Betterment’s Socially Responsible Investing portfolios methodology

Desk of Contents

Introduction
How will we outline SRI?
The Challenges of SRI Portfolio Building
How is Betterment’s Broad Impression portfolio constructed?
How is Betterment’s Local weather Impression portfolio constructed?
How is Betterment’s Social Impression portfolio constructed?
Conclusion

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 at the moment provide a Broad Impression portfolio and two extra, extra targeted SRI portfolio choices: a Social Impression SRI portfolio (targeted on social empowerment) and a Local weather Impression SRI portfolio (targeted on climate-conscious investments). These portfolios signify a diversified, comparatively low-cost resolution constructed utilizing alternate traded funds (ETFs), which will likely be regularly improved upon as prices decline, extra information emerges, and in consequence, 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:

Lowering publicity to investments concerned in unsustainable actions and environmental, social, or governmental controversies.
Growing publicity to investments that work to deal with options for core environmental and social challenges in measurable methods.
Allocating to investments that use shareholder engagement instruments, reminiscent of 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 consultants now favor “sustainable investing” because the identify for the whole class).

Our SRI strategy makes use of SRI mandates based mostly on a set of business standards often 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 straight choose firms to incorporate in, or exclude from, the SRI portfolios. Relatively, Betterment identifies ETFs which have been categorized 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.

Betterment’s SRI portfolios additionally goal a small operational money allocation in taxable accounts, well being financial savings accounts, and particular person retirement accounts (IRAs).

Utilizing SRI Mandates

One facet of enhancing a portfolio’s ESG publicity is lowering 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 could embrace promoting tobacco, navy weapons, civilian firearms, in addition to involvement in latest and ongoing ESG controversies. Nonetheless, SRI is about extra than simply adjusting your portfolio to attenuate 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 goals 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. One of the vital 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 variety of subjects reminiscent of share possession, the composition of the board of administrators, and govt degree compensation. Shareholders obtain data on the subjects to be voted on previous to the assembly within the type of a proxy assertion, and might vote on these subjects by means of a proxy card. A shareholder also can make an express advice for the corporate to take a selected plan of action by means of a shareholder proposal.

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

The Challenges of SRI Portfolio Building

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

1. Many current SRI choices available in the market have critical shortcomings.

Many SRI choices at the moment sacrifice adequate diversification applicable for traders who search market returns, and/or don’t present traders an avenue to make use of collective motion to result in ESG change.

Betterment’s SRI portfolios don’t sacrifice international diversification. In keeping with our core precept of worldwide 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 lessons. Moreover, all three of Betterment’s SRI portfolios embrace 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 traders 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 could not all the time meet each investor’s expectations.

For traders who prioritize an absolute exclusion of particular varieties of firms above all else, sure approaches to ESG will inevitably fall wanting expectations. For instance, most of the largest ESG funds targeted on US Giant Cap shares embrace some power firms that interact in oil and pure fuel exploration, like Hess. Whereas Hess may not 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 traders could desire to focus particularly on a sure pillar of ESG, Betterment has made three SRI portfolios accessible. 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 give attention to social fairness with partial allocations to gender range and veteran impression targeted funds. With our Local weather Impression portfolio, we sharpen the give attention to controlling carbon emissions and fostering inexperienced options.

3. Most accessible 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 at the moment available on the market. With out adequate liquidity, each execution turns into dearer, making a drag on returns. Median every day greenback quantity is a technique of estimating liquidity. Greater quantity on a given asset means you could shortly purchase (or promote) extra of that asset available in the market with out driving the value up (or down). The diploma to which you’ll be able to drive the value up or down along with your shopping for or promoting have to be handled as a price that may drag down in your returns.

To that finish, Betterment reassesses the funds accessible for inclusion in these portfolios repeatedly. In balancing price and worth for the portfolios, the choices are restricted to funds of sure asset lessons reminiscent of 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 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 contemplate all three ESG pillars, and contains an allocation to an engagement-based SRI ETF. Broad ESG investing options are at the moment essentially the most liquid, highlighting their recognition amongst traders. With a view to keep geographic and asset class diversification and to satisfy our necessities for decrease price and better liquidity in all SRI portfolios, we proceed to allocate to some funds that don’t replicate SRI mandates, notably in bond asset lessons.

How is Betterment’s Local weather Impression portfolio constructed?

