The ongoing generational transfer of wealth has brought increased attention to impact investing, as millennials and the generations following them consider how they want to approach investing.
“They want to be more creative in their investments. They want their investments to matter, to make some good change in the world,” says Pat Soldano, president of Policy and Taxation Group, an advocacy firm for family office economic and tax issues.
The term “impact investing” can encompass a range of ways to use money to do good. At one end of the spectrum are investments that express the family’s values and generate returns comparable to any other investment. At the other end is philanthropy: giving away money with no expectation of a financial return.
In the middle are traditional investments that may generate lower-than-average returns. Other opportunities may blur the lines between investing and philanthropy: A foundation may make a loan to a small business and charge a below-market rate interest rate.
“The levers of change in the world include philanthropy, and they also include the investment world,” says Susan Wells Jenevein, managing director of philanthropy and family engagement for Tolleson Wealth Management.
There are also different ways to approach using an investment to express values. This can mean simply screening a stock portfolio to ensure it does not include investments that the family finds objectionable. It can also mean making direct investments in companies that advance the family’s values.
For Celine Fitzgerald, investing with Impact Engine, an impact asset manager that invests in economic opportunity, environmental sustainability and health equity-focused companies, has offered a window into investments in areas such as sustainable packaging and learning tools for low-income children.
“Investing in things that give back to the community in a positive way — I think that is a selling point for NextGens,” says Fitzgerald, who is president of the Fitzgerald Family Foundation, an analyst with Webb & O’Neill Capital and a legacy consultant with Legacy Capitals. “A big thing for me is that a majority of these companies are led by women or CEOs of color.”
A way to promote intergenerational communication
Although impact investing has attracted investors of all ages, it’s not uncommon for it to be a stronger draw for the rising generation than for their parents and grandparents.
“A leadership generation person may say, ‘I’m not here to invest to lose money – I’m here to maximize my returns. If I want to give to a cause, I’ll do that in my politics and in my philanthropy,’” Jenevein says. “What I hear in the rising generation is, ‘I want to understand the impact that our assets are having in the world. I want to do more than just not do harm – I want to make the world a better place.’”
This creates an opportunity to improve family communication and education.
“We have found impact investing to be a wonderful tool to connect generations that may at first glance look like they have different values and different interests,” Jenevein says. “The leadership generation has deeply defined and held values, as does the rising generation. While it can look at first glance like they’re not shared, if you talk long enough, you can find areas of agreement.”
In one case, for example, a father was uninterested in environmental causes but was interested in faith-based work in Africa. His son preferred environmental investments.
“They had an open communication about it, but it appeared to be a misalignment of values,” Jenevein says. Then they found an investment in a company working on water conservation in Africa that met both their goals. “They were surprised to find themselves in the same place, where both of their value sets are being served and the investment is sound.”
Educational opportunities
Impact investing can also be a good way for rising generation members to learn about investing more generally.
“We are seeing really increased engagement when you can talk about impact alongside of investing,” Jenevein says. “It allows the conversation to flow into more traditional forms of investment – you can contrast it with public securities and fixed-income securities. Now you’re doing financial education in a way that makes them pay attention.”
This has been the case for Fitzgerald, who has learned a lot from investing in Impact Engine’s funds.
“In the future, if people pitch me, I’ve gone through the process and know what to look for,” Fitzgerald says.
She has also seen first-hand that with long-term investments, results do not happen overnight.
“It’s like watching paint dry,” Fitzgerald says. “It could be a 10-year process, and we’re still in the early stages.”
Effective impact investing — like the family communication and education that it can unlock — requires time and effort.
“There’s a lot of nuance,” says Rebecca Meyer, a partner at Relative Solutions.. “For people who want to do it more seriously, it requires an investment in learning – what are you actually trying to do? What will it take to get that done? What are the limits of possibilities? What are the tools?”
When done well, though, the rewards of impact investing can go beyond the financial returns, Meyer says: “It’s a very rich area for learning and for conversations in families, in terms of testing and clarifying values and understanding that what you invest your money in is an action that has implications – the choices you make about that reflect your priorities.”
