Why social impact investing needs a radical rethink for true change
Guest post by Til Klein, Founding Partner at identity.vc.
Guest post by Til Klein, Founding Partner at identity.vc. | Originally published on Linkedin.
Everyone is talking about ESG investment. But let’s be honest: most of the excitement is focused on the “E”—the environment. Billions of dollars are flowing into climate tech, clean energy, and sustainability initiatives, creating a tidal wave of innovation. Meanwhile, the “S” for social impact remains in the shadows, struggling to gain momentum.
But I’m not talking about charitable causes or philanthropic efforts. I’m talking about economically motivated investments aimed at driving real social change. Social impact, in this context, is about creating fair representation for minorities and equal opportunities for disadvantaged groups. It’s about ensuring that women, LGBTQ+ individuals, immigrants, and people with disabilities have the same opportunities in the economy as everyone else.
Yet, despite the urgency and potential for transformation, social impact investing lags far behind green investing. So why isn’t social investing taking off?
The Flawed Theory of Change
One major reason is the flawed theory of change that guides most social impact investors. The prevailing approach is to invest only in companies whose core business is directly focused on social issues. For example, these might be companies that address specific health disparities for minorities, or platforms that help underrepresented groups access the labor or financial markets. These ventures are important, and their work is undeniably worthy of support.
But there’s a limit to how far these companies can go. These businesses often scale slowly, constrained by their niche focus, and while they address symptoms of inequality, they rarely tackle the underlying structural problems that perpetuate it. As a result, their economic attractiveness is limited, and so is their overall social impact.
The Real Leverage Lies Elsewhere
If social impact investors want to create both substantial social change and achieve strong returns, they need to shift their focus. The real leverage lies in supporting underrepresented and disadvantaged groups within the mainstream economy.
Instead of restricting investment to businesses that directly focus on social issues, investors should back companies with diverse leadership teams, invest in founders from underrepresented backgrounds, and support organizations that integrate diversity into their operations. This approach creates a win-win: it is not only economically attractive but also drives meaningful, systemic change.
Why This Approach Works
Studies consistently show that diverse teams perform better. Research has found that companies with greater gender, ethnic, and racial diversity in their leadership teams are more likely to outperform their peers financially. Investing in diversity is not just the right thing to do—it’s a smart business decision.
Supporting diverse founders and teams doesn’t just help the individuals involved. It creates ripple effects throughout society. By ensuring that underrepresented and disadvantaged groups are fairly represented in leadership positions and mainstream businesses, we address the root causes of inequality. These investments can shift industries, influence corporate cultures, and create broader opportunities for the next generation of entrepreneurs and workers.
The Future of Social Impact Investing
To unlock this potential, social impact investors need to rethink their theory of change. It’s not enough to focus on niche solutions or businesses that operate on the fringes of the economy. The real transformation comes from making diversity and inclusion a core part of investment decisions across all sectors.
Imagine a world where social impact is not confined to niche projects but is integrated into the DNA of every business. A world where diverse leadership is the norm, and where underrepresented founders have equal access to capital and resources. This is the future we should be investing in—not only because it’s the right thing to do but because it makes good economic sense.
The Breakthrough
For social impact investing to truly take off, we need to expand the scope of what social change looks like. Investors must realize that supporting diversity in the mainstream economy holds the greatest potential for both financial returns and lasting social impact. By shifting their theory of change, social impact investors can create a broader, more inclusive economy that benefits everyone.
