The Best of Both Worlds? Impact Investors and Their Role in the Financial versus Social Performance Debate

Over the last decades, management scholars have tried to examine whether profitability can be achieved with actions that also improve social and environmental performance. More recently, this debate has gained new traction with the emergence of the so-called "impact investors," who not only avoid firms with negative practices, but also actively seek projects with proven metrics of social impact. In other words, they represent a new class of investors where financial and social performance are expected to be harmonized. In this paper we aim to understand how impact investors approach financial and social goals, and the mechanisms used to gauge and reconcile these performance dimensions. Given the still evolving stage of the impact investing industry, we follow a grounded theory approach using data from qualitative interviews and discussions groups with investment funds, social entrepreneurs, non-profit organizations and other actors in the industry. We then contribute with a novel theoretical framework proposing how different types of impact investors and contractual arrangements emerge in two situations: when financial and social goals are naturally aligned ("complements") and when pursuing superior profitability might undermine actions to increase social performance ("substitutes").