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 below that umbrella since then. Inside Betterment’s SRI choices, we presently supply a Broad Impression portfolio and two extra, extra centered SRI portfolio choices: a Social Impression SRI portfolio (centered on social empowerment) and a Local weather Impression SRI portfolio (centered on climate-conscious investments). These portfolios signify a diversified, comparatively low-cost answer constructed utilizing change traded funds (ETFs), which shall be regularly 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 basic dimensions that form our portfolio building mandates:

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

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

Our SRI strategy makes use of SRI mandates primarily based on a set of trade 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. Relatively, Betterment identifies ETFs which have been categorised as ESG or related by third-parties and considers internally developed “SRI mandates” alongside different qualitative and quantitative elements to pick ETFs to incorporate in its SRI portfolios.

Utilizing SRI Mandates

One facet of enhancing a portfolio’s ESG publicity is decreasing publicity to firms that interact in sure actions which may be thought of undesirable as a result of they don’t align with particular values. These actions could embody 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 influence.

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 embody in our portfolios’ exposures.

Shareholder Engagement Mandate

Along with the mandates listed above, Betterment’s SRI portfolios are constructed utilizing a shareholder engagement mandate. One 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 plenty of matters equivalent to share possession, the composition of the board of administrators, and government stage compensation. Shareholders obtain data 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 way of a proxy card. A shareholder also can make an express advice for the corporate to take a particular plan of action by way of a shareholder proposal.

ETF shareholders themselves don’t vote within the proxy voting means of underlying firms, however quite 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 lively function participating with underlying firms by way of proxy voting to advocate for extra socially accountable company practices. These issuers use engagement-based methods, equivalent 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 choice. 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 general strategy to constructing an SRI portfolio:

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

Many SRI choices at this time sacrifice enough 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. According to 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 embody a partial allocation to an engagement-based socially accountable ETF utilizing shareholder advocacy as a method 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 specific shareholder campaigns are unsuccessful.

2. Integrating values into an ETF portfolio could not at all times meet each investor’s expectations.

For buyers who prioritize an absolute exclusion of particular varieties of firms above all else, sure approaches to ESG will inevitably fall wanting expectations. For instance, lots of the largest ESG funds centered on US Giant Cap shares embody 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 when it comes to the “S” and the “G.”

Understanding that buyers could want to focus particularly on a sure pillar of ESG, Betterment has made three SRI portfolios obtainable. The Broad Impression portfolio seeks to steadiness every of the three dimensions of ESG with out diluting completely different dimensions of social duty. With our Social Impression portfolio, we sharpen the concentrate on social fairness with partial allocations to gender range and veteran influence centered funds. With our Local weather Impression portfolio, we sharpen the concentrate on 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 in the marketplace. With out enough liquidity, each execution turns into costlier, making a drag on returns. Median each day greenback quantity is a technique of estimating liquidity. Larger quantity on a given asset means which you can rapidly purchase (or promote) extra of that asset out there with out driving the worth up (or down). The diploma to which you’ll drive the worth up or down together with your shopping for or promoting should be handled as a price that may drag down in your returns.

To that finish, Betterment reassesses the funds obtainable for inclusion in these portfolios recurrently. In balancing value and worth for the portfolios, the choices are restricted to funds of sure asset courses equivalent 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 Impression portfolio constructed?

Betterment’s Broad Impression portfolio invests belongings 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 contemplate all three ESG pillars, and consists of an allocation to an engagement-based SRI ETF. Broad ESG investing options are presently probably the most liquid, highlighting their recognition amongst buyers. With a view to preserve geographic and asset class diversification and to fulfill our necessities for decrease value and better liquidity in all SRI portfolios, we proceed to allocate to some funds that don’t replicate SRI mandates, notably in bond asset courses.

How is Betterment’s Local weather Impression portfolio constructed?

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

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

The Local weather Impression 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 are able to measure the carbon influence a fund has is by 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. Based mostly on weighted common carbon depth information from MSCI, Betterment’s 100% inventory Local weather Impression 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 Impression portfolio is allotted to fossil gasoline reserve funds. Relatively 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 a few of the most adverse influence on local weather change, together with oil producers, refineries, and coal miners equivalent to Chevron, ExxonMobile, BP, and Peabody Power.

How is Betterment’s Social Impression portfolio constructed?

Betterment affords a Social Impression portfolio for buyers that wish to put money into a method extra centered on the social pillar of ESG investing (the S in ESG).
Betterment’s Social Impression portfolio invests belongings in socially accountable ETFs and is constructed utilizing the next mandates: ESG, gender fairness, social fairness, and shareholder engagement. The Social Impression portfolio was designed to offer buyers publicity to investments which promote social empowerment with out sacrificing correct diversification and balanced value. Fund choice for this portfolio follows the identical pointers established for the Broad Impression portfolio mentioned above, as we search to include broad primarily based ETFs that concentrate on social empowerment with enough liquidity relative to their measurement within the portfolio.

How does the Social Impression portfolio assist promote social empowerment?

The Social Impression portfolio shares lots of the similar holdings as Betterment’s Broad Impression portfolio. The Social Impression portfolio moreover seems to additional promote the “social” pillar of ESG investing by allocating to the next ETFs:

• SPDR SSGA Gender Range Index ETF (SHE)
• Academy Veteran Impression ETF(VETZ)
• Goldman Sachs JUST U.S. Giant Cap Fairness ETF (JUST)

SHE is a US Inventory ETF that permits buyers to put money into extra female-led firms in comparison with the broader market. With a view to obtain this goal, firms are ranked inside every sector in keeping with their ratio of ladies in senior management positions. Solely firms that rank extremely inside every sector are eligible for inclusion within the fund. By investing in SHE, buyers are allocating extra of their cash to firms which have demonstrated better gender range inside senior management than different companies of their sector.

VETZ, the Academy Veteran Impression ETF, is a US Bond ETF and is the primary publicly traded ETF to primarily put money into loans to U.S. service members, army veterans, their survivors, and veteran-owned companies. A majority of the underlying belongings include loans to veterans or their households. The fund primarily invests in Mortgage-Backed Securities which can be assured by government-sponsored enterprises, equivalent to Ginnie Mae, Fannie Mae, and Freddie Mac. The fund additionally invests in swimming pools of small enterprise loans backed by the Small Enterprise Administration (SBA).

JUST, Goldman Sachs JUST U.S. Giant Cap Fairness ETF, invests in U.S. firms selling optimistic change on key social points, equivalent to employee wellbeing, buyer privateness, environmental influence, and group energy, primarily based on the values of the American public as recognized by JUST Capital’s polling.

Conclusion

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