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Meeting the challenge of impact investing: how can contracting practices secure social impact without sacrificing performance?

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  • Madeleine Evans

Abstract

Impact investors seek financial return and positive economic, social or environmental impact. While certain segments of the impact investing industry see strong returns and high positive impact as conflicting objectives, others argue that strong performance across both objectives can be simultaneously achieved. Despite the importance of this question to the industry, no widely accepted framework exists that enables impact investors to determine whether and how they will be able to invest without a trade-off. This article draws on contract theory and the analysis of incentives in multitask principal-agent relationships in an attempt to fill the void. For impact investors, this article pioneers a theoretical framework for the discussion of strategy, offering a first set of hypotheses that can be elaborated through further theoretical work and tested against actual experience. Within contract theory, this article fits most closely alongside the applied multitask literature concerned with an agent assigned to a financial and an environmental task (Sinclair-Desgagné, B., and H. L. Gabel. 1997. "Environmental Auditing in Management Systems and Public Policy." Journal of Environmental Economics and Management 33 (3): 331-346; Lothe, S., I. Myrtveit, and T. Trapani. 1999. "Compensation Systems for Improving Environmental Performance." Business Strategy and the Environment 8 (6): 313-321; Lothe, S., and I. Myrtveit. 2003. "Compensation Systems for Green Strategy Implementation: Parametric and Non-Parametric Approaches." Business Strategy and the Environment 12 (3): 191-203), while the theory referenced within bridges models from Holmstrom and Milgrom (1991. "Multitask Principal-Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design." Journal of Law, Economics, & Organization 7: 24-52), Feltham and Xie (1994. "Performance Measure Congruity and Diversity in Multitask Principal/Agent Relations." The Accounting Review 69 (3): 429-453) and Budde (2007. "Performance Measure Congruity and the Balanced Scorecard." Journal of Accounting Research 45 (3): 515-539).

Suggested Citation

  • Madeleine Evans, 2013. "Meeting the challenge of impact investing: how can contracting practices secure social impact without sacrificing performance?," Journal of Sustainable Finance & Investment, Taylor & Francis Journals, vol. 3(2), pages 138-154, April.
    • Handle: RePEc:taf:jsustf:v:3:y:2013:i:2:p:138-154
    DOI: 10.1080/20430795.2013.776260
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    References listed on IDEAS

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    1. Jean Tirole, 2006. "The Theory of Corporate Finance," Post-Print hal-00173191, HAL.
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    Cited by:

    1. Maria Carolina Rezende de Carvalho Ferreira & Vinicius Amorim Sobreiro & Herbert Kimura & Flavio Luiz de Moraes Barboza, 2016. "A systematic review of literature about finance and sustainability," Journal of Sustainable Finance & Investment, Taylor & Francis Journals, vol. 6(2), pages 112-147, April.
    2. Arena, Marika & Bengo, Irene & Calderini, Mario & Chiodo, Veronica, 2018. "Unlocking finance for social tech start-ups: Is there a new opportunity space?," Technological Forecasting and Social Change, Elsevier, vol. 127(C), pages 154-165.
    3. Thomas André, 2015. "Managing Societal Performance of Impact Investing: An Action Research Inquiry," Working Papers hal-01211725, HAL.
    4. Akhtaruzzaman, Md & Banerjee, Ameet Kumar & Le, Van & Moussa, Faten, 2024. "Hedging precious metals with impact investing," International Review of Economics & Finance, Elsevier, vol. 89(PA), pages 651-664.
    5. Watts, Natasha & Scales, Ivan R., 2020. "Social impact investing, agriculture, and the financialisation of development: Insights from sub-Saharan Africa," World Development, Elsevier, vol. 130(C).
    6. Clarkin John E. & L. Cangioni Carole, 2016. "Impact Investing: A Primer and Review of the Literature," Entrepreneurship Research Journal, De Gruyter, vol. 6(2), pages 135-173, April.
    7. Thomas André, 2015. "Institutionalization Of Impact Investing Through Societal Management Pressures: An Action Research Inquiry," Working Papers hal-01180070, HAL.
    8. Irene Bengo & Alice Borrello & Veronica Chiodo, 2021. "Preserving the Integrity of Social Impact Investing: Towards a Distinctive Implementation Strategy," Sustainability, MDPI, vol. 13(5), pages 1-19, March.
    9. Antonio Minguzzi & Michele Modina & Carmen Gallucci, 2019. "Foundations of Banking Origin and Social Rating Philosophy—A New Proposal for an Evaluation System," Sustainability, MDPI, vol. 11(13), pages 1-16, June.
    10. Chen, Suwen & Harrison, Richard, 2020. "Beyond profit vs. purpose: Transactional-relational practices in impact investing," Journal of Business Venturing Insights, Elsevier, vol. 14(C).

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