How real is the impact in impact investing?
One way to answer this question is to investigate the legal contracts that bind impact investors. To what extent do these contracts reinforce a commitment to impact?
“Contracts with Benefits,” a new study by researchers at the Wharton School, Chicago Booth, and Georgia State University, answers this question. Using data from Wharton Social Impact Initiative’s WIRED (a first-of-its-kind database containing descriptive, financial, and legal information from over 120 impact investing private equity funds and over 1200 transactions), “Contracts with Benefits” examines the legal contracts that bind impact investing general partners, their investors, and the portfolio companies in which they invest.
The paper explores whether contracts of impact funds differ from contracts of non-impact PE/VC funds, and how expectations to produce social and environmental impact are embedded in the contracts. The paper is part of a larger, on-going data collection effort by Wharton Social Impact to advance the evidence-base of impact investing.
The takeaways? Authors Chris Geczy (Wharton School), Jessica Jeffers (Booth School of Business, University of Chicago), David Musto (Wharton School), and Anne Tucker (Georgia State University College of Law) find that contracts in fact reinforce the impact in impact investing to a considerable extent.
“WHEN YOU BREAK OPEN THESE CONTRACTS, YOU SEE THERE IS A LOT OF COMMITMENT TO THE SOCIAL BENEFIT IN THIS CONTRACTING ENVIRONMENT. IT’S SHOWING US THAT THIS IS MORE THAN JUST OPTICS,” MUSTO NOTES.
“Contracts with Benefits” recently won the Investment for Impact Research Prize from the University of California – Berkeley. To learn more, watch the Knowledge@Wharton interview between Wharton Social Impact Vice Dean, Katherine Klein and Wharton’s Finance Chair, David Musto.
Read the full “Contracts with Benefits” paper on SSRN.