MacKenzie Scott’s Foray Into Impact Investing

Late last year, philanthropist MacKenzie Scott announced that her giving would come with a new twist: Rather than park her wealth in the stock market with a goal of making a profit, some of it — how much is unclear — would be invested in companies and funds that aim to make societal and environmental improvements, such as reducing wealth disparities and providing more people with homes.

Scott’s move to “impact investing” is an attempt to go beyond the tax-deductible donations she makes to nonprofits. Those donations have totaled more than $19 billion over the past five years; Forbes estimates her net worth was about $28 billion this month.

“When I make gifts, rather than withdrawing funds from a bank account, or from a stock portfolio that increases the wealth and influence of leaders who already have it,” she explained in a statement, “I’d like to withdraw them from a portfolio of investments in mission-aligned ventures, with leaders from the populations they are serving, or from generally undercapitalized groups like women and people of color.”

Beyond that, Scott did not provide detail.

Her announcement gave the rationale behind the decision: She wants to harmonize her financial investments with her philanthropy. But, typically, she provided no information on the “how” — no timeline, no details on her impact investing strategy and no indication of how much of her wealth she would devote to the approach.

Below are some of the questions impact investing experts are asking about Scott’s turn to so-called “double-bottom-line” investing, which aims to generate both social and financial returns.

Does Scott’s foray into impact investing mean she’ll extend her philanthropy decades into the future?

The attention Scott has placed on how she will invest her fortune is “an acknowledgment that her wealth accumulation is outpacing her philanthropic efforts,” said George Suttles, executive director of the Commonfund Institute, the research arm of the asset management firm Commonfund.

Scott is effectively saying that if she can’t spend her money fast enough by making direct philanthropic gifts, she may as well attempt to generate social change through social benefit investments. Often, investment strategies that use a broad portfolio of investment choices seek to generate a return in a 10-, 15-, or 30-year time frame, and Suttles expects Scott and her investment team to pick such an approach with extended return targets.

That doesn’t mean that by turning to mission-aligned investments, Scott is creating a giving vehicle that will outlive her, like philanthropic predecessors Andrew Carnegie or John D. Rockefeller, Suttles said.

“Perpetuity in her mind might not mean forever,” Suttles said. “But definitely is implicitly signaling some longer-term time frame.”

Is Scott attempting something novel for a major donor?

In recent years, it’s become common for billionaire donors to cordon off at least part of their assets to make impact investments. Others, like eBay founder Pierre Omidyar, Facebook co-founder Mark Zuckerberg and his wife, Priscilla Chan, Emerson Collective founder Laurene Powell Jobs, and Melinda French Gates have made impact investing a part of their giving strategy.

And over the past decade, major grant makers, including the California Endowment, Ford, McKnight, and Heron foundations have collectively committed billions of dollars from their endowments to mission investments. (The Ford Foundation is a financial supporter of the Chronicle of Philanthropy.)

By making it a priority, Scott is “going down an established path in trying to develop a portfolio that includes both philanthropy and impact investing,” said Matthew Lee, professor of public policy and management at the Harvard Kennedy School of Government.

How long will it take to move her assets to market plays that seek social impact?

It’s impossible to know when the job will be complete, because Scott has not shared publicly how much of her fortune she plans to dedicate to impact.

But moving money to investments designed to generate a social return isn’t something a large investor can do instantly, like shifting money to a single index fund, Suttles said. Large investors with a broad portfolio will be looking to tap private equity opportunities as they become available and develop a comprehensive strategy that may take time.

“Portfolio construction in general isn’t like flipping a switch,” he said. “This isn’t going to happen overnight.”

Will Scott cede control over her investments in the same way she has with her philanthropy?

Over the past three years, Scott has carved a name for herself philanthropically by making surprise gifts, now in the billions of dollars, to nonprofits that don’t have to adhere to any specific strategy or achieve preordained outcomes.

But a balanced impact portfolio is likely to place a lot of money into early stage for-profits looking to achieve social benefits, said Dana Brakman Reiser, a law professor at Brooklyn Law School and co-author of For-Profit Philanthropy: Elite Power & the Threat of Limited Liability Companies, Donor-Advised Funds, and Strategic Corporate Giving.

