Seduced? That’s One Hypothesis

Commentary by Wharton Social Impact Initiative’s Nick Ashburn and Katherine Klein

In the latest edition of SSIR, we read Mara Bolis and Chris West’s thoughtful critique of the evolution of impact investing with great interest.

Bolis and West argue that impact investors have become increasingly “seduced” by the promise of strong financial returns and strong social impact. Bolis and West worry that impact investors’ hopes and expectations of strong financial returns will lead them to sacrifice social impact, diminishing the impact in impact investing.

Could Bolis and West’ characterizations of impact investors’ beliefs, practices, and ultimate impact be correct?  Yes.

But, is there rigorous research to support (or to refute) most of their claims?  No, not yet.

Where Bolis and West see facts – evidence that impact investing has gone awry – we see hypotheses to be tested.  Bolis and West’s claims are great fodder for research – research that the field of impact investing badly needs to achieve the kind of impact we’re all hoping to see.

Here are some of the thought-provoking and important hypotheses that Bolis and West advance:

“According to the prevailing view, the achievement of both social impact and market-rate financial returns is the norm – not the exception.”

We know of no rigorous research on individuals’ beliefs about the ease of achieving both social impact and market-rate financial returns.  We have no doubt that some individuals believe, as Bolis and West assert, that achieving both is the norm, not the exception.  But, given prior research documenting that people believe that “nice guys finish last” – that is, people believe that truly altruistic individuals and companies do not benefit from their acts of altruism – we suspect the prevailing assumption may be opposite to what Bolis and West suggest.  Many members of the public may believe that if a company truly has a positive social impact, it can’t generate strong financial returns.  We’d love to see rigorous research examining individuals’ beliefs about the relationship between social impact and financial returns.  We also wonder what shapes individuals’ beliefs.  Do individuals’ beliefs reflect their experience, training, politics, or even their personality?  We’ve got a lot to learn from research on this topic.

“Achieving predetermined financial returns has become the primary goal, with the needs of investors taking priority over the interests of the communities their funding seeks to remedy.”

Bolis and West’s statement implies that funds that seek market-rate financial returns make investments that generate less social impact than funds that seek concessionary returns.  This is certainly possible.  But, as above, we know of no rigorous research testing this hypothesis.  At the Wharton Social Impact Initiative, we’re building a data base that will allow researchers around the world to test this and related hypotheses.  From our initial research, we know that impact investing funds differ substantially in the financial returns they seek.  Even the impact investing private equity funds in WIRED (the Wharton Impact Research and Evaluation Database) that identify as “market-rate-seeking” vary widely in how they use the term – from a 4% target net IRR to well above 20%.

We don’t yet know from our research whether impact investing funds that seek higher returns achieve the same, more, or less social impact than funds that seek lower returns.  Clearly, this is a critical question for the future of impact investing.  Is a fund’s social impact positively related to its financial performance, negatively related, or unrelated?  As we grow and strengthen WIRED, we hope and expect that researchers at Wharton and beyond will examine in depth the relationship among funds’ financial goals, financial performance, and social impact.

“Social entrepreneurs often accept financial terms and conditions that pressure them to drift from their social mission.”

This, too, is an interesting and important hypothesis for research.  To the best of our knowledge, researchers have yet to document the experience of social entrepreneurs as they seek and gain impact investments.  We would love to know the extent to which private equity impact investing funds support, tolerate, or challenge portfolio companies’ achievement of their social impact goals.  In the finance research literature, we’re seeing studies of the strategies that traditional PE funds employ to maximize the value of their investments.  How different are impact investing PE funds?  The legal documents – limited partner agreements and term sheets, for example – that we’re collecting in WIRED will provide important empirical insights.  In coming years, we hope and expect to see increasing research on the experiences of social entrepreneurs as they seek and gain impact investments.  There are plenty of important questions here for impact investors, social enterprises, and for researchers in law, finance, management, and more.

As the field of impact investing grows, so grows the need for rigorous research on impact investing practices and effects.  While Bolis and West make some strong assertions, they also note a need for “more independent research” and “greater transparency in reporting the social return as well as the actual financial returns (gross and net) achieved by impact investors.”  We could not agree more.


If you’d like to help us build the evidence base for impact investing – especially if you’d like to submit your data – we would love to hear from you.  Please contact the Wharton Social Impact Initiative at impactinvesting@wharton.upenn.edu to learn how you can get involved in our research efforts.

Katherine Klein is the Vice Dean for the Wharton Social Impact Initiative. In this position, Klein shapes WSII’s vision and strategy for social impact projects, partnerships, initiatives and faculty engagement at Wharton. Her research appears in numerous top journals including Administrative Science Quarterly, Journal of Applied Psychology, the Academy of Management Journal, and the Academy of Management Review.

Nick Ashburn is the Senior Director for Impact Investing at the Wharton Social Impact Initiative. Nick is a co-author of “Great Expectations: Financial Performance & Mission Preservation in Impact Investing” and also co-hosts “Dollars & Change” on SiriusXM Channel 111 – Business Radio powered by the Wharton School – a show dedicated to the intersection of business and finance for social impact.