How Socially Responsible Investing Connects to Your Values
Learn more about this increasingly-popular category of investments and our approach to it.
Socially responsible investing—or SRI for short—is an increasingly popular option for people looking to invest in companies that are striving to create a positive social and environmental impact on the world.
With SRI, everyday investors can influence markets and invest in the change they want to see. This category of investing is booming with a total of $35 trillion in assets according to Bloomberg—and it goes by many names:
- Environmental, Social, and Governance (ESG) investing
- Sustainable investing
- Values-based investing
No matter what it’s called, though, SRI is built on the same idea. It considers both a company’s returns and its impact on the world. In this guide, we’ll summarize our approach to SRI as well as address questions on the performance of the category in general.
- Meet our SRI portfolios
- How the $VOTE fund is shaking up shareholder activism
- How SRI’s performance stacks up
Meet our SRI portfolios
Using the principles of SRI, you can buy into like-minded organizations via hundreds or even thousands of stocks, funds, and portfolios. But we try to make investing simple at Betterment. So we did the legwork for you and built three impact-focused SRI portfolios to choose from, one designed for a broad impact and two others tuned specifically to climate and social criteria. All three are diversified, cost-efficient, and built for the long-term, just like our Core portfolio.
A popular choice for anyone interested in overall change, Broad Impact increases your exposure to companies that rank highly on all ESG criteria. We use the Core Portfolio as a foundation and replace the market capitalization funds (standard funds based on the size of companies) with SRI alternatives in four classes: U.S. Stocks; Emerging Market Stocks; Developed Market Stocks; U.S. High Quality Bonds and U.S. Corporate Bonds.
We also increase the proportion of stocks of companies deemed to have strong social responsibility practices, brands you might recognize such as Intel, Cisco, and Disney.
The portfolio for the eco-conscious investor, Climate Impact, uses funds that include stocks with more climate-conscious alternatives and divest from owners of fossil fuel reserves. A global green bond fund is also included in the construction of this portfolio. This puts the focus on companies working to lower carbon emissions and fund green projects.
The portfolio for the equality-minded investor, Social Impact, uses Broad Impact as a foundation while adding two funds, one focused on gender diversity ($SHE) and another on minority empowerment ($NACP). These two funds are some of the only ones of their kind. The NACP fund, in fact, is the only ETF of its kind.
We won’t go into the full methodology of these portfolios here. To sum up our approach, we analyze hundreds of low-cost ETFs and choose funds that have an ESG mandate. These funds may, for example, be focused on selecting companies that rank highly on ESG factor scores from a data provider such as MSCI, an industry-leading provider of financial data and ESG analytics that has served the financial industry for more than 40 years. The funds that are incorporated into Betterment’s SRI portfolios not only meet these criteria but also maintain our signature diversification and cost considerations.
Finally, our team of investing experts is never satisfied. It’s why Betterment’s SRI offering continues to evolve since we first introduced it in 2017. We continue to search for new funds and updated standards that increase impact and deliver better performance. For an example of this evolution, look no further than $VOTE, a groundbreaking fund that’s included in all of our SRI portfolios.
How the $VOTE fund is shaking up shareholder activism
On the surface, the $VOTE ETF looks a lot like a garden variety index fund tracking the S&P 500. Behind the scenes, however, it represents an innovative approach to pushing companies toward environmental and social practices.
How? Through a process called “proxy voting.” Purchasing stock in a company grants you not just a share of its potential profits, but also the right to vote on certain aspects of its decision-making at annual shareholder meetings. If you hold stock of a company through an index fund, however, the fund technically holds this right.
The rise of index fund investing has meant a lot of this power goes untapped. That started to change in 2021, when the investment firm Engine No. 1 launched $VOTE with the aim of harnessing indexes for shareholder activism. The firm stunned the corporate world that year by persuading a majority of ExxonMobile shareholders—despite only holding just .02% of the company’s shares itself—to install three new board members in the name of reducing the energy company’s carbon footprint.
With each new investment in $VOTE, the potential for more headlines grows. By tracking the highest-valued companies proportionately (aka market cap weighted) and charging a management fee of only .05%—among the lowest in the industry—$VOTE is designed for mass adoption.
How SRI’s performance stacks up
Speaking of performance, it’s a frequently asked and totally reasonable question when it comes to socially responsible investing in general. Does trying to do right by the world through your investments limit their potential for growth?
The answer is becoming increasingly clear: not likely. According to a survey of 1,141 peer-reviewed papers and other similar meta-reviews, the performance of SRI funds has “on average been indistinguishable from conventional investing.” And while the researchers note that “finance is not a static field, so it is likely that these propositions will evolve,” they also found evidence that socially responsible investing may offer “downside” protection in times of social or economic crisis such as pandemics.
Investing in a better world
There was a time when SRI was barely on the radar of everyday investors. If you did know about it, you likely had one of two options:
- Spend a good amount of time researching individual stocks for a DIY SRI portfolio.
- Spend a handsome amount to buy into one of the few funds on the market.
Thankfully, those days are in the past. It’s never been easier and is becoming more affordable to express your values through your investing. And we’re proud to help to make it possible. At Betterment, there’s no separate tier of access for our SRI portfolios. All of our customers can choose socially responsible investing at the same simplified management fee.
If you’re ready to give socially responsible investing a try, we’re ready.