By Samuel Wilson and Diane Sivasubramaniam
As Deborah Berland and Ann Tucker (2019) outline, the ambition to do good through business is not new, but the proliferation of this ambition in impact investing is.
Impact investing, defined as an investment strategy aimed at generating positive returns for both individual portfolios and society at large, is a huge and growing field: currently, more than $1 trillion in “impact” assets are managed by impact investors.
Lawyers play a key role in shaping the contracts that underpin impact investing, helping clients structure and document new legal forms, investment vehicles, and products. What role can social psychology play in facilitating effective processes in impact investing, and in impact-oriented legal practice?
We had the opportunity to explore these questions at a recent conference, “Legal Issues in Social Entrepreneurship and Impact Investing – United States and Beyond,” hosted by the Impact Investing Legal Working Group and the Grunin Center in New York.
There are several ways to approach this research, but the four core characteristics of impact investing outlined by the Global Impact Investment Network provide a useful framework for thinking about how psychology can inform lawyers’ work in the context of impact investing.
1. Intentionality
The first feature is IntentionalityImpact investing is characterized by a deliberate desire to contribute to a measurable social or environmental benefit. In other words, impact investing aims to contribute to the public good.
But while efforts to advance the public interest are laudable, what does the “public interest” actually mean? And what implications must we take into account whenever we seek to act in the public interest in a world where diverse stakeholders share power?
Although the meaning of terms like “public interest” and “common good” seems self-evident, this is not the case. Considering the myriad writings on the public interest from experts in fields ranging from philosophy to psychology, one thing is clear: there is no single, definitive public interest.
Recent work on private conceptions of the public good suggests that public beliefs about the public good consist of three intertwined conceptions of the “benefits” that constitute the public good (outcomes), the process by which the public good is realised (processes), and the people to whom the public good is sought (beneficiaries).As philosopher Hans Surga has observed, normative propositions about the public good vary along all these dimensions.
2. Use evidence and impact data in investment design
The second feature is uS of Evidence and impact data in investment designThis means that impact investments cannot be designed based on intuition alone, but require evidence and data, where available, to drive smart investment design that contributes to the public good.
But how do we use evidence and data? We are not algorithms that objectively evaluate and combine data to make decisions. As humans who make decisions based on evidence and data, we are plagued by biases and blind spots.
For example, consider how hindsight bias can affect the evaluation of a company’s performance: The knowledge that a company met (or did not meet) financial performance targets distorts the evaluation of other data about the company. This knowledge blinds us to the value of the company’s processes and decisions that led to that outcome.
A variety of biases can influence our judgements, including decisions about risk, attributing responsibility for success or failure, judgements about moral value, and even choosing which evidence or data to consider. A key message from social psychology is that we should aim to rely on data in impact investing, but not assume that we can objectively evaluate that evidence.
3. Manage impact performance
The third feature is: Managing Impact PerformanceInvestments should be managed towards the goal of generating measurable social or environmental benefits, including by putting in place feedback loops to communicate performance information to enable other companies in the investment chain to adopt impact-driven management.
Here, impact investing requires a dynamic exchange of information, where stakeholders are given the opportunity to provide input (also known as “voice”) that helps investments produce better outcomes.
Decades of psychological research shows that voice matters: When people feel they have a say in the decision-making process, they judge that process and its outcomes to be more fair and they view the people who run that process more favorably.
In impact investing, voice is often given through community consultation, where people affected by an investment have the opportunity to be consulted about it. But voice is not without pitfalls. Some academics warn of a “false consciousness” – that voice is used to make people happier with outcomes that are actually less equitable.
Where impact investments rely on community consultation or other forms of input, psychologists can contribute to the evidence-based design of these consultation processes to ensure stakeholders are involved in the decision-making process in an effective and ethical way.
4. Contribute to the growth of the industry
The fourth feature relates to the mandate for impact investors. Contributing to the growth of the impact investing industryIt calls on impact investors to contribute to the greater good of the industry by sharing their learnings and allowing others to learn from their experiences what actually contributes to social and environmental good.
What does this mean in the context of legal practice, which has both the traditional goal of profit and the additional goal of delivering social benefit, or which seeks to combine tried and tested good practices and best practices with a combination of existing law and the creation of new legal forms? and Innovative “next” practices.
All this suggests that successful impact investing at a practice level, and its more equitable contribution to the growth of the industry, requires paradoxical and meta-paradoxical leadership (e.g. understanding and leading within the context of public good paradoxes), ambidextrous leadership for innovation (e.g. maintaining the leveraging of existing legislation and the creation of new investment vehicles), and integrative leadership (e.g. facilitating the types of partnerships across organisational, sectoral and/or jurisdictional boundaries needed to advance the public good).
Thus, while not immediately obvious, there are myriad ways in which psychology can help facilitate an effective process of impact investing. Psychology can reveal numerous preferences, biases, and blind spots that influence everything from decisions about risk to judgments about moral values. Overall, the applications of psychology to impact investing are myriad and relevant to every aspect of this burgeoning field.
Note: A version of this post was presented at “Legal Issues in Social Entrepreneurship and Impact Investing – United States and Beyond,” hosted by the Impact Investing Legal Working Group and the Grunin Center in New York.