Those sort of investments typically need to be tended to more than just socking money into a stock fund, said Brakman Reiser: “They require a lot more hand-holding.”

Often venture investors — whether the aim is a financial windfall or achieving social gains, or both — take seats on the boards of the companies they invest in. In fact, their ability to steer companies, and connect them to various partnership opportunities, is part of the “value proposition major private equity investors bring to the table,” said Harvard’s Lee.

But Scott’s thesis, he said, is that leaders who benefit from her philanthropic gifts know more about the problems they are trying to solve than she does. For that reason, she makes her gifts, then steers clear.

“I’ll be interested to see how that philosophy translates, if at all, to her impact investing,” Lee said.

How much will Scott reveal about her investment choices, payoffs, and failures?

While she doesn’t have to file federal forms showing where she has made gifts, Scott has periodically listed recipients and the amount received. But unlike a private foundation that has to provide information about grantees, salaries, liabilities, and investments in their annual reports to the Internal Revenue Service, Scott is not bound by law as an individual donor to disclose such information.

That, said Brakman Reiser, is a reason to be concerned.

“I have an issue with elite philanthropy that happens outside of foundations,” she said. “It would be great if once she starts moving to this impact investing approach, she was also transparent about her investment decisions.”

Will Scott generate interest among other investors to design portfolios built for impact?

In the philanthropy world, Scott is seen as both inspirational and disruptor, said Marta Ferro, founder of philanthropic advisory firm Starfish Impact, who predicted that the move will help introduce impact investing to masses of new investors, particularly women, many of whom see her as a role model.

“She’s like the Oprah of philanthropy,” Ferro said. “She has this incredible opportunity to signal to the markets and others what she values, not only through her philanthropic grants, but also through her financial investing mission.”

If Scott spurs interest, is there a supply of investment-ready companies and indexes available for investors looking for impact?

Definitely, according to Ferro.

Ferro has seen increased interest, especially among younger high-net-worth donors, in dovetailing investment and philanthropic strategies. The development of new tools and the refinement of data on social impact have made it easier for companies to demonstrate their social advantages to potential investors, and for investors to make choices on where to devote their resources.

“When impact investing first became of interest, say like 15, 20 years ago, I just don’t think there were as many tools to get where you wanted to go,” she said. “Today you can build a portfolio across asset classes that is very meaningful and values-aligned and still meets your clients’ financial goals.”

What kind of financial returns can Scott expect with the new strategy?

Scott might be able to achieve the same sort of return on impact investments that she’d make from a set of choices meant solely to maximize wealth, suggested Suttles.

Suttles said the field had matured to the point where researchers have, in some cases, two decades of market-return data to compare environmental, social, and governance investing strategies with other, return-focused strategies. Over the longer haul, impact investments have outperformed expectations, he said.

“If there’s market-rate return, that’s amazing,” he said. “And if it’s concessionary, we’re willing to make those trade-offs.

The Ford Foundation, which committed $1 billion of its endowment to mission-related investments in 2017, does not focus on market returns. Instead, Roy Swan, director of Ford’s mission investment team, points to what the portfolio has helped accomplish, including securing more than 23,000 rental units for families, and boosting financial inclusion by providing more than 76 million customers in emerging markets with access to savings accounts, insurance, and other financial services.

In its first five years, the Ford Foundation’s Mission Investments program generated a compound annual return rate of 28 percent. Notably, wrote Swan in an email, this is triple the return required to sustain the foundation’s perpetual existence, which accounts for payouts and inflation.

However, Swann cautioned against celebrating too soon. “This initial financial performance is largely based on unrealized gains and took place during a period of extraordinarily favorable market conditions,” he wrote.

It’s not certain Scott can generate a return anything like that. For one thing, noted Lee, many impact investment strategies gravitate toward proven profitable models, going to health care or clean energy technology.

Those investments are not necessarily in Scott’s philanthropic sweet spot, Lee said.

Said Lee: “You don’t see a lot of impact investors building portfolios around social justice and community building.”