Make money and do good: Impact investing hits $1 trillion

Impact investing is now a $1 trillion market, and Justina Lai believes it all starts with intention

What you probably already know: You’ve likely read about the debates over environmental, social and governance programs, but this focus has become important segment of the investment market. Impact investing recently surpassed the $1 trillion mark and is expected to grow by double-digit rates through 2030, according to the World Economic Forum. But what is impact investing and is it really an effective way to both generate returns while doing good for the world? For Justina Lai, the chief impact officer at Laird Norton Wetherby, it’s about intention. She defines impact investing as investments made with the intention to generate positive, proactive social and environmental impact alongside a financial return. “There’s a lot of nuance to what that actually means in practice,” Lai said, “and a lot of different approaches to actually achieving that.”

Why? You can’t have impact without intention, Lai said. Some investors are more interested in business practices and approaches, others are seeking to fund solutions to fundamental social and environmental challenges. “Yes, the capital itself matters,” she said, “but more important is what role you play within the system.” For some investors, it can even mean de-investing from companies that aren’t maintaining strong ESG principles or are, for example, having a negative impact on the environment. If enough capital moves away from the company, it can provide an incentive to change.

What it means: The majority of what Lai sees from clients isn’t about disinvesting, though, but rather about seeking ways to find solutions. Their clients are interested in carbon removal and storage, for example, technology that is very early stage and thus can struggle to find inexpensive capital to grow. “When technologies are emergent, they’re incredibly expensive because they’re not scaled,” Lai said. That means impact investors sometimes have to be more patient than traditional investors, and even a bit more risk tolerant if they want to support these kinds of initiatives.

What happens now? While there has been some legitimate criticism of the returns on impact investing, generally these have focused on the impact performance, not the financial performance. There’s a lot of academic and practitioner evidence that shows impact investments have performed in line or better than other traditional strategies over the long term, Lai said, but you can’t automatically expect an impact investment to outperform other traditional strategies. The criticism, Lai said, is part of the maturation of this industry. But when it becomes highly politicized, like divestment of fossil fuels, then the noise can drown out the realities of the approach. For instance, divestment of traditional oil companies can sometimes force those companies to cut investment in more sustainable fuel sources. “To me,” Lai said, “actions matter a lot more than words.”