8 min read

Too Good To Be True?

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Happy Thursday!

Sometimes everything can feel a bit upside down… Maybe it’s because we are still recovering from our Spotify Wrapped reveals or are reeling from the impact of inflation on our holiday gift purchases, but the fact that every time we get positive economic news (like higher-than-expected activity in the services sector), the broader stock market drops can make for some real head scratching — even if we know it’s driven out of fear that a strong economy will embolden the Fed’s interest-rate-raising campaign.

Investors who value sustainability are seeing similar tension around the growth of and pushback on ESG-focused investing. A stark reminder of this came a few days ago when Florida’s CFO announced that the state would divest $2B from BlackRock because of its ESG agenda. Yesterday, Vanguard (another manager of $7T in assets) exited a major net-zero group in the face of political pressure. The Financial Times offers a glimpse into how impact and ESG investing are getting battered from both ends of the American political spectrum — with the left demanding more disclosures and the right saying that efforts to fight climate change and improve diversity have gone too far.

Other trends suggest that ESG isn’t going away anytime soon. One big takeaway from last week’s Fortune Impact Initiative was that many companies are doubling down on their ESG and diversity, equity, and inclusion initiatives. A Bloomberg survey of finance professionals found that more than 60% expect ESG to be a standard part of, or increasingly critical to, running a business. BlackRock’s Larry Fink joined this chorus (while also being targeted for his advocacy of stakeholder capitalism and ESG investing) at last week’s NYT DealBook conference, where he noted record inflows from investors to BlackRock so far this year.

In contentious times, it can be helpful to stay focused on your personal values and goals, whether they relate to social equity, the climate, your faith, or any other worthy cause. Aligning your investments with your values is a way to achieve returns while building the world you want to see. The media hype highlights one issue we aim to address over here at FWIW — there’s still a lot of confusion about what ESG, sustainable investing, and impact investing actually mean. So, if you ever find yourself lost in the acronyms, check out our glossary or guide to the ESG alphabet soup. Is there a term you want to understand but don’t see here? Drop us a note so we can add it to the list.

News you can use

Graphic of newspaper with magnifying glass

Will history repeat itself? The Indicator from Planet Money asks whether recent tech layoffs signal that we could be heading for another dot-com bust that makes ripples throughout the economy. The bottom line — many experts don’t think so. Tech companies may be slowing down, but they’re not going away, and the rest of the labor market is still strong (evidenced by last Friday’s jobs report), although many companies are taking a conservative approach as the threat of a recession still looms. That said, this is something we will keep an eye on.
The world will add as much solar capacity in the next five years as it built in the last two decades, predicts the International Energy Agency (IEA). The IEA’s new report highlights how the global energy crisis, sparked by Russia’s invasion of Ukraine, has motivated countries to speed up adoption of renewables as part of a campaign to reduce reliance on fossil fuels. You can read more about investing in solar energy here and in our Guide to Cleantech Investing.
On Monday, Foresight Sustainable Forestry Co. became the first investment fund to launch under the London Stock Exchange’s new market for carbon credits. The voluntary market offers a way for investors and companies to purchase carbon credits to offset emissions and meet net-zero goals.

Asking for a friend….

We know there is a lot to think about these days, and it can sometimes be a bit overwhelming. To help with those nagging questions and so you have useful resources at your fingertips, here are few links to resources and past stories relevant in these turbulent times:

FWIW’s Guide to Long-Term Investing
How to Practice Faith-Based Investing
Some of our favorite inflation-fighting strategies (and a few more)
“Siri, What Is a Recession?”

Buy now pay later

It’s the most wonderful time of the year for retailers, and early reports suggest consumers are being resilient despite soaring inflation. A record 196.7 million Americans shopped in stores and online during the five days from Thanksgiving Day through Cyber Monday, according to the National Retail Federation. Both Black Friday and Cyber Monday brought record-breaking online sales this year, per Adobe Analytics.

That’s not saying this holiday shopping season doesn’t look different. Of course Ariana Grande’s “Santa Baby” is still on heavy rotation, but you may have noticed more discounts and promotions as consumers try to stretch their dollars with inflation at near-record levels.

Despite what your Instagram feed looks like, the majority of Americans are living paycheck to paycheck, and shopping for gifts is out of reach this year for 5.8%, or 15 million, of those who did it in 2021. Personal savings as a share of disposable income per person dropped to 2.3% in October, the lowest since 2005. Consumers are racking up significant debt to deal with financial pressures, even as credit card interest rates are at a record high near 20%.

