Good stories can obscure material facts by focusing investors on possibilities.
Secondly, fund managers, whether traditional commercial or impact managers, are themselves entrepreneurs, and like all entrepreneurs require a certain degree of irrational optimism.
Optimism is the fuel that feeds their belief that the next investment they make will birth a unicorn, or the upcoming investor pitch will hook the big fish.
There is an inherent temptation, then, to embellish their successes, to keep the wheels of their enterprise turning. But here is where impact managers distinguish themselves: they carry an extra incentive, an added layer of conviction.
They operate with the profound belief that their work can enact transformative change, not for their personal gain, but for those less fortunate and for the generations yet to come.
Finally, many impact managers emerge from non-traditional backgrounds, from NGOs to varied roles within financial services, often lacking hands-on fiduciary experience.
What can investors do about this? Firstly, ensuring that the impact narrative does not change the breadth or depth of diligence they do on managers. If it does not stack up commercially it will not have a sustainable impact, no matter how compelling the story.
Secondly, in order to ensure both the integrity of their investments and the authenticity of the impact, investors need to be willing to challenge their impact managers. This can be hard when these managers are cloaked in a halo of virtue.
Thirdly, building on Aristotle's notion that ethical behaviour is honed through practice, developing a fiduciary awareness requires time and experience.
Investing in impact managers with senior decision-makers, who have wrestled with fiduciary dilemmas and emerged with a refined sense of responsibility, can go a long way in reducing this risk.
In impact investing, some of the stories may sound too good to be true: earning commercial risk-adjusting returns while curing diseases, constructing affordable housing, or harnessing clean energy. And the remarkable thing? A good deal of these stories are rooted in reality.
Yet, for these endeavours to succeed, investors will need to harbour a profound confidence in the storytellers.
Jim Roth is founder and chief executive of Zamo Capital
