Investing with Dual Objectives: An Assessment of the Investment Process of Impact Investors

Live Embla Fjelde Bjerga & Sunniva Tjosås Drønen

Student thesis: Master thesis

Abstract

Impact investing opens up for effectively addressing social and environmental challenges at a greater scale than governments and philanthropists alone can afford. However, there exists a conceptual confusion on the definition with regards to how the dual objectives – social and financial returns – should be approached. Historically, pursuing these two objectives simultaneously has been deemed incompatible. Thus, this thesis aims at exploring how impact investors approach their dual objectives in an investment process. Furthermore, as personal opinions and feelings affect the perception of these objectives, additional challenges to the investment process may arise due to goal misalignment between the investors and entrepreneurs. Therefore, this thesis further analyses how potential challenges that may arise along the investment process can be controlled for or mitigated. By interviewing investors and advisors within the field, we address the above-mentioned challenges. First, we find that impact investors generally emphasise the financial objectives. Furthermore, by utilising the traditional agency theory within the impact investment setting, we find that a thorough pre- screening and due diligence of potential investments is necessary in order to better align goals, and hence, reduce information asymmetries. Moreover, we find that more rigid and contingency-based contracting on impact is optimal to constrain or encourage certain behaviour by the entrepreneur in cases where uncertainties are present. Lastly, we find that in a lack of a proper impact assessment tool, active involvement can be employed to ensure disciplined behaviour by the entrepreneur. Nevertheless, we see that the lack of proper ways to measure social impact is the main source for potential agency problems throughout the whole impact investment process.

EducationsMSc in International Business, (Graduate Programme) Final Thesis
LanguageEnglish
Publication date2019
Number of pages170
SupervisorsPeter Gammeltoft