In the world of investing, aligning your portfolio with your personal values has become increasingly important. Betterment, a pioneer in automated investing, launched its first Socially Responsible Investing (SRI) portfolio in 2017, and has since expanded its offerings to cater to various environmental and social priorities. Today, Betterment provides three distinct SRI portfolios: the Broad ImpactClimate Impactand Social Impact portfolios. These portfolios are designed to offer diversified, low-cost solutions using exchange-traded funds (ETFs), with the aim of continually improving as more data emerges and the availability of SRI funds broadens.
The core of Betterment’s SRI approach lies in its commitment to Environmental, Social, and Governance (ESG) criteria. This framework helps identify companies that demonstrate strong performance in these three key areas. Betterment’s SRI portfolios go beyond traditional ESG investing by incorporating shareholder engagement tools, such as proxy voting, to encourage socially responsible corporate behavior. However, it’s important to note that ETF shareholders themselves do not vote in the proxy voting process of underlying companies; rather, the ETF fund issuer participates on behalf of their shareholders.
Betterment’s SRI portfolio construction: mandates and challenges
Betterment’s SRI portfolios are built upon three fundamental dimensions: reducing exposure to unsustainable activities, increasing exposure to investments addressing core environmental and social challenges, and allocating to investments that use shareholder engagement tools. To achieve these goals, Betterment employs internally developed SRI mandates that guide the portfolio construction process.
However, constructing SRI portfolios is not without its challenges. Betterment has identified three main limitations that influence their approach: the shortcomings of many existing SRI offerings, the potential mismatch between investor expectations and ESG integration, and the liquidity limitations of many SRI-oriented ETFs. To address these challenges, Betterment continually reassesses the funds available for inclusion in their SRI portfolios, balancing cost, value, and liquidity.
The ESG and shareholder engagement mandates
Betterment’s SRI portfolios are constructed using a combination of ESG and shareholder engagement mandates. The ESG mandate focuses on ETFs that track indices constructed with reference to some form of ESG optimization, promoting exposure to the three pillars of ESG. The shareholder engagement mandate, on the other hand, aims to fulfill one or more of the above mandates through the shareholder engagement process, such as proxy voting.
Fossil fuel divestment and carbon footprint reduction
The Climate Impact portfolio places a strong emphasis on fossil fuel divestment and carbon footprint reduction. This portfolio invests in ETFs that track indices aiming to exclude stocks in companies with major fossil fuel holdings and minimize exposure to carbon emissions across the entire economy. By investing in funds like the iShares MSCI ACWI Low Carbon Target ETF (CRBN), investors actively support companies with a lower carbon footprint. Additionally, the Climate Impact portfolio allocates a portion of its assets to green bonds, which fund environmentally beneficial projects.
Gender equity and social equity
The Social Impact portfolio focuses on promoting social empowerment through gender equity and social equity mandates. This portfolio invests in ETFs that track indices aiming to represent the performance of companies seeking to advance gender equality and obtain exposures in investments that seek to advance vulnerable, disadvantaged, or underserved social groups. Examples of ETFs included in this portfolio are the SPDR SSGA Gender Diversity Index ETF (SHE), Academy Veteran Impact ETF (VETZ), and Goldman Sachs JUST U.S. Large Cap Equity ETF (JUST).
Performance considerations and future outlook
One might wonder if a socially responsible portfolio could lead to lower returns in the long term. However, research has shown that there can be positive correlations between ESG performance and operational efficiencies, stock performance, and lower cost of capital. It’s essential to note that performance in SRI portfolios can be impacted by several variables and is not guaranteed to align with the results of any specific study.
As the investing landscape continues to evolve, Betterment remains committed to supporting its customers in aligning their values with their investments. The company may add additional socially responsible funds to the SRI portfolios and replace other ETFs as new opportunities arise. By staying informed and adaptable, Betterment aims to provide its customers with the best possible tools to invest in a manner that reflects their personal values and priorities.
