Risks of Impact Investing

Like traditional investing, impact investing is susceptible to the risks of misleading marketing and promotion. “Greenwashing” is a deceptive marketing practice where a company falsely promotes its products, services, or overall operations as environmentally friendly or sustainable, with the aim of attracting environmentally conscious consumers and investors without making substantial or genuine efforts to reduce the environmental impact. Vague Statements about products/services such as “eco-friendly” and “green” can be used frequently to demonstrate supposed environmental benefits.

While the environmental benefits might be minimal, the marketing efforts aimed at promoting these claims could be quite extensive (for example, highlighting an improvement in the packaging of a product but ignoring the environmental and social damages inflicted from the company’s operations such as excess energy-use and poor labour practices.)

There have been several negative headlines concerning greenwashing:

• More recently, the financial industry has been rocked by greenwashing allegations from big name players such as Deutsche Bank, who recently paid the SEC $25M to settle charges brought by the US securities regulator over greenwashing allegations (the highest penalty related to ESG criteria issued by the SEC).

• Equally disturbing was a recent warning from the state of Mississippi against Blackrock, widely regarded as a pioneer in ESG and impact investing, about ‘misleading statements’ tied to their ESG funds.

• In Canada, The Competition Bureau announced improvements to the “Deceptive Marketing Act” aiming to tackle unsupported environmental claims (i.e. greenwashing) by implementing rules requiring that claims about the environmental benefits of a product be supported by adequate and proper testing, among other obligations.

There are additional risks within the categories of impact investing mentioned in our previous article:

Inclusionary Impact Investing: There is a risk of misidentifying companies that are capable of creating positive impact and overloading them with too much capital, resulting in wasted investment and creation of obstacles for potentially better alternatives that could achieve greater social or environmental good.

Exclusionary Impact Investing: Reducing prices below their "fair" values through exclusionary investing (i.e. divesting) can allow investors indifferent to social impact to gain higher returns by owning these companies. Additionally, if public investment in "bad" businesses decreases, it may create opportunities for private investors to step in and fill the gap.

Activist Impact Investing: Without support from other shareholders, efforts to influence business practices will likely be ineffective. Even if successful in steering companies away from "bad" investments, there is a risk that these companies might return the cash to shareholders through dividends and buybacks instead of making "good" investments (i.e., in place of making impact investments, cash is merely returned to shareholders).