Impact investing has become increasingly common in recent years as modern investors look to couple the search for high returns with a desire to promote social well-being. People have come to see their investments as an extension of their individual selves rather than a separate business venture, and so they want their investment choices to reflect their personal ethics. This of course requires a significant adjustment to traditional investment strategies, with much more than the bottom line now in play. But does impact investing significantly cut down on the potential for high returns? Are making a profit and having a social impact mutually exclusive? Research suggests that, contrary to popular belief, above market-average returns can be expected with impact investments.

Traditional investing practice calls for analyzing a potential investment by calculating it’s risk and potential for returns. In impact investing, the desire of social beneficence is added to this equation, complicating it considerably. Some investors have said that the addition of this third parameter could only ever result in diminished returns or increased risk for any given investment, because the consideration of social impact will force a deviation from what would otherwise be the optimal investment plan. Others, however, insist that there are places in the market where the philanthropic value of an investment can be taken into account among otherwise optimal investments.

A 2019 study sought to examine how the priorities of investors impacted their returns. Investors were divided into four categories: “financial-only” investors, who worried about nothing beyond their monetary returns, “impact-only” investors, who worried only about social beneficence, “financial first,” investors, who worried about both returns and impact but prioritized returns, and “impact-first” investors, who worried about both finance and impact but prioritized impact. The results of the study showed that most investments in the portfolios under all four categories gave returns above the market rate, dispelling the myth that impact investment means sacrificing the prospects of healthy returns.

The study also showed that , while financial-only investors had better returns than the financial-first and impact-first counterparts, the differences were not as large as you might have imagined. This furthers the argument that impact investing is a sound strategy for socially-conscious individuals who still desire returns.

The past decades have seen major shifts in the worlds of investment and philanthropy, with the impact investing trend bringing those two worlds closer together. Traditionally, investors sought to maximize profits while philanthropists made donations. Now, the ranks of the socially-conscious with capital are starting to invest in companies with the stated intention of forwarding their goals. Philanthropists must now decide if the best way to support a charitable organization is through a donation (as in traditional philanthropy) or through investment (in the spirit of the new impact investment phenomenon).

There are several factors philanthropists should consider while deciding between a donation/grant and an investment in a particular organization. First, they should determine whether the cause merits a long-term commitment. If a philanthropist is sure that an organization will always need and warrant their financial support, then a grant is appropriate. If, on the other hand, the organization might soon no longer need funding or match the donor’s interests, then an investment is a better strategy because it can be revoked at any time.

Philanthropists should also consider whether an organization’s profitability could enhance its social function. If greater profits would result in greater social beneficence, then an investment might be a good option to help the organization boost its bottom line. Again, the ability to revoke capital and allocate it to another organization is a benefit of investment over donations; if the organization fails to use its profits for the socially-impactful purposes the philanthropist had in mind, then the capital can be taken back and set to another purpose.

This revocability of capital is crucial to impact investors because it gives them the ability to “recycle” their funds. Capital can be invested in one organization and then, once the capital is no longer needed or the organization is no longer serving the same social function as before, that same capital can then be revoked and put to good in another organization.

Investment also gives philanthropists a greater say in the management of organizations, because they have become part-owners. This means they can take an active role in promoting profitability that can then be requisitioned for greater social impact. This ultimate results in a greater societal impact.