Betterment provides a Local weather Impression portfolio for traders that need to put money into an SRI technique extra targeted on the environmental pillar of “ESG” relatively than specializing in all ESG dimensions equally. Betterment’s Local weather Impression portfolio invests property 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 provide traders publicity to climate-conscious investments, with out sacrificing correct diversification and balanced price. Fund choice for this portfolio follows the identical pointers established for the Broad Impression portfolio, as we search to include broad based mostly climate-focused ETFs with adequate liquidity relative to their dimension 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, traders 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 technique we are able to measure the carbon impression 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, based mostly 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 are greater than 47% decrease than Betterment’s 100% inventory Core portfolio as of March 12, 2025*.

*Goal investments, precise holdings will differ. 

Moreover, a portion of the Local weather Impression portfolio is allotted to fossil gasoline reserve funds. Relatively than rating and weighting funds based mostly 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, traders are actively divesting from firms with a number of the most adverse impression on local weather change, together with oil producers, refineries, and coal miners reminiscent of Chevron, ExxonMobile, BP, and Peabody Power.

One other means that the Local weather Impression portfolio promotes a optimistic environmental impression is by investing in bonds that fund inexperienced tasks. The Local weather Impression portfolio invests in iShares World Inexperienced Bond ETF (BGRN), which tracks the worldwide market of investment-grade bonds linked to environmentally useful tasks, as decided by MSCI. These bonds are known as “inexperienced bonds.” The inexperienced bonds held by BGRN fund tasks in a variety of environmental classes outlined by MSCI together with different power, power effectivity, air pollution prevention and management, sustainable water, inexperienced constructing, and local weather adaptation.

How is Betterment’s Social Impression portfolio constructed?

Betterment provides a Social Impression portfolio for traders that need to put money into a technique extra targeted on the social pillar of ESG investing (the S in ESG).
Betterment’s Social Impression portfolio invests property 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 provide traders publicity to investments which promote social empowerment with out sacrificing correct diversification and balanced price. Fund choice for this portfolio follows the identical pointers established for the Broad Impression portfolio mentioned above, as we search to include broad based mostly ETFs that target social empowerment with adequate liquidity relative to their dimension within the portfolio.

How does the Social Impression portfolio assist promote social empowerment?

The Social Impression portfolio shares most of the identical holdings as Betterment’s Broad Impression portfolio. The Social Impression portfolio moreover seems to be 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 traders 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 response to their ratio of girls in senior management positions. Solely firms that rank extremely inside every sector are eligible for inclusion within the fund. By investing in SHE, traders are allocating extra of their cash to firms which have demonstrated better gender range inside senior management than different corporations 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, navy veterans, their survivors, and veteran-owned companies. A majority of the underlying property encompass loans to veterans or their households. The fund primarily invests in Mortgage-Backed Securities which are assured by government-sponsored enterprises, reminiscent of 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, reminiscent of employee wellbeing, buyer privateness, environmental impression, and group power, based mostly on the values of the American public as recognized by JUST Capital’s polling.

Funding in socially accountable ETFs varies by portfolio allocation; not all allocations embrace the particular ETFs listed above. For extra details about these social impression ETFs, together with any related dangers, please see our disclosures.

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 someway there’s a premium to be paid for investing based mostly in your social beliefs and values.

A white paper written in partnership between Rockefeller Asset Administration and NYU Stern Heart for Sustainable Enterprise studied 1,000+ analysis papers revealed from 2015 to 2020 analyzing the connection between ESG investing and efficiency. The first takeaway from this analysis was that they discovered “optimistic correlations between ESG efficiency and operational efficiencies, inventory efficiency, and decrease price of capital.” When ESG elements had been thought-about within the research, there gave the impression to be improved efficiency potential over longer time durations and potential to additionally present draw back safety in periods of disaster. It’s vital to notice that efficiency within the SRI portfolios might be impacted by a number of variables, and isn’t assured to align with the outcomes of this research.

Dividend Yields Might Be Decrease

Utilizing the SRI Broad Impression portfolio for reference, dividend yields over a one-year interval ending March 31, 2025 point out that SRI earnings returns at sure threat ranges have been decrease than these of the Core portfolio. Oil and fuel firms like BP, Chevron, and Exxon, for instance, at the moment have comparatively excessive dividend yields, and excluding them from a given portfolio could cause its earnings return to be decrease. In fact, future dividend yields are unsure variables and previous information could not present correct forecasts. Nonetheless, decrease dividend yields generally is a think about driving complete returns for SRI portfolios to be decrease than these of Core portfolios.

Comparability of Dividend Yields

Supply: Bloomberg, Calculations by Betterment for one 12 months interval ending March 31, 2025. Dividend yields for every portfolio are calculated utilizing the dividend yields of the first ETFs used for taxable allocations of Betterment’s portfolios as of March 2025.

Conclusion

Regardless of the varied limitations that every one SRI implementations face at the moment, Betterment will proceed to assist its clients 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.