28/04/2026
The Political Economy of Impact Investing: Regulation, Markets, And Societal Value Creation
Ramzi BENKRAIEM
Emmanuelle DUBOCAGE
Over the past decade, social and environmental impact investing has moved from the margins to become a structuring segment of sustainable finance. Impact investing can be defined as an investment strategy that seeks to generate, alongside financial returns, positive, intentional, and measurable social and environmental impact, thereby distinguishing itself from ESG or socially responsible investment approaches through an explicit logic of transformation and action (Forum for Responsible Investment).
The most recent estimates indicate that this market represents approximately $1.57 trillion in assets under management, mobilised by more than 3,900 organisations worldwide. This expansion reflects sustained growth dynamics, with a significant annual increase in assets and a growing participation of institutional actors.
This rise reflects a broader transformation in how investors, entrepreneurs, and policymakers conceptualise the role of capital in contemporary economies. Rather than focusing exclusively on financial returns, impact investing is grounded in a logic of intentionality and measurability, aiming to simultaneously generate financial performance and social and environmental outcomes. In doing so, it contributes to reshaping the normative foundations of finance by questioning the very purpose of capital allocation and its embeddedness within societal dynamics.
Sustainable Finance at A Crossroads
The development of this financial segment remains fragile, particularly in a geopolitical context marked by increasing uncertainty. This is further reinforced by the climate-sceptical stance of the world’s leading economic power, reflected in the rejection of multilateral commitments—notably the withdrawal of the United States from the Paris Agreement—as well as opposition to environmental regulations perceived as constraining.
In Europe, the regulatory architecture surrounding sustainable finance has evolved rapidly in recent years. Initiatives such as the EU Taxonomy, the Corporate Sustainability Reporting Directive (CSRD), and the Corporate Sustainability Due Diligence Directive (CSDDD) have been designed to enhance transparency and limit the risks of greenwashing in financial markets. However, recent developments illustrate the tensions surrounding these reforms. At the end of 2025, European policymakers agreed on measures aimed at simplifying sustainability reporting obligations and due diligence requirements in order to reduce regulatory burdens and improve competitiveness (Consilium).
More specifically, initiatives such as the EU Taxonomy (Regulation (EU) 2020/852 adopted on 18 June 2020), the Corporate Sustainability Reporting Directive (Directive (EU) 2022/2464 of 14 December 2022), and the Corporate Sustainability Due Diligence Directive (formally adopted in 2024) were designed to improve transparency and limit greenwashing risks in financial markets (European Commission, 2020, 2022, 2024). However, recent developments highlight the tensions surrounding these reforms: between October and December 2025, the Council of the European Union and the European Commission launched a simplification agenda aimed at easing reporting and due diligence requirements, in line with objectives of competitiveness and regulatory burden reduction (Council of the European Union, 2025; European Commission, Work Programme 2025–2026).
These adjustments are part of the broader “Omnibus” reforms within the EU sustainable finance agenda. While intended to rationalise existing rules, some critics argue that reducing reporting obligations may weaken transparency and create new uncertainties for investors and firms engaged in sustainability strategies (Clarity AI, 2025). This debate reflects a structural challenge of sustainable finance: balancing the need for regulatory credibility—essential to mitigate greenwashing—with the constraints associated with administrative complexity and economic competitiveness.
Alongside regulatory developments, recent dynamics in international financial markets reveal a different type of tension. While sustainable finance assets under management continue to grow—reaching approximately $3.9 to $4.1 trillion in 2025—this expansion appears increasingly disconnected from investment flows, as it is partly driven by valuation effects rather than new capital inflows (Morgan Stanley, 2025).
Indeed, 2025 marks a significant turning point: sustainable funds recorded net outflows estimated between $60 and $86 billion after several years of positive inflows, while traditional funds continued to attract capital (Morgan Stanley, 2025). This divergence between asset growth and declining flows highlights a growing gap between the strategic positioning of sustainable finance and the actual behavior of investors.
In this context, impact investing occupies a particularly distinctive position. Unlike many ESG strategies, which primarily integrate environmental or social risks into financial analysis, impact investing explicitly aims to finance activities that generate positive and measurable societal outcomes, implying a higher level of intentionality and accountability.
