Since its inception in 2017, Betterment has positioned itself as a leader in socially responsible investing (SRI), expanding its offerings to meet a diverse range of ethical investment choices. Betterment currently provides various portfolios designed to align with the values of socially conscious investors. These include the Broad Impact portfolio, along with specialized options like the Social Impact and Climate Impact portfolios. Each portfolio is designed to be cost-effective and diversified, utilizing exchange-traded funds (ETFs) that are continually adjusted as market conditions evolve.
The core philosophy behind Betterment’s SRI strategy encompasses three pivotal dimensions that guide the creation of its investment portfolios. While SRI has traditionally referred to values-based investing, many professionals now prefer the term sustainable investing to capture the broader concept.
Core principles of Betterment’s socially responsible investing
At the heart of Betterment’s SRI approach is the ESG framework, which stands for Environmental, Social, and Governance. This framework serves as a benchmark for evaluating a company’s ethical practices across these three critical dimensions. Betterment enhances the ESG framework by integrating investment strategies that employ shareholder engagement techniques.
Investment selection process
Betterment does not handpick companies for inclusion in its SRI portfolios. Instead, the firm selects ETFs that have been vetted and classified as ESG-friendly by independent third parties. Additionally, Betterment applies its own internal SRI mandates that align with qualitative and quantitative factors to curate these portfolios.
Optimizing an ETF’s ESG profile involves reducing investments in companies engaged in practices that conflict with specific values. These practices often include industries like tobacco, military arms, and firearms, as well as involvement in controversies surrounding ESG issues. However, the essence of SRI goes beyond merely avoiding companies with negative impacts; it emphasizes promoting a positive social effect through investment choices.
Betterment’s SRI mandates and engagement strategies
For each of its SRI portfolios, Betterment employs a unique set of SRI mandates. These specific sustainable investment goals shape the portfolio’s overall exposure:
- ESG Mandate:ETFs that track indices designed with ESG optimization in mind.
- Fossil Fuel Divestment Mandate:ETFs that exclude stocks of companies heavily invested in fossil fuels.
- Carbon Footprint Mandate:ETFs that focus on minimizing carbon emissions across various sectors.
- Green Financing Mandates:ETFs that finance environmentally beneficial projects.
- Gender Equity Mandate:ETFs representing companies that prioritize gender equality.
- Social Equity Mandate:ETFs that invest in initiatives aimed at supporting marginalized communities.
Shareholder engagement as a strategy
Betterment incorporates a Shareholder Engagement Mandate in its portfolios, emphasizing the importance of investor participation in corporate governance. Shareholders can influence company decisions through proxy voting and shareholder proposals during annual meetings. Although ETF shareholders do not vote directly, fund issuers represent them in these processes, advocating for responsible corporate practices on their behalf.
This engagement approach allows Betterment to align its portfolios with ethical investment strategies while actively promoting ESG principles within the companies it invests in.
Balancing diversification with responsible investing
One of the challenges in constructing SRI portfolios is ensuring adequate diversification while meeting investors’ ethical standards. Many current SRI offerings either compromise on necessary diversification for market returns or fail to provide avenues for collective action to promote ESG change. Betterment aims to address this by ensuring that its SRI portfolios maintain global diversification, including both domestic and international bonds.
For those who prioritize complete exclusion of certain sectors, it is essential to recognize that many large ESG funds may still include companies involved in energy production, which might not fully align with investor values. Betterment’s three distinct SRI portfolios cater to different investor preferences, with the Broad Impact portfolio offering a balanced approach across all ESG dimensions, while the Social Impact and Climate Impact portfolios focus on social equity and environmental sustainability, respectively.
Liquidity considerations in fund selection
The core philosophy behind Betterment’s SRI strategy encompasses three pivotal dimensions that guide the creation of its investment portfolios. While SRI has traditionally referred to values-based investing, many professionals now prefer the term sustainable investing to capture the broader concept.0
The core philosophy behind Betterment’s SRI strategy encompasses three pivotal dimensions that guide the creation of its investment portfolios. While SRI has traditionally referred to values-based investing, many professionals now prefer the term sustainable investing to capture the broader concept.1