Trade-offs in decision making by impact investors between socio-environmental return and financial return

Abstract

Impact Investing is an alternative source of funding for socio-environmental impact optimising organisations. The legitimacy of this investment approach has been questioned however, as the model combines two competing institutional logics. The impact investor faces the logic of socio-environmental impact and the profit logic, which have traditionally been thought of as being on opposite ends of the spectrum. Combing multiple logics is confusing and can ultimately handicap the firm, however this can be resolved by specifying the trade-offs among the various dimensions. Research on Impact Investing in the past few years focused on the performance of Impact Investing funds in comparison to conventional funds, but could not conclusively prove if there is a cost to Impact Investing. For this reason there is not a full understanding of the trade-offs, if any, of Impact Investing. The objective of this study is to demystify the trade-offs inherent in Impact Investing, in order to support the legitimacy of the investment strategy as an alternative form of financing. The study was performed as a qualitative research, using 15 semi-structured, in-depth interviews with investment professionals and experts, who had been practicing for at least two years. The collected data were analysed using inductive content and frequency analysis techniques, which enabled the researcher to extract and extrapolate the recurring themes and develop a practical framework for effective management of an Impact Investing asset portfolio. The results of this research show that the question of trade-offs depends on the framing, as there are instances where the trade-offs are distinct, however high impact and high returns can be achieved without compromise. There is no denying the immensurable risks involved in Impact Investing, some are as seen in conventional capital markets, yet some are inherent not only in the impact approach, but also in other variants of the strategic positioning of the investment firm involved. The risks can be mitigated by integrating impact into the business model and aligning values throughout the Impact Investing value chain.