In recent years, the demand for socially responsible investing (SRI) has surged as investors increasingly seek to align their financial goals with their ethical values. Betterment, a leading automated investment platform, recognized this trend by launching its first SRI portfolio in 2017. Since then, it has expanded its offerings to include various portfolios catering to different social and environmental causes.
At the core of Betterment’s SRI framework are three primary dimensions that guide its portfolio construction.
These dimensions revolve around the principles of sustainable investing, which emphasize the importance of considering environmental, social, and governance (ESG) factors in investment decisions. By focusing on these criteria, Betterment aims to provide a diversified and cost-effective solution for investors.
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Portfolio types and their focus areas
Betterment currently offers three distinct SRI portfolios: the Broad Impact Portfolio, the Climate Impact Portfolio, and the Social Impact Portfolio. Each portfolio is designed to cater to specific investor priorities while still maintaining a level of diversification.
Broad Impact Portfolio
The Broad Impact Portfolio seeks to balance all three ESG pillars, ensuring that investors benefit from a well-rounded approach to socially responsible investing. This portfolio includes ETFs that adhere to ESG optimization principles, promoting investments in companies that align with environmental sustainability, social equity, and strong governance practices. The aim is to foster positive change while still allowing for potential market returns.
Climate Impact Portfolio
For those particularly concerned about environmental issues, Betterment offers the Climate Impact Portfolio. This portfolio specifically targets investments that address climate change, such as reducing carbon footprints and promoting green financing. By excluding companies involved in fossil fuel extraction and prioritizing those with lower carbon emissions, investors can direct their funds towards more sustainable initiatives.
Social Impact Portfolio
The Social Impact Portfolio focuses on advancing social equity and empowerment. This portfolio allocates funds to ETFs that prioritize gender equity and support vulnerable communities. By investing in companies that promote diversity and inclusion, investors can make a meaningful impact while still pursuing financial growth.
Shareholder engagement and ESG mandates
One of the unique aspects of Betterment’s SRI approach is its emphasis on shareholder engagement. This allows investors to influence corporate behavior through proxy voting and shareholder proposals. Although ETF shareholders do not vote directly, the fund issuers represent their interests, advocating for socially responsible practices among the companies they invest in. Betterment incorporates this engagement strategy into its portfolios to enhance the impact of its investments.
Moreover, Betterment has developed specific SRI mandates that guide its portfolio construction. These mandates provide a framework for selecting ETFs based on their adherence to ESG criteria. For instance, the fossil fuel divestment mandate excludes companies with significant fossil fuel holdings, while the gender equity mandate emphasizes investments in businesses that support gender diversity in leadership roles.
Balancing costs and liquidity
While SRI-focused ETFs typically feature lower expense ratios compared to traditional mutual funds, Betterment is aware of the challenges related to liquidity in the current market. Insufficient liquidity can lead to higher transaction costs, which ultimately affect returns. To address this, Betterment continually reassesses its fund selections, ensuring that the portfolios maintain a balance between cost efficiency and optimal liquidity.
By focusing on asset classes such as US stocks, developed and emerging market equities, and investment-grade bonds, Betterment aims to provide a well-diversified investment strategy without compromising its SRI principles. This approach allows investors to achieve their financial objectives while making a positive social and environmental impact.
Commitment to socially responsible investing
At the core of Betterment’s SRI framework are three primary dimensions that guide its portfolio construction. These dimensions revolve around the principles of sustainable investing, which emphasize the importance of considering environmental, social, and governance (ESG) factors in investment decisions. By focusing on these criteria, Betterment aims to provide a diversified and cost-effective solution for investors.0
