Since the launch of the Socially Responsible Investing (SRI) portfolio in 2017, Betterment has broadened its offerings to include various specialized investment options. Investors can choose from the Broad Impact portfolio, the Social Impact portfolio, which emphasizes social empowerment, and the Climate Impact portfolio, designed for environmentally conscious investments. These portfolios prioritize diversification and maintain low costs through the use of exchange-traded funds (ETFs), which will evolve in response to market dynamics.
The methodology behind Betterment’s SRI portfolios is guided by three essential principles. First, SRI is frequently referred to as values-driven investing, a term that many experts now prefer to call sustainable investing. Second, Betterment adheres to a framework defined by Environmental, Social, and Governance (ESG) criteria, which quantifies a company’s performance across these three important areas. Lastly, Betterment employs shareholder engagement strategies to enhance ESG exposure within its portfolios.
How Betterment constructs its SRI portfolios
Instead of directly selecting individual companies for inclusion or exclusion, Betterment identifies ETFs recognized by third-party organizations as meeting ESG criteria. The firm utilizes internally developed SRI mandates combined with qualitative and quantitative assessments to curate these ETFs for its investment portfolios.
Key mandates for SRI portfolios
The construction of Betterment’s SRI portfolios is influenced by specific mandates that guide investment choices. These include the ESG Mandate, which focuses on indices that optimize for ESG exposure; the Fossil Fuel Divestment Mandate, which aims to exclude companies with significant fossil fuel holdings; and the Green Financing Mandates, which promote investments in environmentally beneficial initiatives. Each of these mandates aligns with Betterment’s commitment to responsible investing.
Additionally, the Shareholder Engagement Mandate is crucial, as it enables investors to influence corporate decisions through proxy voting and shareholder proposals. This engagement is intended to drive companies toward more socially responsible practices, allowing investors to express their preferences for ethical behavior.
Addressing limitations and ensuring diversification
Despite the growing interest in SRI, many portfolios often compromise on diversification or fail to provide avenues for collective action regarding ESG issues. Betterment prioritizes global diversification, ensuring that investors have access to a wide range of asset classes while still adhering to SRI principles. For instance, while some funds without an explicit ESG mandate may be included, they are selected carefully to maintain overall portfolio integrity.
Investors who seek to exclude specific companies entirely from their portfolios may encounter limitations in certain ESG approaches. For example, large-cap ESG funds may still contain energy companies involved in oil and gas exploration. Recognizing diverse investor preferences, Betterment offers multiple SRI portfolios, including the Broad Impact portfolio, which balances all three ESG dimensions, and the more targeted Social Impact and Climate Impact portfolios.
Investment strategies for targeted portfolios
For those interested in climate-conscious investments, the Climate Impact portfolio is structured to focus primarily on environmental factors within the ESG framework. This portfolio utilizes various mandates aimed at reducing carbon footprints and divesting from fossil fuels. Notably, it includes the iShares MSCI ACWI Low Carbon Target ETF (CRBN), which targets companies with lower carbon emissions relative to their peers.
Moreover, the Social Impact portfolio emphasizes social equity, investing in ETFs that promote gender diversity and support vulnerable populations. For example, the SHE ETF highlights companies with substantial female leadership, while the VETZ ETF focuses on supporting U.S. veterans and their families through targeted loans.
Ultimately, Betterment’s commitment to socially responsible investing allows it to cater to a variety of ethical investment preferences without sacrificing diversification and cost efficiency. By regularly reassessing fund inclusion criteria and prioritizing liquidity, Betterment aims to provide solutions that meet the evolving needs of socially conscious investors.