Investing for Impact: The Dual Objective Dilemma

Impact investing as a nascent investment class seeking to solve the greatest challenges of our time has gained the interest of academics and practitioners over recent years. However, there exists an apparent lack of rigorous empirical research on whether it fulfills its dual objective. Studying the performance of 65 impact investment funds, I show that in the quest to simultaneously deliver financial returns and social or environmental impact, impact funds reliably underperform conventional private equity investment vehicles by -6.27 percentage points ex-post as measured by net IRR after matching and adjusting for key fund characteristics. The results obtained in this paper using matching approaches are robust and relatively insensitive to a potential hidden bias, providing compelling evidence there exists a dual objective dilemma when investing for impact. My findings highlight a need for further research on how to assess performance on the impact and financial dimensions, the drivers behind impact fund performance and the broader understanding of what constitutes impact investing