Betterment’s Socially Accountable Investing portfolios methodology

Introduction

Betterment launched its first Socially Accountable Investing (SRI) portfolio in 2017, and has widened the funding choices underneath that umbrella since then. Inside Betterment’s SRI choices, we presently provide a Broad Affect portfolio and two extra, extra centered SRI portfolio choices: a Social Affect SRI portfolio (centered on social empowerment) and a Local weather Affect SRI portfolio (centered on climate-conscious investments). These portfolios characterize a diversified, comparatively low-cost answer constructed utilizing trade traded funds (ETFs), which will probably be frequently improved upon as prices decline, extra information emerges, and because of this, the supply of SRI funds broadens.

How will we outline SRI?

Our strategy to SRI has three elementary dimensions that form our portfolio building mandates:

1. Decreasing publicity to investments concerned in unsustainable actions and environmental, social, or governmental controversies.
2. Rising publicity to investments that work to handle options for core environmental and social challenges in measurable methods.
3. Allocating to investments that use shareholder engagement instruments, similar to shareholder proposals and proxy voting, to incentivize socially accountable company habits.

SRI is the normal title for the broad idea of values-driven investing (many specialists now favor “sustainable investing” because the title for the whole class).

Our SRI strategy makes use of SRI mandates primarily based on a set of business standards generally known as “ESG,” which stands for Environmental, Social and Governance. ESG refers particularly to the quantifiable dimensions of an organization’s standing alongside every of its three parts. Betterment’s strategy expands upon the ESG-investing framework with publicity to investments that use complementary shareholder engagement instruments.

Betterment doesn’t instantly choose firms to incorporate in, or exclude from, the SRI portfolios. Somewhat, Betterment identifies ETFs which have been labeled as ESG or related by third-parties and considers internally developed “SRI mandates” alongside different qualitative and quantitative elements to pick out ETFs to incorporate in its SRI portfolios.

Utilizing SRI Mandates

One facet of bettering a portfolio’s ESG publicity is decreasing publicity to firms that interact in sure actions that could be thought-about undesirable as a result of they don’t align with particular values. These actions might embrace promoting tobacco, army weapons, civilian firearms, in addition to involvement in current and ongoing ESG controversies. Nevertheless, SRI is about extra than simply adjusting your portfolio to reduce firms with a poor social impression.

For every Betterment SRI portfolio, the portfolio building course of considers a number of internally developed “SRI mandates.” Betterment’s SRI mandates are sustainable investing targets that we embrace in our portfolios’ exposures.

Shareholder Engagement Mandate

Along with the mandates listed above, Betterment’s SRI portfolios are constructed utilizing a shareholder engagement mandate. Some of the direct methods a shareholder can affect an organization’s resolution making is thru shareholder proposals and proxy voting. Publicly traded firms have annual conferences the place they report on the enterprise’s actions to shareholders. As part of these conferences, shareholders can vote on a lot of matters similar to share possession, the composition of the board of administrators, and government stage compensation. Shareholders obtain info on the matters to be voted on previous to the assembly within the type of a proxy assertion, and may vote on these matters by a proxy card. A shareholder also can make an express advice for the corporate to take a particular plan of action by a shareholder proposal.

ETF shareholders themselves don’t vote within the proxy voting strategy of underlying firms, however moderately the ETF fund issuer participates within the proxy voting course of on behalf of their shareholders. As buyers sign rising curiosity in ESG engagement, extra ETF fund issuers have emerged that play a extra energetic function participating with underlying firms by proxy voting to advocate for extra socially accountable company practices. These issuers use engagement-based methods, similar to shareholder proposals and director nominees, to interact with firms to result in ESG change and permit buyers within the ETF to precise a socially accountable desire. Because of this, Betterment features a Shareholder Engagement Mandate in its SRI portfolios.

The Challenges of SRI Portfolio Development

For Betterment, three limitations have a big affect on our total strategy to constructing an SRI portfolio:

1. Many present SRI choices out there have severe shortcomings.

Many SRI choices at this time sacrifice ample diversification acceptable for buyers who search market returns, and/or don’t present buyers an avenue to make use of collective motion to result in ESG change.

Betterment’s SRI portfolios don’t sacrifice world diversification. In line with our core precept of world diversification and to make sure each home and worldwide bond publicity, we’re nonetheless allocating to some funds with out an ESG mandate, till passable options can be found inside these asset courses. Moreover, all three of Betterment’s SRI portfolios embrace a partial allocation to an engagement-based socially accountable ETF utilizing shareholder advocacy as a way to result in ESG-change in company habits. Engagement-based socially accountable ETFs have expressive worth in that they permit buyers to sign their curiosity in ESG points to firms and the market extra broadly, even when explicit shareholder campaigns are unsuccessful.

2. Integrating values into an ETF portfolio might not all the time meet each investor’s expectations.

For buyers who prioritize an absolute exclusion of particular kinds of firms above all else, sure approaches to ESG will inevitably fall in need of expectations. For instance, lots of the largest ESG funds centered on US Giant Cap shares embrace some vitality firms that interact in oil and pure fuel exploration, like Hess. Whereas Hess won’t meet the standards of the “E” pillar of ESG, it might nonetheless meet the standards by way of the “S” and the “G.”