Towards A New Conception of Economic Value
One of the most distinctive features of impact investing lies in its capacity to foster innovation—not only within entrepreneurial ventures but also within finance itself. Because impact investors seek to assess both financial performance and societal outcomes, traditional financial metrics often prove insufficient. This has led to the development of new measurement frameworks designed to capture social value, environmental outcomes, and long-term systemic transformations. Concepts such as Social Return on Investment (SROI), or impact measurement frameworks developed by organisations such as the Global Impact Investing Network, attempt to quantify the broader value created by investments.
However, the challenge remains considerable. Social and environmental impacts are inherently complex, long-term, and often difficult to attribute to a single intervention. Their measurement requires not only methodological innovation but also a shift in how value is conceptualised within contemporary capitalist societies.
Impact Investing and The Rise of Sustainable Entrepreneurship
The growth of impact investing is closely linked to another major development: the emergence of mission-driven entrepreneurship. Across sectors and regions, a new generation of entrepreneurs is developing ventures designed to address societal challenges, whether in clean energy, sustainable agriculture, inclusive healthcare, or digital education.
For these entrepreneurs, access to appropriate financing remains one of the main barriers to growth. Traditional investors may hesitate to support ventures whose financial returns are uncertain or whose impact objectives extend beyond conventional profitability logics. Impact investors can play a critical role in bridging this gap. By combining financial resources, strategic support, and networks, they contribute to scaling enterprises capable of addressing complex social and environmental challenges. In this sense, impact investing contributes to the transformation of entrepreneurial ecosystems. However, this relationship also raises important issues related to potential drifts and governance.
The Growing Risk Of “Impact Washing”
A major drift within impact investing is “impact washing”, whereby some investors adopt the language of impact without fundamentally transforming their investment practices. In a financial landscape already saturated with ESG labels, distinguishing genuine impact strategies from marketing narratives becomes increasingly difficult.
The question of impact measurement thus becomes central to the credibility of the field. Without robust methodologies capable of demonstrating real societal outcomes, impact investing risks losing its distinctive identity. Yet the question remains: how should impact be measured? Qualitative approaches are often best suited to capturing these dimensions, but they present significant limitations for financial decision-making, as they cannot be fully standardised.
Another key issue concerns governance: who determines what constitutes “positive impact”? Traditionally, corporate governance has focused on shareholder value maximisation. Impact investing introduces a different perspective by emphasising the interests of a broader set of stakeholders. Some scholars argue that impact investment funds should integrate the perspectives of beneficiaries and vulnerable stakeholders into investment processes, monitoring practices, and the selection of non-financial indicators. This perspective challenges conventional models of corporate and financial governance and raises fundamental questions regarding representation, accountability, and the distribution of decision-making power within investment ecosystems.
A Field Still in Construction
Impact investing thus occupies a position that is both central and uncertain within contemporary finance. On the one hand, the sector has experienced remarkable growth, mobilising substantial volumes of capital and fostering innovation in finance and entrepreneurship. On the other hand, it faces significant challenges: improving measurement standards, strengthening governance structures, and maintaining credibility in an increasingly politicised environment.
Ultimately, the future of impact investing will depend not only on the scale of capital it is able to mobilise but also on the integrity of the principles that underpin it. If it succeeds, impact investing could contribute to redefining the role of economic value—and, by extension, finance—in addressing the major social and environmental challenges of the twenty-first century. If it fails, it may simply become another episode in the long history of financial innovations that promised profound transformation but ultimately delivered only marginal change. The ongoing debate surrounding sustainable finance suggests that the outcome remains, for now, largely open.
The Authors
Prof. Ramzi Benkraiem is the Head of Research of the Accounting, Management Control, and Economics Department and a Professor at Audencia Business School. He holds a PhD from Toulouse School of Management and a Habilitation to Supervise Research (HDR) from the University of Western Brittany. His research interests mainly lie in the fields of accounting, finance, and economics. He has published numerous articles in both national and international academic journals.
Prof. Emmanuelle Dubocage is a Full Professor at emlyon Business School in the Accounting and Corporate Finance Department. She teaches corporate finance, business plan valuation, and impact investing. She has published extensively in international academic journals and has authored both teaching and research books. Her research interests focus on innovation financing and environmental and social impact investing. She also serves as a member of the Mission Committee of emlyon Business School.
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