Many impact investors assume their investments are delivering real social or environmental outcomes, without adequate evidence or scrutiny of the risks involved, according to a study by two US-based university researchers published in the Journal of Business Ethics.

The report, “Who Loses in Win–Win Investing? A Mixed Methods Study of Impact Risk”, was co-authored by Lauren Kaufmann at the University of Virginia and Helet Botha from the University of Michigan-Dearborn.

“We found that investors often make decisions based on narratives or assumptions—what feels right—rather than on sustained, rigorous evaluation. And that’s a problem, especially when real communities and ecosystems are depending on these investments to deliver results,” said Kaufmann.

Impact investing has grown into a $1.5trn (€1.3trn) industry, according to 2024 statistics by the Global Impact Investing Network (GIIN), with young investors driving demand for investment products that are offering both purpose and profit.

The study’s findings were partly based on 124 interviews about impact risk with impact investors from across the world, including community development financial institutions, development financial institutions, consultants/advisors, funds, private foundations and intermediaries that Kaufmann and Botha conducted in 2020. Twenty-two percent of the interviewees held senior roles including CEO, chief financial officer, partner, managing director and chief investment officer.

Few investors are truly bothered about impact risk once a company passes exclusionary checklists or ESG screening tools early on in the deal cycle, according to the study, which also included an online experiment with 435 participants. Kaufmann and Botha are linking this outcome to so-called ‘win-win’ thinking, or the assumption that profit and social impact naturally go hand in hand, among investors.

A large minority of interviewees said they don’t consider any kinds of impact-related risk at any point during the investment cycle. When asked why, they pointed out their investments simply don’t carry any risk.

“[Risk is] something we probably pay less attention to, than think about positive impact. For example, if we are looking to make an investment into a healthcare company because of the number of patients it’s reaching, we are not at the same time also thinking about its carbon or water footprint in a deep way,” one investor was quoted as saying in the study.

There is a danger in siloed thinking and not considering risk later on in the deal cycle of a company, according to the report. Impact risk that isn’t properly managed could lead to unintended negative outcomes. For example, a clean energy project may in practice end up displacing vulnerable communities, while a healthcare initiative could bypass local needs.

“When investors believe the business model itself guarantees positive outcomes, they’re less likely to ask hard questions about what’s really happening on the ground,” said Kaufmann. This approach makes it harder for investors to notice when something is going wrong, she added.

One investor, who works in developing markets and has a background in water management, told the researchers the impact sector could learn a thing or two from the history of economic development.

“It’s important to have some kind of fact-checking of your own rose-tinted glasses, especially when you’re investing in emerging markets,” the investor said.

The study’s findings should serve as a “wake-up call” for the impact investing industry, and should lead to the adoption of better accountability measures, according to Kaufmann and Botha. Although the GINN and Impact Frontiers both provide measurement frameworks for investors, “these are often underutilised or applied only superficially,” the researchers said.

In fact, the study pointed to recent industry data potentially underreporting impact underperformance. In the GIIN’s two most recent surveys of practicing investors, only between 1% and 2% reported falling short of their impact goals. And over the past seven years, that number hovered between 1% and 3%, according to Kaufmann and Botha.

These figures may be unrealistically low given the complexities of development, health, education, and climate work, the researchers warned.

“There’s a growing concern that impact investing is more comfortable with storytelling than with evidence,” said Kaufmann. “If we want to live up to the promise of this field, we need to get much more serious about understanding what works, what doesn’t, and why.”

With some $84trn (€71.2trn) being transferred from the baby boomer generation to younger investors by 2045, time is of the essence, Kaufmann and Botha said.

They urged investors to treat impact with the same level of scrutiny as financial performance, which includes tracking outcomes over time, engaging with affected communities, and more transparency about successes and failures.