I agree that markets are inefficient, but believe that the inefficiency results in opportunities that are both worse than average and better than average. Since I suspect most investors under-value the social impact, this would result in impact investments that are more attractive than average to someone who does value the impact as well as the return.
Generally when was looking to invest, I looked for options that I expected to outperform market average at a set risk level, and I didn’t assess social utility in that calculation (assuming I could donate the return more effectively, as you suggest). I’m not sure if this logically follows, but if my choice is between effective charity and impact investment, generally an effective charity would do more good. But if I’m considering my retirement fund, I believe the right impact investment could be better than a comparable equity investment—I just need to remember to include the social utility in my valuation.
Unless you assign relatively high priority to the cause that is addressed by the company, I think it’s appropriate to suppose that other impact investors are over-valuing the social impact. Also, since other impact investors don’t think about counterfactuals, they are likely to greatly overestimate the social impact. They may think that when they invest $1000 in a different company, they are actually making that company $1000 richer on balance… when in reality it is only $100 or $10 or $1 richer in the long run, due to market efficiency. I don’t think markets are generally inefficient, just a bit, sometimes, it really depends on how you define it.