Greenwashing, conflicts of interest, oh my!
With the recent meteoric rise of impact investing, many companies and funds are rushing to reframe themselves as "green" and "responsible" so they can cash in. So how do you, the investor, make sure you don't make investments that are bs? Don't worry, we've created a list of important questions and tactics you can deploy to ensure you only invest in the "right" initiatives.
Greenwashing
"A form of marketing spin to convey the false impression that a company's products are environmentally friendly."
Greenwashing might sound clean, but it’s actually quite dirty. It’s basically the thing that companies/funds do to make something seem sustainable, just to make you buy it. Not only is this a crummy thing to get sucked into, it also prevents your money from reaching the opportunities that actually deserve funding.
- Here’s the dictionary definition (so to speak): Greenwashing is when a company or organization spends more time and money on marketing themselves as environmentally friendly than on minimizing their environmental impact. It is a deceitful advertising gimmick intended to mislead consumers who prefer to buy goods and services from environmentally conscious brands.
So how do you know if you’re being taken for a ride? I wish there was an easy answer, but there are a few hacks to minimize the likelihood that your advisor/provider isn’t giving you the full story:
- Fufu language: Words or terms with no clear meaning (i.e., “responsible”)
- Suggestive imagery: Images that give an (unjustified) green impression (e.g., flowers blooming from a pile of money)
- “Best-in-class” : Effectively saying that they are slightly greener than the rest, even if the rest are nothing to write home about.
- Confusing terminology: Jargon and wording that only a financial professional could check or understand (“the sharp ratio is creating risk-adjusted alpha and beta that are off the charts!“)
- No proof: A claim that could be accurate but has no evidence to back it up (look for third-party certification on any/all claims that are material to your decision making)
conflicts of interest
shocker: people in the financial industry may have a confict of interest
It probably won't come as a surprise that the industry known for sayings like "greed is good" might not have their interests in line with yours. Here are some questions you can ask to help make sure there isn't any funny business going on that you're not aware of:
- How are you being compensated? (commission or fee, or both)
- Are you receiving any additional compensation to sell me this product versus other products you can offer? (kickbacks, incentive programs, etc)
- Are there any limitations to the kinds of opportunities you're able to offer me? ** it's often the case that banks and other providers have a limited menu of products/services they can offer you. So, you may not be getting the perfect solution, just the best they can offer. It's important, when possible, to work with advisors/providers that don't have any limitations to the types of solutions they can offer you. This is sometimes referred to as "open architecture."
- Why do you like this company/fund better than others that are out there? Can you tell me which companies/funds it's similar to and why this stands out in comparison?
- Are you investing your own personal money in this company/fund? (referred to as "eating your own cooking") If not, how come?
ways to limit your risk
these tips can help you minimize the risk of being greenwashed or misled
The list below will help give you some ideas on how you can protect yourself:
- Ask your advisor/provider for a contract which states that they won't take any compensation with disclosing it to you first (*if they won't, this can serve as a warning sign)
- Hire a lawyer to review any/all agreements and contracts to see if there is any language or terms that appear worrisome or out of alignment with your goals
- Ask to speak to some of their other clients. This can help you get feedback from folks who already work with them. This isn't fool-proof, but it can help in your decision making process. It's good to try to only speak with people who are "credible." This could include a notable foundation, a well-known investor, or other professional investor. Their feedback is likely to be more valuable that someone you don't know, never heard of, or can't look into.
- If you are delegating your investment decisions to someone (discretionary authority), make sure you only give them a "limited power of attorney" on your account. This is in contrast to a "general power of attorney," which allows them to withdraw funds from your account without notifying you, etc.