Investors can not only make money, but also benefit society. But a study we published in the Journal of Business Ethics found that few impact investors pay attention to whether their strategies are having a positive impact.

Impact investing aims to generate financial returns while creating positive social or environmental outcomes. But having the intention to do good by choosing the right assets does not guarantee that you will do so. We call this uncertainty “impact risk.”

After conducting 124 interviews with impact investors and conducting an experiment with 435 participants, we found that many impact investors do not directly assess impact risk when evaluating their investment options, but instead perceive them as will succeed in making a positive impact on the world.

In other words, they believe that certain businesses, such as solar companies or microfinance programs, are inherently good for society. This “win-win” mentality leads investors to focus primarily on financial performance rather than assessing whether their investments have a social or environmental impact. Often, this means investors cannot determine whether a particular investment performs better than others on social metrics.

We find that this mindset prevents investors from seeking information that might indicate deficiencies in the social performance of investments.

why this is important

According to the Global Impact Investing Network, impact investing is a rapidly growing financial field. By the end of 2024, the scale of global impact investing will exceed US$1.5 trillion. The industry attracts a range of investors, including wealthy individuals, banks, development finance institutions, corporations, foundations, pension funds and religious institutions.

Nearly 75% of young individual investors, including Millennials and Generation Z, prioritize investing that aligns with their social values.

By 2045, much of the $84 trillion in wealth expected to be inherited from seniors will flow to Millennials and other younger Americans in what's known as the "Great Wealth Shift," according to Goldman Sachs, Morgan Stanley and Financial institutions such as Vanguard Group are working harder to attract impact investors. They now offer a range of investment options that promise social impact and financial performance.

However, we found that good intentions alone may not lead to lasting social impact. Without robust risk assessment and ongoing evaluation of whether investments are achieving expected results, impact investing may fall short of its objectives.

Don't know what yet

Many questions remain about how investors can effectively assess impact risk without imposing potentially onerous reporting requirements for themselves or their clients. Some of our related research shows that financial managers are concerned about this potential burden.

However, new regulations are still likely to emerge. For example, proposed Securities and Exchange Commission rules would require public companies in the United States to disclose risks related to climate change. However, implementation of the rule has been delayed — perhaps indefinitely — by pending litigation.

what happens next

Our next phase of research will build on these findings and examine how impact investors seek out and respond to evidence of underperformance. Together with other colleagues at the University of Virginia, we are currently investigating whether moral clarity—the degree of confidence people have in their ethical decisions—affects investor behavior.

By continuing to examine the link between impact and financial performance, we aim to contribute to a broader conversation in academia and practice about how to ensure investments truly benefit people and the planet.

A research profile is a short introduction to interesting academic work.