Understanding that buyers might choose to focus particularly on a sure pillar of ESG, Betterment has made three SRI portfolios obtainable. The Broad Affect portfolio seeks to stability every of the three dimensions of ESG with out diluting totally different dimensions of social accountability. With our Social Affect portfolio, we sharpen the give attention to social fairness with partial allocations to gender variety and veteran impression centered funds. With our Local weather Affect portfolio, we sharpen the give attention to controlling carbon emissions and fostering inexperienced options.

3. Most obtainable SRI-oriented ETFs current liquidity limitations.

Whereas SRI-oriented ETFs have comparatively low expense ratios in comparison with SRI mutual funds, our evaluation revealed inadequate liquidity in lots of ETFs presently available on the market. With out ample liquidity, each execution turns into costlier, making a drag on returns. Median each day greenback quantity is a technique of estimating liquidity. Greater quantity on a given asset means that you could shortly purchase (or promote) extra of that asset out there with out driving the worth up (or down). The diploma to which you’ll be able to drive the worth up or down along with your shopping for or promoting have to be handled as a value that may drag down in your returns.

To that finish, Betterment reassesses the funds obtainable for inclusion in these portfolios usually. In balancing value and worth for the portfolios, the choices are restricted to funds of sure asset courses similar to US shares, Developed Market shares, Rising Market shares, US Funding Grade Company Bonds, US Excessive High quality bonds, and US Mortgage-Backed Securities.

How is Betterment’s Broad Affect portfolio constructed?

Betterment’s Broad Affect portfolio invests property in socially accountable ETFs to acquire publicity to each the ESG and Shareholder Engagement mandates, as highlighted within the desk above. It focuses on ETFs that think about all three ESG pillars, and consists of an allocation to an engagement-based SRI ETF. Broad ESG investing options are presently essentially the most liquid, highlighting their recognition amongst buyers. So as to preserve geographic and asset class diversification and to satisfy our necessities for decrease value and better liquidity in all SRI portfolios, we proceed to allocate to some funds that don’t mirror SRI mandates, notably in bond asset courses.

How is Betterment’s Local weather Affect portfolio constructed?

Betterment presents a Local weather Affect portfolio for buyers that wish to put money into an SRI technique extra centered on the environmental pillar of “ESG” moderately than specializing in all ESG dimensions equally. Betterment’s Local weather Affect portfolio invests property in socially accountable ETFs and is constructed utilizing the next mandates that search to realize divestment and engagement: ESG, carbon footprint discount, fossil gasoline divestment, shareholder engagement, and inexperienced financing. The Local weather Affect portfolio was designed to present buyers publicity to climate-conscious investments, with out sacrificing correct diversification and balanced value. Fund choice for this portfolio follows the identical tips established for the Broad Affect portfolio, as we search to include broad primarily based climate-focused ETFs with ample liquidity relative to their measurement within the portfolio.

How can the Local weather Affect portfolio assist to positively have an effect on local weather change?

The Local weather Affect portfolio is allotted to iShares MSCI ACWI Low Carbon Goal ETF (CRBN), an ETF which seeks to trace the worldwide inventory market, however with a bias in the direction of firms with a decrease carbon footprint. By investing in CRBN, buyers are actively supporting firms with a decrease carbon footprint, as a result of CRBN overweights these shares relative to their high-carbon emitting friends. A method we will measure the carbon impression a fund has is by taking a look at its weighted common carbon depth, which measures the weighted common of tons of CO2 emissions per million {dollars} in gross sales, primarily based on the fund’s underlying holdings. Primarily based on weighted common carbon depth information from MSCI, Betterment’s 100% inventory Local weather Affect portfolio has carbon emissions per unit gross sales which can be greater than 47% decrease than Betterment’s 100% inventory Core portfolio as of March 12, 2025.

Moreover, a portion of the Local weather Affect portfolio is allotted to fossil gasoline reserve funds. Somewhat than rating and weighting funds primarily based on a sure local weather metric like CRBN, fossil gasoline reserve free funds as a substitute exclude firms that personal fossil gasoline reserves, outlined as crude oil, pure fuel, and thermal coal. By investing in fossil gasoline reserve free funds, buyers are actively divesting from firms with among the most destructive impression on local weather change, together with oil producers, refineries, and coal miners similar to Chevron, ExxonMobile, BP, and Peabody Vitality.

Ought to we count on any distinction in an SRI portfolio’s efficiency?

One would possibly count on {that a} socially accountable portfolio might result in decrease returns in the long run in comparison with one other, related portfolio. The notion behind this reasoning is that in some way there’s a premium to be paid for investing primarily based in your social beliefs and values.

Conclusion

Regardless of the assorted limitations that each one SRI implementations face at this time, Betterment will proceed to assist its prospects in additional aligning their values to their investments. Betterment might add extra socially accountable funds to the SRI portfolios and exchange different ETFs because the investing panorama continues to evolve.