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This article investigates ethnographically how early-stage impact investors evaluate the credibility of the impact promises made by social entrepreneurs. Uncovering how investors carry out this task beyond observable characteristics and self-reported prosocial intentions, the author proposes that their evaluation of impact promises centers on four interrelated aspects of the entrepreneurs’ behavior: impact metrics, impact track record, impact management, and impact prospects. The author articulates these aspects into a framework explaining how credible beliefs about entrepreneurs’ impact promises emerge among investors and embolden their investment decisions.

The authors provide the first analysis of the risk exposure and risk-adjusted performance of impact investing funds, private market funds with dual financial and social goals. They introduce a dataset of impact fund cash flows and exploit distortions in VC performance measures to characterize risk profiles. Impact funds have a lower market β than comparable private market strategies. Accounting for β, impact funds underperform the public market, though not necessarily more so than comparable strategies. The authors consider alternative pricing models, accounting for sustainability and emerging markets risk. They show investors’ wealth portfolios and taste change the perceived financial merit of impact investing.

The change in the cost of capital that results from a divestiture strategy can be closely approximated by a simple function of three parameters: (1) the fraction of socially conscious capital, (2) the fraction of targeted firms in the economy and (3) the return correlation between the targeted firms and the rest of the stock market. When calibrated to current data, the authors demonstrate that the impact on the cost of capital is too small to meaningfully affect real investment decisions. The authors then derive the conditions that would be required for the strategy to have a meaningful impact. They empirically corroborate their theoretical results by studying firm changes in ESG status and are unable to detect an impact of ESG divestiture strategies on the cost of capital of treated firms. The results suggest that to have impact, instead of divesting, socially conscious investors should invest and exercise their rights of control to change corporate policy.

Impact investing urges investors to weigh the social and environmental impacts of their investment decisions. However, in practice, it remains unclear whether investors in financial products are driven by ethical motivations, such as environmental considerations, and what factors influence their trust in the non-financial aspects (e.g., green attributes) of these investments. This study investigates the ethical motivations behind investors’ decisions to invest in green bonds using a machine learning-assisted causal inference framework based on data collected on all green and conventional bonds issued worldwide from 2007 to 2022. It also explores the underlying factors contributing to investors’ trust in green bonds by examining four perspectives: the issuer’s environmental performance, the transparency and governance of environmental disclosure related to bonds, and the financing purpose of the bonds. The results indicate that (1) investors are willing to forgo financial gains for environmental causes, with this sacrifice quantified as an 18 basis points (bps) green premium, demonstrating a clear ethical motivation; (2) the credibility of bond information, financing purposes, and issuer’s greenhouse gas emission intensity directly influence investors’ trust in green bonds, while bond information disclosure and the issuer’s environmental (E) scores have only indirect effects; and (3) companies with weaker environmental performance often adopt proactive disclosure or certification policies to bolster investors’ green trust. This study is the first to explore the factors influencing investors’ trust in green bonds and to analyze the overall causal transmission mechanism among these factors using a causal inference framework.

Impact investors are supposed to generate financial returns alongside social and environmental benefits. Increasingly, they must also measure these benefits as a form of performance management to provide robust evidence of impact. However, it is an “open secret” that because of inconsistencies and fragmentation in the applied means of impact measurement, ends are imperfectly met. In this article, the authors probe how and why means–ends decoupling occurs in impact investing in plain sight. They apply a qualitative and interpretative approach, drawing on 135 interviews and 102 documents gathered from impact investors. The authors find that impact measurement is not primarily used for performance management but plays a relational role between stakeholders. They uncover and conceptualize three mechanisms that drive decoupling between the ideal and actual functions of impact measurement, namely impact measurement as: (1) communication, (2) categorization, and (3) construction of the domain. The authors also find an important contingency: decoupling becomes more likely with increasing systemic opacity in an investment field. The authors outline contributions to the organizational decoupling literature and the sociology of quantification, and they show how the problems that arise from means-ends decoupling could be overcome.

Impact investing aims to achieve intentional social impact in addition to financial return. The authors’ systematic literature review of 104 articles finds that the growing academic literature on impact investing is scattered across a variety of disciplines and topics, with inconsistencies in terminology and concepts and a paucity of theoretical explanations and frameworks. To provide an overview of common research areas and findings, the authors integrate the articles on impact investing in nine emerging topics and shed light on inconsistencies in the literature. The analysis reveals one major shortcoming in this research: Despite the fact that impact investing aims to create a measurable societal impact, this impact of impact investing, its raison d’être, is not scrutinized in the literature. The authors argue that investigating the impact of impact investing requires a holistic lens, for which they propose systems theory. They suggest prospective future research avenues which combine socio-economic research approaches (especially longitudinal qualitative studies and experimental methods) with socio-technical methods (especially life cycle analysis) to enable a holistic systems perspective of impact investing.

