Research emphasizes the role of optimism in investment decisions linked to sustainability and ethical considerations
The study "Who Loses in Win–Win Investing? A Mixed Methods Study of Impact Risk," co-authored by Lauren Kaufmann at the University of Virginia and Helet Botha from the University of Michigan-Dearborn, has shed light on potential pitfalls in the impact investing industry. The research suggests that reliance on narrative or assumptions rather than rigorous evaluation could compromise the effectiveness and integrity of impact investments.
The study, based on 124 interviews with impact investors from around the world and an online experiment with 435 participants, found that many investors may be underestimating potential negative consequences due to insufficient rigorous evaluation of risks. This oversight can lead to ineffective allocation of resources, unforeseen challenges, and even unintended negative outcomes such as displacement of vulnerable communities or bypassing local needs.
One of the key concerns highlighted by the study is the lack of evidence-based impact. Many investors assume their investments are delivering real social or environmental outcomes without adequate evidence. This can result in investments that do not achieve their intended impact, wasting resources that could be better used elsewhere.
The study also emphasizes the need for the impact investing industry to adopt better accountability measures. According to Kaufmann and Botha, the absence of rigorous evaluation means that critical risks may not be identified early enough, potentially affecting the sustainability and success of impact investments.
Impact risk that isn't properly managed could lead to a significant problem, the authors warn. Between 1% and 2% of investors reported falling short of their impact goals in the GIIN's two most recent surveys of practicing investors, according to Kaufmann and Botha. A large minority of interviewees said they don't consider any kinds of impact-related risk at any point during the investment cycle.
Kaufmann states that there's a growing concern that impact investing is more comfortable with storytelling than with evidence. She and Botha suggest that time is of the essence for the impact investing industry. They emphasize the need to treat impact with the same level of scrutiny as financial performance, including tracking outcomes over time, engaging with affected communities, and more transparency about successes and failures.
The study also highlights the complexities of development, health, education, and climate work. When investors believe a business model guarantees positive outcomes, they're less likely to ask hard questions about what's really happening on the ground. Impact investing has grown into a $1.5 trillion industry, and the authors urge the industry to take a closer look at its practices to ensure that investments are truly delivering the promised social and environmental benefits.
- The study suggests that overreliance on assumptions and narrative, rather than rigorous evaluation, in impact investing could lead to investments that fail to deliver their intended social or environmental impact, compromising the financial inclusion of vulnerable communities and undermining the biodiversity objectives of these investments.
- Considering the complexities of development, health, education, and climate work, the study warns that a lack of evidence-based impact could result in impact investments bypassing local needs, displacing vulnerable communities, and straying from their biodiversity objectives, thereby undermining the sustainability and success of these investments.
- To mitigate potential pitfalls and achieve the promised social and environmental benefits, the study advocates for the impact investing industry to adopt blended finance strategies that combine financial and social return objectives, prioritize rigorous evaluation, and ensure transparency in outcomes, tracking, and community engagement, thereby facilitating sustainable and effective investments that positively impact biodiversity.
