Research underscores the role of optimism in investment decisions focused on social good
In a recent study titled "Who Loses in Win-Win Investing? A Mixed Methods Study of Impact Risk", researchers Lauren Kaufmann from the University of Virginia and Helet Botha from the University of Michigan-Dearborn have identified several challenges and risks associated with impact investing that is based on "win-win" thinking.
The study, which was based on 124 interviews with impact investors from across the world and an online experiment with 435 participants, highlights the importance of adequate evidence and scrutiny of risks involved in impact investing.
One of the key issues identified by the study is the oversimplification of outcomes. The "win-win" framework assumes that financial returns and social or environmental benefits naturally align, which can obscure trade-offs and complexities that arise in practice. This oversimplification may lead investors to overlook potential negative impacts that could arise from their investments.
Another issue is the potential for unrealistic expectations. Thinking in terms of guaranteed mutual benefit can lead investors to underestimate the risks and difficulties in achieving both impact and profit simultaneously. This could result in investments that fail to deliver on their intended social or environmental benefits, or that generate financial returns at the expense of these benefits.
The study also warns of the risk of impact washing, where investments are presented as universally positive, but do not hold up under scrutiny. This could occur when investors make superficial or misleading claims of social or environmental benefits to make their investments more attractive.
The study further emphasizes the need for the impact investing sector to get much more serious about understanding what works, what doesn't, and why. Neglect of systemic change and the risk of mission drift are also highlighted as challenges. Focusing on individual investment "wins" may divert attention from broader systemic issues and structural inequalities that require more transformative approaches beyond investment.
The study's authors urge investors 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. They also point out that the measurement frameworks provided by the Global Impact Investing Network (GIIN) and Impact Frontiers are often underutilized or applied superficially.
The study's findings should serve as a "wake-up call" for the impact investing industry, according to Kaufmann and Botha. Over the past seven years, the number of investors reporting impact underperformance has hovered between 1% and 3%. However, these figures may be unrealistically low given the complexities of development, health, education, and climate work.
Impact investing has grown into a $1.5 trillion industry, and with $84trn (€71.2trn) expected to be transferred from the baby boomer generation to younger investors by 2045, the urgency for change in the impact investing sector is clear. One investor suggests that the impact sector could learn a thing or two from the history of economic development, emphasizing the importance of fact-checking one's own assumptions, especially when investing in emerging markets.
A study published in the Journal of Business Ethics found that many impact investors make investment decisions based on narratives or assumptions, rather than on sustained, rigorous evaluation. This highlights the need for the impact investing sector to move away from "win-win" thinking and towards a more evidence-based approach.
In conclusion, the study by Kaufmann and Botha identifies several challenges and risks associated with impact investing that is based on "win-win" thinking. To address these challenges, the impact investing sector must critically assess risks, remain transparent about limitations, and move towards a more evidence-based approach that prioritizes systemic change and long-term impact over short-term financial gains.
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