NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

There has long been a debate about whether impact investing must involve a tradeoff between social or environmental impact and financial returns.

The answer to that question is nuanced: There is no necessary tradeoff, but committed catalytic investors often do trade returns for impact. Put another way, there are some investments that are both high-impact and high-return, but there are many more investment opportunities (many of which remain underfunded) that are high-impact but require catalytic capital.

But the most recent data in Toniic’s T100 Project — a longitudinal study of the practices and preferences of some of the most committed impact investors in the world, which we have been running for the past 10 years — reveals something that has not been so much discussed: the clear inverse correlation between impact and liquidity. Our data shows convincingly that investors need to accept illiquidity for greater impact. And among the private wealth demographic (High Net Wealth Individuals, family offices and foundations) that Toniic works with, there is plenty of appetite for that tradeoff.

In a T100 Project report released publicly on April 14, 2025, titled “Cruising Altitude,” we find lots of evidence that impact investors are willing to allocate more capital to illiquid investments than their traditional counterparts, in order to achieve positive social or environmental impact.

Enterprise Impact and Liquidity

The chart on the right depicts the assessment of investors in the study of the “enterprise impact” of the businesses in their portfolios, based on liquidity. If you aren’t familiar with the term enterprise impact, you might know it as the “ABC” classification system developed by the Impact Management Project, now stewarded by Impact Frontiers. In this system, enterprises are classified into four categories, based on an assessment of whether they’re acting to “Avoid Harm,” “Benefit People and the Planet” or “Contribute to Solutions” (the “ABC” in the original name). If they make no efforts to mitigate negative social or environmental impacts, they’re placed in a fourth category: “Does or May Cause Harm.”

The deepest expression of enterprise impact in this schema is “Contribute to Solutions” — the purple color in the chart. The weakest is “Does/May Cause Harm” — the grey color. Each row in the chart represents how long the invested money is locked up in the investment. The chart shows that the longer the lockup (i.e., the lower the liquidity), the greater the impact (as assessed by the investor).

“Contribute to Solutions” does not decrease in lockstep with every increase in liquidity, nor does “Does or May Cause Harm” increase with every decrease in liquidity.  But, taken as a whole, the progression is clear: The lesser the liquidity, the greater the potential impact.

This finding helps to explain why impact investors tend to overweight the private equity asset class, relative to traditional investors, despite its inherent liquidity constraints. Impact-motivated investors appear undeterred by the reduced liquidity typically associated with this asset class, suggesting that the potential for greater impact outweighs traditional liquidity concerns.

It appears that many portfolios in this dataset have been built to maximise their impact with less liquid asset classes, and use the more liquid asset classes to meet the risk-adjusted return and liquidity needs of the overall portfolio.

In some ways, this is quite unsurprising: The call for “patient capital” has long echoed in the halls of impact investors. It may even point to deeper challenges embedded in the dominant financial system — i.e., that investments designed for quick-wins, and enterprises that are managed to achieve quarterly results, are inherently less able to deliver positive social or environmental impact.

But this finding can also be seen as pointing to unmet needs in investing products for committed impact investors. This demographic desires impactful investments in every asset class and at every liquidity duration, but struggles to find this impact potential in more liquid investments. It is particularly difficult to find strong impact in cash and similarly highly liquid asset classes. This suggests unmet latent demand for such investment products — if they can be created in such a way that they maintain authenticity of impact.

Investor Contribution and Liquidity

The other dimension of impact in the Impact Management Project framework is “investor contribution.” It refers to the ways investors contribute to social and environmental impact through the assets they invest in. Some investments may demonstrate values alignment but not much investor contribution, because the investors are not causing impacts to happen that otherwise would not. In other cases, the investor contribution is clearer: for instance, if the enterprise would not be operating if it lacked the investor’s capital. In order to claim that the investor is causing something good to happen that otherwise would not, there must be an identified mechanism of investor contribution beyond merely signaling that impact matters.

Under the investor contribution framework, investor contribution mechanisms consist of an investor’s efforts to: signal that impact matters, engage with the enterprise in order to make it more positively impactful, grow new or undersupplied capital markets, or provide catalytic (sub-commercial) capital — or some combination of these actions that enable the enterprise to achieve impact that otherwise would not be possible. As with the ABCs, these investor contributions vary in depth of impact, with signaling as the lightest form of investor contribution and catalytic capital as the deepest, and with differences of depth within categories as well.

The data on investor contribution (depicted in the chart on the right) paints a slightly less clear picture about the relationship with liquidity than the data on enterprise impact, but overall it still suggests that greater investor contribution correlates with longer investment lockups (an inverse correlation with liquidity).

For example, more than 30% of investments committed for less than one year have “traditional” investor contribution (i.e., none), whereas less than 10% of investments with more than a year are in this category. Conversely, the deeper forms of investor contribution (from light pink to deep maroon in the chart) represent more than half of the investments locked up for more than one year, but less than 20% of the investments locked up for 90 days or less.

This, too, is as expected: Positive impact, and especially meaningful engagement, takes patience. Furthermore, investments aimed at growing undersupplied capital markets are limited to primary issuances (e.g., initial and secondary public offerings of public companies, and direct investments in private companies, both debt and equity), rather than investments in securities in the secondary market (e.g., purchasing from a current investor on a stock exchange, or purchasing outstanding bonds). Since primary issuances by public companies are primarily subscribed by institutional investors, it is difficult for private (non-institutional) investors to grow undersupplied capital markets in public equities.

Overall, these findings document a willingness among investors in the T100 demographic (i.e., committed impact investing private wealth holders) to lock up their money for longer to achieve greater investor contribution.

We intuit from this data that, in more liquid asset classes, those reaching for maximum impact must often perform extra work to achieve investor contribution. Their efforts might generate impact at a greater scale and magnitude than enterprise impact, but this impact is also likely harder to achieve.

Conclusion

For impact investors, the decision of how to balance liquidity and impact is a complex one. There is no one-size-fits-all answer, and the optimal approach will vary depending on each investor’s individual circumstances and objectives. The latest T100 Project data shows a broad consensus, however, that those whose constraints and liquidity needs permit longer lockups find greater opportunities for net positive social and environmental impact.

The T100 Project is a groundbreaking study. It has provided privileged access to aggregated and anonymised details from the portfolios of committed impact investors for a decade. The latest data set has data from more than 100 distinct portfolios, some of which have been in the study since its inception. This has provided the opportunity for both trend analysis and “state of the field” insights.

The forthcoming report reveals many nuanced dimensions of the practices of private impact investors, including how they approach enterprise impact and investor contribution, how they allocate across the UN Sustainable Development Goals, where investors focus their geography of impact, how impact investors approach asset class allocations, and what they seek in terms of expected financial returns (in addition to the findings on liquidity summarised here). You can access the full report on April 14, 2025 at this link, in which you will also find a description of the study’s methodology and limitations. For questions about Toniic or the T100 Project, contact us at T100@toniic.com.

Adam Bendell is President of Toniic.

Image credit: Mikhail Nilov