How the Rich Make a Difference With Impact Investing

Facebook CEO Mark Zuckerberg and his wife, Priscilla Chan, recently made news when they pledged to donate 99% of their Facebook shares, worth some $44 billion at current prices, to charitable causes during their lifetimes. But lost in the headlines was that they intend to invest much of the money in the meantime. In a letter published on Facebook, the couple announced that they plan to advance social and environmental causes, such as elementary-school education and clean energy, with their investments.

Zuckerberg and Chan are part of a growing number of “impact” investors—individuals who expect their investments to have a positive social or environmental effect as well as deliver a financial return. It’s not a new concept. People have been able to use mutual funds to invest according to their conscience for years. But wealthy individuals (those with more than $1 million to invest) have had access to stakes in projects or privately held companies that offer a potentially greater social return—the chance to make an impact, in other words.

Whether socially responsible investing requires sacrificing financial returns in the name of doing good is debatable. But most impact investors want to make money and help the world, says Jonathan Firestein, managing director of Ascent Private Capital Management, an investment firm for U.S. Bank clients with $75 million or more in assets. In a survey conducted by J.P. Morgan and the Global Impact Investing Network, 55% of impact investors said that earning a market-rate return in their portfolio was a priority. Another 27% sought what Firestein calls a “balanced objective,” a moderate return coupled with an impact in targeted areas, such as solar power. The remaining 18% are “impact first” investors, who are willing to accept minimal returns (enough to preserve their wealth) but seek maximum impact.

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The world of impact investments comes with a wide range of risk-and-return profiles, says Anna Snider, head of equity due diligence at Merrill Lynch Wealth Management. For instance, an investment in alternative energy has a much greater chance of delivering good returns than one that goes toward combating AIDS in Africa, an issue with little potential for profit. The latter is what Snider calls an “aspirational” investment—one that is less about profit than it is about making a lasting impact.

For many impact-first investors, investments such as these complement or substitute for philanthropy. And for many of Firestein’s clients, impact investing is changing the classic Gospel of Wealth model, created by Andrew Carnegie. “The traditional model says to accumulate wealth while you’re alive, and then the money you leave behind can be used to make an impact,” Firestein says. “As an impact investor, you can exert influence while you’re still alive and, with earnings from your investments, potentially increase the pool of capital you direct.”