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How 'Impact Investing' Can Put a Profitable Spin on Charity

Steve and Jean Case, early adopters of "impact investing." Larry French 2015 Getty Images

One of the earliest investments that Jean Case, the CEO of the Case Foundation, made with a philanthropic purpose came in 2008. That’s when she invested in three crowdsourcing platforms that hoped to democratize giving.

These platforms – Network for Good, MissionFish and Causes on Facebook – were designed to empower people to send micro-donations to issues or efforts they supported, no matter how small. That meant the platforms had something important in common: They could take Case’s investment and magnify it as they grew. Her original $2 million investment “brought billions of dollars of micro-donations into causes people cared about,” says Case.

It was an early foray for Case into the world of impact investing, a growing and relatively new strategy that is encouraging more people to invest in philanthropic works. Like charitable giving, impact investing channels your money toward organizations that seek social good. But unlike charitable giving, impact investing targets for-profit businesses and organizations, including companies that aren’t publicly traded. And if those organizations are successful, your investment could also generate financial gains for you.

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The Case Foundation, created in 1997 by Jean and her husband, AOL co-founder Steve Case, has been proselytizing this approach to philanthropy by gathering data about impact-investing options, hoping to provide some insight into the companies and financial firms that can help the giving give smarter. The foundation recently created an impact-investing map that offers an interesting overview of the different major players in socially focused investing.

A growing network

According to latest estimates from the Global Impact Investing Network (GIIN), impact investing now includes a minimum of $114 billion in assets under management. People are finding they don’t have “to give up returns to have a social return,” says Case. Of the 209 impact investors surveyed by GIIN, 91% said their impact investments performed in line with or outperformed their expectations.

Steve and Jean Case, early adopters of "impact investing." - Larry French 2015 Getty Images
Steve and Jean Case, early adopters of "impact investing." Larry French 2015 Getty Images

This approach has also begun to grow in popularity among the younger set. In a survey of millennial investors, impact platform Swell Investing and Harris Poll found that 78% of those surveyed either currently invest or plan to invest with social good in mind.

Despite the sense of positivity you might get from an impact investing strategy, it’s not without risks—especially since many of the companies and organizations attracting such capital are relatively small. Most investors should only earmark money that they can afford to lose, especially if they’re investing in individual companies. And impact investing isn’t like giving to charity or investing in a large cap index fund.

Tax issues

There’s one important difference between impact investing and donating money to a non-profit: Taxes. An impact investment is not a charitable gift, which means you can’t automatically write it off.

That doesn’t mean you can’t find savings. Joe Milan co-founder of AngelSpan, which provides investor relation services to startups, recently pointed out that there’s a provision in current tax law that allows you to deduct investments in “qualified small businesses” against ordinary income, if your investment ends up in the red. That provision provides a backstop, in case a company you’ve invested in struggles to get off its feet, but still offers an upside opportunity if the business succeeds. Whether the small business qualifies depends on when you invested and what the company does.

There are also limits to the number of asset classes where you can find decent opportunities. Private equity and venture capital have dominated this particular investment class. But the space does include some relatively big and stable companies. For example, the eyeglass maker Warby Parker gives a pair of eyeglasses to someone in a developing country for every one it sells. Three million people who couldn’t afford glasses have received them through this program. Built on a social good premise, Warby Parker has raised $215 million in funding since 2010.

Other routes

If you have less time – or money – to do research on specific programs or companies, there are also a few mutual funds that specialize in social-good oriented investing. Most funds that get the “socially responsible” label make a point of avoiding certain arguably unethical industries, like alcohol, tobacco or guns. Relatively few take the active step of investing in companies that encourage social change: One, the Parnassus Endeavor fund, invests in companies that create positive work environments for employees, and has returned an annualized 13% over 10 years, compared to 8% for the S&P 500. (Click here to read a Fortune feature about Parnassus Endeavor.)

If you’re philanthropically minded, the best strategy is to first focus on the goals and social change you care about the most. It’s a tactic that even the wealthiest have embraced.

Jean and Steve Case have signed the Giving Pledge, an initiative supported by Warren Buffett and others in which prominent high-net-worth people commit to give the majority of their wealth to philanthropic causes. Other Giving Pledge members have signaled their support for an impact-investing strategy, including Bill Gates, who developed the Breakthrough Energy Ventures Fund to invest in clean energy technologies, along with other pledge members, like Kleiner Perkins Caufield & Byers Chairman John Doerr, SAP co-founder Hasso Plattner and former energy hedge fund manager John Arnold.

These world-class investors and business leaders “have come to impact investing,” because they see the value in the return, whether it’s social or monetary, says Jean Case. So you’ll have good company if you decide to give a little more this year.

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