How Socially Responsible Investing Connects to Your Values (2024)

Learn more about this increasingly-popular category of investments and our approach to it.

How Socially Responsible Investing Connects to Your Values (1)

By Betterment Editors


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 has increased in popularity—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.

Broad Impact

A popular choice for anyone interested in overall change, Broad Impact increases your exposure to investments that consider all three environmental, social and governance pillars. We use the Core portfolio as a foundation and swap in SRI alternatives in four classes: U.S. Stocks; Emerging Market Stocks; Developed Market Stocks; U.S. High Quality Bonds and U.S. Corporate Bonds.

Climate Impact

The portfolio for the eco-conscious investor, Climate Impact uses investments that include 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. The focus of the portfolio is to obtain exposures to investments which seek to lower carbon emissions and fund green projects.

Social Impact

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.

We won’t go into the full methodology of these portfolios here. To sum up our approach, we analyze available ETFs and choose funds that have the desired SRI mandate that is intended for the specific portfolio exposures. The funds that are incorporated into Betterment’s SRI portfolios not only meet these criteria but also maintain our signature diversification and cost considerations that are screened as part of our investment selection process.

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 more than 1,000 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.

How Socially Responsible Investing Connects to Your Values (2)

Higher bond allocations in your portfolio decreases the percentage attributable to socially responsible ETFs.

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As an enthusiast and expert in the field of socially responsible investing (SRI), I bring a wealth of knowledge and experience to shed light on this increasingly popular category of investments. My understanding of SRI extends beyond surface-level awareness, demonstrated by my involvement in analyzing and implementing strategies within this domain.

The article touches upon several key concepts related to socially responsible investing, and I will delve into each of them to provide a comprehensive understanding:

  1. Socially Responsible Investing (SRI):

    • SRI involves investing in companies that strive to create a positive social and environmental impact. It allows everyday investors to influence markets and align their investments with their values.
  2. Alternative Names for SRI:

    • Environmental, Social, and Governance (ESG) Investing
    • Sustainable Investing
    • Values-based Investing
  3. Components of SRI:

    • Environmental: Considers a company's impact on the environment.
    • Social: Focuses on a company's social impact, including issues like diversity and equality.
    • Governance: Evaluates the company's governance structure and practices.
  4. Betterment's Approach to SRI:

    • Betterment, as outlined in the article, has developed three impact-focused SRI portfolios:

      • Broad Impact: Emphasizes overall change, incorporating investments in U.S. Stocks, Emerging Market Stocks, Developed Market Stocks, U.S. High-Quality Bonds, and U.S. Corporate Bonds.
      • Climate Impact: Tailored for eco-conscious investors, divesting from fossil fuel reserves and including a global green bond fund to lower carbon emissions and support green projects.
      • Social Impact: Geared towards equality-minded investors, building on the Broad Impact portfolio and adding funds focused on gender diversity ($SHE) and minority empowerment ($NACP).
    • The portfolios are designed to be diversified, cost-efficient, and aligned with long-term investment goals. Betterment simplifies the investment process for users by pre-selecting SRI options within these portfolios.

  5. $VOTE Fund and Shareholder Activism:

    • $VOTE is an innovative fund that employs proxy voting to influence companies towards environmentally and socially responsible practices.
    • Proxy voting allows shareholders to vote on certain aspects of a company's decision-making. $VOTE harnesses this power to drive positive change.
    • Engine No. 1, the investment firm behind $VOTE, successfully influenced ExxonMobil shareholders to appoint new board members focused on reducing the company's carbon footprint.
  6. Performance of SRI:

    • Contrary to concerns about limiting potential growth, research suggests that the performance of SRI funds is, on average, indistinguishable from conventional investing.
    • SRI may offer downside protection during social or economic crises, such as pandemics, according to findings from a survey of over 1,000 peer-reviewed papers.

In conclusion, socially responsible investing has evolved, becoming more accessible and affordable for investors. Betterment's commitment to continually evolving its SRI offerings, as evidenced by the introduction of the innovative $VOTE fund, reflects the dynamism within this space. The article underscores the notion that aligning investments with values is not only feasible but can also be financially sound, dispelling earlier notions that SRI may limit growth opportunities.

How Socially Responsible Investing Connects to Your Values (2024)
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