Exploring the Difficulty of Impact Investing: A Comparative Analysis
Study Finds Impact Investing Not Necessarily Harder Than Traditional Investing
Investors often face numerous challenges in their work, from analyzing financial reports to sourcing deals. However, when it comes to impact investing, the perception has been that the added focus on social and environmental impact makes the process even more difficult. A recent study conducted by Katherine Klein and the Impact Finance Research Consortium sought to investigate whether impact investing is indeed more challenging than traditional investing.
The study surveyed over 200 impact fund managers, particularly in private equity and venture capital, to gather insights on their experiences with impact investing. The results were surprising: impact investors seeking market-rate returns reported lower levels of difficulty in impact investing compared to those targeting lower financial returns. This finding challenges the common belief that pursuing impact alongside financial returns is inherently more complex.
One possible explanation for this unexpected result is the emphasis that market-rate impact investors place on the integration of impact and business models. Many of these investors believe that impact and financial performance are closely linked, with the growth of a business inherently leading to increased impact. This perspective simplifies the process of measuring impact, as it becomes intertwined with financial success.
On the other hand, investors seeking below-market-rate returns often focus more rigorously on assessing and reporting impact underperformance, as their mission-driven approach requires a sharper focus on social and environmental outcomes. Despite facing unique challenges tied to their return goals, these investors still perceive impact investing as equally difficult as traditional investing.
The study’s findings raise important questions about the essence of impact investing and the concept of “additionality,” which refers to the unique value that impact investors bring to their investees beyond financial returns. While market-rate impact investors may not perceive added difficulty in their work, there is a concern that they may not be achieving the level of additionality that is central to the impact investing philosophy.
Ultimately, the study prompts a reevaluation of the purpose of impact investing. Should it be a more challenging and distinct form of investing that actively contributes to social and environmental outcomes, or is it simply a synonym for responsible investing? The researchers argue that in a time of pressing global challenges, impact investing should be more than just traditional investing with an impact report. It should be a rigorous and demanding practice that addresses neglected problems and drives meaningful change.
As the field of impact investing continues to evolve, the study’s findings serve as a reminder of the importance of maintaining a high standard of impact measurement and contribution. Impact investors must be willing to embrace the inherent challenges of their work to truly make a difference in the world.