Essec Business School

With Anne-Claire Pache

Have you heard of impact investing? It’s a hybrid practice, an innovative blend of philanthropy and finance. Our reactions to this practice are shaped by our personal and professional histories, and how we view the related rules, norms and values. We all react differently when we encounter practices that blend these rules, norms and values in different ways: some people accept hybridity, some people reject it, and others ignore it altogether. Until now, it hasn’t been clear why these different reactions occur. Professors Arthur Gautier and Anne-Claire Pache of ESSEC Business School along with Filipe Santos (Católica Lisbon School of Business and Economics, Portugal) explored this question in a recent paper published in Organization Studies. They found that our personal connection to institutions shapes how we react to hybrid practices. In particular, the researchers found that our familiarity with institutional logics (here, philanthropy and finance) plays a key role in how we perceive and if we adopt hybrid practices like impact investing. Contrary to what was previously thought, being a novice (having no familiarity) or, on the contrary, being very attached to institutional logic represents an obstacle to the adoption of hybrid practices, whereas intermediate familiarity proves to be much more conducive. 

The rise of hybrid practices

When different classic practices are combined (here, donations and investments), it can be surprising, since we aren’t used to seeing that combination. Reactions vary from one person to another, influenced by how they learned about the practice and their life experiences. People may ignore, reject, or adopt hybrid practices after learning about them. For example, someone who doesn’t know much about philanthropy or finance is likely to ignore impact investing as a hybrid practice. On the other hand, someone who knows both well will evaluate the hybrid practice by comparing it with each individual practice. Based on how familiar they are with the associated logic (philanthropy or finance), the person will positively or negatively evaluate the hybrid practice.

Exploring reactions to impact investing

To address the lack of research on the subject, the researchers led a qualitative study involving 14 “high-net-worth” individuals, meaning those with liquid assets from one to 20 million dollars. They explored how participants reacted to impact investing, a hybrid practice combining two different logics:

• A philanthropy logic based on unconditional donations to help others

• A financial logic anchored in maximizing profits and using different forms of debt and investment as key practices 

Impact investing blends the two, and involves accepting that the anticipated financial results are likely below market value in exchange for positive social impact. 

“Life stories” to understand how people relate to logics 

The researchers conducted a series of biographical interviews with the participants in 2015, 2017 and 2018, exploring various themes: childhood, education, religion and spirituality, civic life, political philosophy, career, investment experience, charitable giving, and impact investing. These interviews revealed that people’s relationships with financial and philanthropic logics significantly influence their perspective and practice (or non-practice) of impact investing.

Evaluating the level of familiarity with financial and philanthropic logics

Next, the researchers coded individuals' adherence to each logic, as characterized by Pache and Santos (2013) through three dimensions: 'availability' (knowledge of a given logic), 'accessibility' (how easily the logic comes to mind in daily life), and 'activation' (the degree to which knowledge of the logic is used in social interactions). Novices have virtually no knowledge of a logic due to a lack of exposure and prior socialization; familiar individuals have a good knowledge of the logic based on their experience, but this knowledge is moderately accessible and activated; identified individuals also have significant experience but have developed a very strong connection with the logic, feeling emotionally and ideologically invested in it.

Drawing parallels between hybridity and familiar concepts

The researchers discovered common patterns in the biographies of the 14 individuals interviewed: they had all practiced financial investment and charitable giving separately before discovering the hybrid practice of impact investing. When they encountered it, they made 'sense' of this hybrid practice through the same process involving three interconnected steps, as revealed by Karl Weick (1995). First, the novelty and ambiguity of this hybrid practice triggered the sensemaking process. Then, the individuals interpreted impact investing by comparing it either as an alternative form of investment or as an alternative to traditional giving. Finally, they took a stance by either ignoring, rejecting, or adopting impact investing.

Explaining the highly contrasting reactions responses to impact investing

Of the 14 cases studied, only one ignored impact investing entirely, while seven rejected it, keeping all their charitable and investment activities strictly separate. However, the other six were willing to adopt or had already adopted impact investing. Interestingly, age, gender, and wealth levels did not vary between those who adopted impact investing and those who did not. Monique had a novice understanding of financial logic, so she did not understand what impact investing was, leading her to simply ignore it. In contrast, Valérie and Alfred, who also had a limited understanding of impact investing, were nevertheless familiar with both philanthropy and finance, acquired through their studies and careers, which enabled them to grasp impact investing after learning about it. This means that being a novice in at least one of the combined logics can hinder the evaluation process of a hybrid practice. However, the common factor among all who adopted impact investing was their familiarity with the logic associated with the reference practice, be it giving or investing. This familiarity allowed them  to recognize impact investing and evaluate it positively, remaining open to eventually adopting it. And, unlike identified individuals, they were able to see the value of hybridity because they were not strongly attached to either the financial or philanthropic logic.

Key takeaways

In a complex world, understanding individuals' reactions to hybrid practices is crucial as these practices are evolving and influencing our choices. Arthur Gautier, Anne-Claire Pache, and Filipe Santos demonstrated through this study that comparison with traditional practices of giving and investing, and the way individuals construct their relationship with philanthropic and financial logics, influence their decisions towards impact investing. Familiarity with a logic facilitates the adoption of hybrid practices, while lack of experience or strong adherence to a logic can hinder them. These findings enrich the literature on institutional theory and sensemaking. Finally, this opens the door to other approaches to the subject that will complement this innovative study.

Article written with Eva Blumen, former ESSEC Knowledge monitor and now a project manager at SeaOrbiter

Reference

Gautier, A., Pache, A.C. et Santos, F.M.S.D. (2023). Making sense of hybrid practices: The role of individual adherence to institutional logics in impact investing. Organization Studies, 44(9), 1385-1412.