Impact investing: where philanthropy meets finance

In a complex world, understanding individuals' reactions to hybrid practices is crucial as these practices are evolving and influencing our choices

By ESSEC Business School

Published: Nov 26, 2024 11:19:22 AM IST

Updated: Nov 26, 2024 11:29:29 AM IST

Our personal connection and familiarity with institutional logics (here, philanthropy and finance) plays a key role in how we perceive and if we adopt hybrid practices like impact investing. Image: Shuttertock

Have you heard of impact investing? It’s a hybrid practice, an innovative blend of philanthropy and finance. Our personal and professional histories shape our reactions to this practice, and how we view the related rules, norms, and values. We all react differently when we encounter practices that blend these rules, norms, and values in different ways: some people accept hybridity, some people reject it, and others ignore it altogether. Until now, it hasn’t been clear why these different reactions occur.

A recent study by professors Arthur Gautier and Anne-Claire Pache of ESSEC Business School, along with Filipe Santos (Católica Lisbon School of Business and Economics, Portugal) sheds light on this topic. They found that our personal connection and familiarity with institutional logics (here, philanthropy and finance) plays a key role in how we perceive and if we adopt hybrid practices like impact investing.

Contrary to what was previously thought, being a novice (having no familiarity) represents an obstacle to the adoption of impact investing, whereas intermediate familiarity proves to be much more conducive.

The rise of hybrid practices

It can be surprising to encounter a combination of different classic practices (here, donations and investments). Reactions vary from one person to another, influenced by how they learned about the practice and their life experiences. After learning about them, people may ignore, reject, or adopt hybrid practices. For example, someone who doesn’t know much about philanthropy or finance is likely to ignore impact investing as a hybrid practice. On the other hand, someone who knows both well will evaluate the hybrid practice by comparing it with each practice. Based on how familiar they are with the associated logic (philanthropy or finance), the person will positively or negatively evaluate the hybrid practice.

Exploring reactions to impact investing

The researchers led a study involving 14 “high-net-worth” individuals. They explored how participants reacted to impact investing, a hybrid practice combining two different logics:

● A philanthropy logic based on unconditional donations to help others

● A financial logic anchored in maximizing profits and using different forms of debt and investment as key practices

Impact investing blends the two, and involves accepting that the anticipated financial results are likely below market value in exchange for positive social impact.

They found that people’s relationships with financial and philanthropic logics significantly influence their perspective and practice (or non-practice) of impact investing.

The importance of familiarity to the adoption of impact investing

Next, the researchers split individuals into three categories:

Novices, who have virtually no knowledge of the logic due to a lack of exposure and prior socialization
Familiar individuals, who have a good knowledge of the logic based on their experience, though this knowledge is only moderately accessible and used in social interactions
Identified individuals, who have significant experience, and have developed a very strong connection with the logic, feeling emotionally and ideologically invested in it

The researchers then discovered common patterns in the biographies of the 14 individuals interviewed: they had all practiced financial investment and charitable giving separately before discovering the hybrid practice of impact investing. When they encountered it, they made 'sense' of impact investing through three interconnected steps. First, the novelty and ambiguity of this hybrid practice triggered their sensemaking process. Then, they interpreted impact investing by comparing it either as an alternative form of investment or as an alternative to traditional giving. Finally, they took a stance by either ignoring, rejecting, or adopting impact investing.

Also read: Now-Gen givers are steering philanthropy into a new era marked by innovation: Neera Nundy

Explaining the highly contrasting responses to impact investing

Of the 14 cases studied, only one ignored impact investing entirely, while seven rejected it, keeping all their charitable and investment activities strictly separate. However, the other six were willing to adopt or had already adopted impact investing.

Interestingly, age, gender, and wealth levels did not vary between those who adopted impact investing and those who did not. Those with a novice understanding of financial logic did not understand what impact investing was and simply ignored it. In contrast, those with a limited understanding of impact investing, but who were familiar with both philanthropy and finance through their studies and careers, were able to grasp impact investing after learning about it.

This means that being a novice in at least one of the combined logics can hinder the evaluation and adoption of a hybrid practice. However, the common factor among all who adopted impact investing was their familiarity with the logic associated with the practice, be it giving or investing. This familiarity allowed them to recognize impact investing and evaluate it positively, remaining open to eventually adopting it. They were able to see the value of hybridity because they were not strongly attached to either the financial or philanthropic logic.

Key takeaways

In a complex world, understanding individuals' reactions to hybrid practices is crucial as these practices are evolving and influencing our choices. Arthur Gautier, Anne-Claire Pache, and Filipe Santos demonstrated through this study that comparison with traditional practices of giving and investing, and the way individuals construct their relationship with philanthropic and financial logics, influence their decisions towards impact investing.

Hybrid practices like impact investing challenge us to rethink established norms. By understanding how we relate to these practices, we can pave the way for more inclusive and innovative solutions.

Anne-Claire Pache is a Professor of Social Innovation and Associate Dean of Strategy and Sustainability at ESSEC Business School.

Arthur Gautier is an Associate Professor of Public and Private Policy at ESSEC Business School.

This article was adapted from ESSEC Knowledge.