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Three Simple Steps To Conscious Investing

If there’s one gift that 2020 gave us, it’s that respecting the natural world and celebrating our diversity is paramount to our collective wellbeing. 

And what better way to express this heightened awareness than to put your money where your mouth is and actively invest in companies advocating for these initiatives. Fortunately for investors, there are plenty of tools now available to quickly and easily find investments that rightfully reflect their views.

Below are three steps that any investor can make to invest consciously.

  1. Use Google or the main brokerage platforms to search for funds or ETFs that have “Clean”, “ESG”, “Social”, “Wind”, “Solar”, “Sustainable”, “Ethical”, “Conscious”, “Responsible”, “Environmental”, “Diversity”, “Inclusion”, “Equality”, or any other terms where you’d like to make a mark.

Environmental, social, and governance, or ESG, is the term that is most used today to describe those investments. But impact, sustainable or conscious investing are also used interchangeably.

Last year saw a huge influx of new money into ESG investments as the markets reacted to a newfound understanding that companies and governments bear responsibility for the advancement of more sustainable and ethical practices. 

And investors have the power to make a difference by investing in companies and funds that adhere to those principles. Many of these funds also showed last year that they can do better than traditional investments by eliminating some of the risks and/or providing higher returns.

If you invest your money on your own, then doing this simple search is the best and easiest way to start. You’ll be able to read up on some of the top funds and will certainly find lists of top-ranked ESG investments.

If you prefer to go to a financial advisor or already have one, then ask him or her to create a list of top-rated funds or ETFs based on your criteria. They’re equipped to do that and could easily generate a very detailed report with some of the best investments for you to pick.

  1. Once you have the list of funds in your hands, you can make a couple of decisions.

First, decide whether you’d like to buy a fund that excludes certain investments, like tobacco-exclusive, or one that specifically includes stocks that fit your ESG criteria. This will be stated within the fund description on a fund’s fact sheet.

Second, there are active and passive funds. Passive funds follow a specific ESG index and seek to align with the investments of that index. It’s good to familiarize yourself with the index if the fund is passive.

Active funds, on the other hand, are run at the discretion of its fund manager(s) according to set strategies. Their goal is to beat the stock market. Active funds usually charge a higher annual management fee, which is important to keep in mind when investing.

Third, you’re not obligated to invest in a fund. There are plenty of companies out there that have their own ESG strategies and they usually make this known in their impact reports. You should be able to find these online on their websites or via your financial advisor.

Selecting your own list of stocks that are involved in ESG initiatives might be a much more tedious task as you’ll have to dig deep into what exactly they’re doing in the ESG area and how it matches your conscious investing goals. 

So, going with a more diversified mutual fund or ETF might be an easier solution as the work is done for you by either the index or the fund manager(s).

Another thing to consider is how much of your total portfolio assets you’d like to invest in ESG-related strategies. It is a good idea to talk to a financial advisor to make sure you maintain a well-diversified portfolio. Many online platforms will also help you with your desired asset allocation based on your risk tolerance, time frame, and goals.

  1. The third, and maybe the most important, step is to look at ESG ratings and fees.

With the huge popularity of impact investing, nearly any and every company on the horizon claims to have something to do with ESG. This is where it becomes paramount to look at a company or fund’s ESG ratings.

Many firms have started to provide ESG ratings, but the leaders in the field are MSCI ESG Ratings and Sustainalytics. MSCI rates over 8,500 companies and 1,500 stock and bond ESG indexes worldwide. Sustainalytics, which was acquired last year by Morningstar, provides ratings on 12,000 companies worldwide. Morningstar Sustainability Ratings for funds help investors understand how companies in a fund portfolio manage their ESG factors relative to their peers.

It’s a good idea to familiarize yourself with how a fund or a company scores in your specific ESG area. The higher the rating the closest the match with your conscious investing goals. If you hold an account at a brokerage, it’s very likely that they share these ratings on the stocks and funds they offer.

Also, pay attention to the fund fees. Historically, many ESG funds have charged higher annual fees to investors to own the fund. This price has now come down significantly due to increased competition. A low-price champion is Vanguard, but other large companies also provide affordable options.

Keep your fees as low as possible as they inevitably eat into your annual returns. Compare similar funds to see what annual management fee they charge.

It’s also important to invest in liquid funds. When markets are volatile, a small, illiquid, fund may have a hard time trading without sacrificing on the price. Large, liquid funds are usually your best bet to keep transaction costs and your total cost down. A good place to start is a mutual fund that has at least $100 million in assets, or an ETF that shows an average daily trading volume of 50,000 shares or more.


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