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The deep dive: Strategizing your way into conscious investing

The deep dive: Strategizing your way into conscious investing

Trying out a new thing for the first time can be scary. And conscious investing is no different. While you might be aware of the different strategies that retail investors use to pick stocks, the process by which conscious investing takes place could be daunting for some. So, sit back and relax as our third deep-dive in our four-part series on conscious investing introduces you to the different elements that make up a conscious investing strategy.

By now, through our last two deep-dives, we’ve gotten a pretty good lay of the ESG land – but the question is what now? How does a conscious investor newbie actually go out and, well, invest? The key thing to note is that conscious investing is not all that different from a standard investing strategy. 

Consciously investing in public companies still involves looking through financials, following earnings reports, and adopting all the other methods typical retail investors use when picking stocks. The difference is that conscious traders have an added layer on top where they’re also looking at the ESG ratings or the sustainability practices of a company. 

Finding your ESG north star

Before we get into the nitty-gritty of it all, we need to pause for a quick soul-searching sesh. Conscious investing is underpinned by the question of: what matters to me? And not just in the context of an investor, but what matters to you in a much broader and personal sense. Conscious investing differs on a preferential basis – picking sustainable agri-tech stocks as opposed to health-tech companies is the same as one investor being attracted to FinTech businesses over automotives. 

Figuring out where you sit on the ‘impact spectrum’ is crucial in your journey as a conscious investor. The ‘impact spectrum’ is a way to think about the extent to which you’re willing to integrate ESG elements into your investing strategy.  Does the primary metric through which you build your portfolio have more to do with the investment’s ability to earn a strict return target? Or is it more important to you that you’re not disregarding returns but also going a step further by being mindful of ESG elements? The answers to these questions will determine your position on the ‘impact spectrum’. It isn’t a question of returns or impact but rather ‘impact over returns’ and by how much?

Once you’re set on what collection of metrics you’re benchmarking your portfolio against, it becomes a question of what is the ‘impact’ element? This is where answering ‘what matters to me?’ comes into play. At a basic level, excluding stocks that might follow practices that don’t align with your values would be a good place to start, and then eventually finding companies that are directly involved with initiatives that you believe in.

Different shades of green

When it comes to codified conscious investing strategies, there are two broad buckets we can identify: (i) negative screening and (ii) positive screening – both come with some caveats.

Negative screening is usually the first step on the impact spectrum – it’s how conscious investing historically began. This is when investors build their portfolios in a way in which certain companies or financial instruments that conflict with their values are excluded. Historically, this form of conscious investing also came into play through faith-based investors – e.g. Islamic investing which excludes debt-bearing instruments or portfolios that avoid stocks that involve the weapons, alcohol, and tobacco industries. In the present day, it might be through additional environmental or social criteria – i.e. excluding companies with high fossil fuel usage or removing stocks linked to animal testing during product development.

Positive screening is when you begin to choose to have certain companies in your portfolio as opposed to others – with the goal that the businesses you’re targeting are actively concerned about their environmental or social responsibilities. This is where you keep track of the companies you’ve invested in and make sure that their business philosophy is tied into your personal values. Investors might do this by only including companies in their portfolio that rank highly on the MSCI ESG Ratings system or target ETFs (exchange-traded funds) that have large holdings in sustainability stocks. Alternatively, it could also involve going out and investing in companies specializing in renewable energy or sustainable agriculture – companies whose main business model revolves around an explicit ESG goal.

While both these buckets sound clear-cut, they’re far from it. Investors employing a ‘negative screening’ approach often have a buffer of exclusion built into their strategy as opposed to an all-out removal of certain stocks. Investors might choose to not exclude certain companies completely – some might allow a small percentage of their portfolio to consist of non-ESG companies while others might be fine with a slightly higher percentage.

Similarly, ‘positive screening’ isn’t an exact science – even with rating systems and ESG certifications out there, it’s pretty hard to gauge from the surface how ESG compliant a company actually is. For instance, companies such as Disney (DIS) or Nike (NKE) are highly-rated on the MSCI ESG Ratings system. But Disney has been the target of a class-action lawsuit regarding gender pay discrimination over the past two years while reports show that Nike is still paying some of its supply-chain workers below the living wage. 

Therefore, although ratings provide a useful place for conscious investors to start, you shouldn’t be afraid of digging a little deeper and finding out whether those ratings are in line with the company’s real-time reputation.

Getting your feet wet

Ok, so having an idea of the process of picking companies that align with your value-set is all good and sound, but how does one begin to deploy capital towards ESG-stocks? 

As the conscious investing space has grown, the platforms out there for retail investors have become more sophisticated. On one side, self-directed retail trading platforms like Fidelity, Robinhood (HOOD), and of course yours truly have sprung up. What makes these platforms stand out is the amount of ESG-related financial instruments and ESG-specific resources they offer to traders. Fidelity has over 100 ESG ETFs and 250 ESG funds on its platform, while Robinhood offers detailed research primers on the ESG space for investors to educate themselves through. When looking for a platform, you should make sure that there’s a variety of ESG instruments available on there for you to invest in.

On the other hand, there also exist platforms that have ESG elements built-in to their own business model. Ellevest, for instance, is a US-based investment and financial literacy platform aimed primarily at women and focused on closing the gender wealth gap. The platform offers a bespoke ‘Impact Portfolio’ for investors to dip into – whose holdings are mainly in companies with women leadership, a focus on sustainable practices, and community development aims. Here at Baraka, an ESG-themed investment product is also on offer – one that allows investors to trade, without any additional costs, in a selection of stocks that are sustainability-centered and focused on generating positive impact. 

Overall, conscious investors are spoiled for choice when it comes to picking an ESG investing platform – from self-directed services that offer the luxury of lining up your portfolio with an evolving set of personal values to ESG-specific platforms that offer tailor-made portfolios.

why it matters

Although rating systems and ESG-weighted financial instruments show that the conscious investing space has come a long way, the process is still deeply contextual. A sound conscious investment strategy involves figuring out how far you’re willing to go in terms of bringing in impact, which shade of the impact spectrum you place yourself in, and what values you want your portfolio to align with.