Unlike traditional investing, where decisions follow a clear financial calculus, it is unclear how and why funders support hybrid ventures. To address this question, the authors analyze the varied priority that investors place on social impact versus financial returns and draw on categories theory to argue that different priority orderings associate with different perceptions of how hybridity aligns with different investment goals. Results show that funders who prioritize financial goals react positively when they perceive a venture exhibits greater hybridity, whereas funders who prioritize social impact do not. The findings contribute to research on impact investing, hybrid organizations, and categories theory.

The authors propose a quantitative framework for assessing the financial impact of any form of impact investing, including socially responsible investing; environmental, social, and governance (ESG) objectives; and other nonfinancial investment criteria. They derive conditions under which impact investing detracts from, improves on, or is neutral to the performance of traditional mean-variance optimal portfolios, which depends on whether the correlations between the impact factor and unobserved excess returns are negative, positive, or zero, respectively. Using Treynor–Black portfolios to maximize the risk-adjusted returns of impact portfolios, the authors derive an explicit and easily computable measure of the financial reward or cost of impact investing as compared with passive index benchmarks. They illustrate their approach with applications to biotech venture philanthropy, a semiconductor research and development consortium, divesting from “sin” stocks, ESG investments, and “meme” stock rallies such as GameStop in 2021.

This paper on sustainable investing reveals that portfolio managers generally rank environmental and social (ES) performance low among value drivers, though most view some ES issues as financially material. Many investors expect good ES performers to deliver positive alpha, often due to correlation with other factors rather than direct value. Both traditional and sustainable fund managers prioritize financial returns due to fiduciary duty, rarely tolerating sacrifices for ES performance. However, ES constraints frequently affect investment decisions, sometimes reducing returns or ES impact. The study finds that differences between traditional and sustainable investors are smaller than commonly believed, with both types incorporating ES into stock selection mainly for financial reasons or due to constraints. The research highlights significant heterogeneity in beliefs about ES performance’s impact on returns, which affects investment behavior. It also notes that few investors support shareholder proposals that negatively impact value, while engagement on ES issues is common and primarily motivated by expected impact on shareholder value. The paper concludes by emphasizing the need to better understand how asset managers reflect asset owners’ ES preferences, given the apparent disconnect between retail investors’ ES concerns and asset managers’ focus on financial returns.

This article examines whether impact investing is more difficult than traditional investing, based on a survey of over 200 impact fund managers. Counterintuitively, the research found that impact investors seeking market-rate returns generally reported their work as no more difficult than traditional investing, while those targeting below-market returns reported higher levels of difficulty. The author suggests this may be because market-rate impact investors tend to view impact as inherently aligned with financial performance, leading them to focus on financial performance metrics. The author argues further that this finding is potentially concerning, as it suggests many market-rate impact investors are not providing additional value beyond traditional investing. The article concludes that impact investing should be more challenging than traditional investing if it’s to fulfill its promise of addressing urgent and neglected social and environmental problems.

This article examines the viability of impact investing through the lens of financial theory and talent development. The author argues that while impact investing inherently limits diversification (which Nobel laureate Harry Markowitz identified as “the only free lunch in investing”), success in impact investing depends primarily on investor skill and expertise in specific sectors. The article explains how impact investments affect both beta (market correlation) and alpha (excess returns from skill), emphasizing that specialized knowledge can offset the limitations of a restricted investment universe. A significant portion of the article focuses on the growing talent pool in impact investing, particularly noting how business schools have evolved to meet increasing student demand for impact investing education. The author uses their experience at Chicago Booth to illustrate how the field has transformed from a niche interest to a mainstream career path, with prestigious institutions now offering formal training and networks like Impact Capital Managers growing from 25 funds with $5 billion in assets to over 100 funds managing $80 billion. The article concludes that while impact investing presents unique challenges, the influx of well-trained professionals will drive its future success.

This article discusses the complex relationship between sustainability, profit, and corporate responsibility. It highlights how the global financial system often prioritizes profitability over environmental and social concerns, leading to various global issues. While some argue that sustainable practices can be financially beneficial for companies, the evidence for this remains mixed. The article critiques the profit-driven approach to sustainability, suggesting that it may overlook deeper systemic issues and justify unsustainable but profitable activities. The piece also touches on the debate surrounding gender diversity in corporate leadership, noting the low representation of women in CEO positions. While some studies show financial benefits from gender diversity, the article questions whether profitability should be the primary motivation for increasing diversity. Ultimately, the article argues that pursuing ethical and sustainable practices solely for financial gain is fundamentally flawed. It calls for a shift in perspective, urging recognition of the intrinsic value of sustainability and equity, rather than viewing them solely through the lens of profitability.