Hybridizing Investors: Designing Investment Organizations for Social Impact

Abstract: Sustainable finance aspires to align capital markets with sustainability goals, yet remains criticized for its limited social impact. Prior research has largely examined investors’ interactions with firms, overlooking the organizational design of the investment intermediaries that channel most financial capital. This study opens the “black box” of investment organizations by examining how asset owners and asset managers jointly design them to pursue both financial and social objectives. Building on a 16-month ethnography of a private equity impact fund complemented by interviews and archival data, we trace how these actors negotiate and stabilize the fund’s organizational architecture (its value-creation objectives, resources, and governance and control structures) before it becomes active on the market. We identify three interrelated organizational mechanisms. First, locking the organizational architecture ex-ante mitigates agency costs and shapes the asset manager’s subsequent behavior. Second, building a social impact ambition leads to hybridizing this architecture by coherently integrating financial and social logics. Third, the resulting configuration exerts a framing effect on investment and monitoring practices, channeling attention and decision-making toward aligned financial and environmental goals. By theorizing these mechanisms, the study builds the organizational foundations of both agency capitalism and sustainable finance. It conceptualizes sustainable finance as an organizational design problem under hybridity constraints, showing that due to financial intermediation, the social impact potential of sustainable finance is determined upstream in the investment chain (through the design of investment organizations) rather than downstream in the financial markets.