Tech companies are also making it easier to go into debt to make most purchases — maybe too easy.

A new way of borrowing

If you’ve looked at the price of anything online lately, even concert tickets, you’ve probably noticed the option to pay in installments over time with a service like Affirm, Afterpay, Klarna, or PayPal. This is a relatively new method of financing called Buy Now Pay Later (BNPL), and it’s available in-store too.

Here’s how it works. If you are approved for, and check out with, a BNPL payment plan, the BNPL company pays the retailer on your behalf immediately, and you agree to pay them back in a fixed period. By taking a short-term loan, you can buy an item that seemed out of reach with a lump-sum payment. The retailer shares a small cut of the revenue with the BNPL platform for helping them make the sale and for acting as a marketing channel with their apps.

Credit cards are a similar form of financing, but BNPL loans are not “revolving” facilities that allow you to repay and withdraw again. They’re quicker and easier to access, and many platforms advertise no fees and/or zero interest (they forget to mention “on certain plans for certain customers”).

Sounds good? A growing group of shoppers think so. A little over 10% of Black Friday online shoppers surveyed by PYMNTS used BNPL this year, up from 8.2% in 2021 and 3.7% in 2020. A March 2022 Lending Tree survey says 43% of Americans have used a BNPL service, an increase from 31% a year earlier. People are also using this method for comparably cheaper goods this year, per a Salesforce analysis of shopping data. Even essentials like groceries are being bought this way.

If you’re wondering if there’s a catch, that’s good — and you are in good company here at FWIW — as this attitude will help you navigate the financial system. (You may also be interested in 5 lessons from the FTX fiasco.)

The risks of BNPL

As its popularity grows among younger Americans especially, BNPL has raised concerns among experts and regulators. They fear many shoppers may not be aware of the fine print, and BNPL platforms still don’t have consistent consumer protections you would find elsewhere. For example, unlike credit cards, there aren’t always clear disclosures of the loan terms. You can be charged multiple late fees on the same missed payment, and the company can make autopay enrollment mandatory.

If you’re considering shopping with BNPL, here’s what you should know:

It promotes overspending and loan stacking: As the Consumer Financial Protection Bureau (CFPB) study of Affirm, Afterpay, Klarna, PayPal, and Zip found, BNPL is “engineered to encourage consumers to purchase more and borrow more.” Companies have aggressively used social media to target ads toward young potential customers.
You could owe fees and interest: Policies differ for each platform and plan, but failing to make payments on time could cost you. The CFPB said 10.5% of borrowers were charged at least one late fee in 2021, up from 7.8% in 2020. Not all customers qualify for 0% interest loans, and you could also pay transaction fees.
It could hurt your credit score: Even if you manage to avoid late fees and interest, late payments can deliver a blow to your credit history if the company sends information to a credit rating agency, like Affirm does. A poor credit score makes borrowing in the future harder and more expensive. Besides, BNPL doesn’t help you build a credit history in the way credit cards do.
Returns and refunds are tricky: What’s more of a nuisance than returning items? Returning items you bought with a short-term loan. It’s a lot of calls and emails for one sweater.
Your loan could become delinquent: If you can’t make payments for a long time, the company can freeze your account and turn it over to a debt collector.

FWIW’s take

If you’re looking to invest in some of these fintechs disrupting borrowing, a couple are publicly traded in the US, like Affirm (AFRM), PayPal (PYPL), and Block (SQ). Fair warning, the stocks have are down this year as the companies face an uncertain future in a recessionary environment.

For a values-based investor, these services can be seen as increasing access to loans and offering an alternative to credit cards with high interest rates. There have also been attempts to go easier on the customer. Affirm and PayPal do not charge any late fees, and Block’s Afterpay caps late fees at 25% of the order value. We would also be remiss if we did not note that PayPal’s commitment to the financial wellness of their employees has earned it good marks on corporate leadership and stakeholder capitalism from JUST Capital.

But there’s still concern about a negative impact on vulnerable consumers who do not need more debt worries. Using banking data for 10.6 million US consumers, researchers found that new BNPL users experience rapid increases in overdraft charges and credit card interest and fees compared to non-users.

If you’re wondering whether you should use BNPL loans, remember there’s good debt and bad debt. Good debt buys you things that improve your life and increase your wealth in the long term, like a home or an education. Bad debt is owing money for things you don’t really need and hurting your financial future and mental health.

Taking on bad debt during an economic recession isn’t wise unless it’s absolutely necessary. Instead, now’s the time to focus on budgeting, building an emergency fund, and staying on track with your investing goals so you can sleep like a baby.