Since the inception of the socially responsible investing (SRI) portfolio in 2017, Betterment has significantly expanded its offerings. The platform now features diverse options, including the Broad Impact portfolio and specialized portfolios such as the Social Impact and Climate Impact portfolios. These options focus on ethical investments while maintaining a commitment to low costs and diversification through the use of exchange-traded funds (ETFs).
Central to Betterment’s strategy are three essential principles guiding the construction of its investment portfolios. The term SRI serves as a traditional label for what many now refer to as sustainable investing. This encompasses a wide range of values-driven investment strategies aimed at aligning financial goals with ethical considerations.
Understanding Betterment’s SRI methodology
Betterment employs a framework based on Environmental, Social, and Governance (ESG) criteria to shape its investment decisions. ESG criteria provide a measurable way to assess how companies perform in these three key areas. Rather than selecting specific companies, Betterment identifies ETFs that third parties classify as ESG-compliant and incorporates them into its portfolios.
The significance of ESG criteria
By prioritizing ESG metrics, Betterment aims to reduce exposure to investments in companies engaged in activities that conflict with certain ethical values, such as the production of tobacco or weapons. Additionally, it seeks to enhance the portfolio’s overall positive impact on society and the environment. For instance, the Climate Impact portfolio focuses on investments that demonstrate a commitment to sustainability and reducing carbon footprints.
Key mandates driving portfolio construction
Each of Betterment’s SRI portfolios is built upon specific internal mandates designed to uphold sustainable investment objectives. These mandates include:
- ESG Mandate:This involves selecting ETFs that emphasize companies excelling in environmental, social, and governance aspects.
- Fossil Fuel Divestment Mandate:This aims to exclude companies heavily invested in fossil fuels from the portfolio.
- Carbon Footprint Mandate:Investments are chosen to minimize overall carbon emissions across various sectors.
- Green Financing Mandates:These focus on ETFs that finance environmentally beneficial projects.
- Gender Equity Mandate:This highlights companies that actively promote gender equality.
- Social Equity Mandate:Investments are directed toward supporting vulnerable and underserved social groups.
Moreover, Betterment integrates a Shareholder Engagement Mandate, which empowers investors to influence corporate practices through proxy voting and shareholder proposals. This engagement approach allows Betterment to actively advocate for socially responsible corporate behaviors.
Striking a balance between ethics and diversification
One challenge many SRI offerings face is the trade-off between achieving ethical investments and maintaining adequate diversification. Betterment addresses this by ensuring its portfolios do not compromise on global diversification. To achieve this, the firm includes a mix of funds, even those without ESG mandates, to ensure comprehensive market exposure.
Portfolios tailored to specific interests
For investors with distinct ethical priorities, Betterment provides three specialized portfolios. The Broad Impact portfolio seeks to balance all ESG dimensions, while the Social Impact portfolio focuses on social equity initiatives, incorporating funds that emphasize gender diversity and support for veterans. Conversely, the Climate Impact portfolio is geared towards investors interested in environmental stewardship, focusing on reducing carbon emissions and promoting green initiatives.
Betterment routinely evaluates the ETFs available for its portfolios, ensuring they meet criteria for cost-effectiveness and liquidity. The company recognizes that while SRI ETFs often have lower expense ratios compared to traditional funds, liquidity can vary significantly, affecting overall investment performance. Higher daily trading volumes generally enable smoother transactions without significantly impacting asset prices.
Investment strategies for diverse goals
Within the Climate Impact portfolio, Betterment allocates funds to ETFs such as the iShares MSCI ACWI Low Carbon Target ETF, which targets companies with a lower carbon footprint. This fund supports investments in firms committed to reducing their environmental impact, thus aligning with Betterment’s sustainability goals. Additionally, a portion of this portfolio is invested in green bonds, which finance projects aimed at promoting environmental sustainability.
Central to Betterment’s strategy are three essential principles guiding the construction of its investment portfolios. The term SRI serves as a traditional label for what many now refer to as sustainable investing. This encompasses a wide range of values-driven investment strategies aimed at aligning financial goals with ethical considerations.0
Central to Betterment’s strategy are three essential principles guiding the construction of its investment portfolios. The term SRI serves as a traditional label for what many now refer to as sustainable investing. This encompasses a wide range of values-driven investment strategies aimed at aligning financial goals with ethical considerations.1