Leading Robo Advisors for Socially Responsible Investing
Socially responsible investing is a relatively new but fast-growing investment sector on Wall Street. This involves three things that are at least as important as the profitability of a company:
- The values the company holds.
- How it conducts business.
- The “footprint” it leaves on the world.
How Can Robo Advisors Make SRI Investing Easier?
Although SRI has certainly been gaining in popularity in recent years, it's far from a new phenomenon. In fact, for decades, there have been dozens of mutual funds created with socially responsible investing in mind.
However, Robo advisors are taking SRI a step further, making specially tailored, conscious portfolios available to investors.
This is a much cheaper option than investing in a mutual fund. Robo advisor fees can be as low as 0.25% or even free. Plus, many Robo advisors offer helpful features such as tax-loss harvesting and automatic portfolio rebalancing.
Best Robo Advisors for SRI Investing
We've reviewed a lot of Robo advisors over the last couple of years, and we're happy to see that some of them are currently offering SRI-focused portfolios. Here's a rundown of our favorites.
1. Betterment
Betterment is among the crème de la crème of Robo advisors. One of the very first in the industry, Betterment has written most of the playbook for other Robo advisors to follow.
The company takes a holistic view of your financial picture, including your goals and risk tolerance. It then uses Modern Portfolio Theory to construct a tailor-made portfolio for your needs.
Betterment is also leading the way with socially responsible investing. Along with charitable giving options, the robot advisor now offers an SRI-specific portfolio called called the Broad Impact portfolio, which is comprised of low-cost exchange-traded funds.
Here are the criteria Betterment uses in selecting funds:
- Reducing exposure to companies involved in activities deemed irresponsible on either an environmental, social, or governmental level
- Increasing exposure to companies that are striving to solve environmental and social challenges.
The funds Betterment picks reflect increased exposure to companies making positive social impacts while lessening exposure to less ethically sound companies.
You can even get a more focused portfolio with Betterment's Social and Climate Impact portfolios. The Climate portfolio focuses on mitigating climate change by focusing on companies that reduce their carbon footprint, excludes fossil fuel companies, and invests in green bonds, which fund environmentally friendly projects worldwide. The Social Impact portfolio expands the Broad Impact portfolio by also including stocks of companies focused on diversity in the U.S.
2. Personal Capital
Most of you are familiar with Personal Capital's free personal finance app, which we've consistently given high marks. But if you have $100,000 or more to invest, you can avail yourself of the app's excellent Wealth Management service. This gives you all of the tools you'd find at any Robo advisor, as well as a suite of core portfolios.
One of these portfolios has been dubbed the Socially Responsible Personal Strategy Portfolio, and it screens U.S. equity holdings with a focus on environmental, social, and corporate governance (ESG) factors. This portfolio also excludes securities in “vice” industries such as gambling, tobacco, adult entertainment, and arms. Personal Capital designed this portfolio with the help of Sustainalytics. Sustainalytics is a firm that has rated the ESG considerations of publicly traded companies for more than 25 years.
3. Wealthfront
Wealthfront is also one of our top-rated Robo advisors. And for a good reason — the platform charges low fees (0.25%), requires a minimum of only $500, and gives you a wealth of personal financial advice and planning.
The platform invests primarily in exchange-traded funds… but you can create a more personalized portfolio using its PassivePlus tools. And this can help you set up an ideal SRI portfolio. Here's how.
Now, Wealthfront may not offer a specific portfolio for SRI. Still, the company does allow you to exclude companies from your portfolio with the PassivePlus Stock-level Tax Loss Harvesting and Smart Beta tools. Simply set up a restriction list to let Wealthfront know which companies you do not want to be invested in.
It's this sort of customization that makes Wealthfront stand out from the rest of the Robo advisor crowd.
4. Ellevest
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The company requires no minimum investment. You can choose a membership plan ranging between $1 and $9 a month based on the types of investment accounts you need. You also have the ability to choose to invest in an impact portfolio, which includes companies that have women in leadership, sustainable business practices, and support community development. Ellevest’s membership provides access to the money resources you may need, and their investment is built to help you reach your money goals.
5. Acorns
Acorns is a robo advisor that makes it easy to start investing with little money. With their round-up spare change feature, you can invest your extra change every time you make a purchase with a linked card. Your money is put into a portfolio based on your risk tolerance and you can even get awards and cashback by shopping at partner brands.
Besides their core portfolios, Acorns also offers a sustainable or ESG portfolio. You get similar returns from a traditional portfolio, but with exposure to sustainable companies. You can choose between four different types of portfolios: Moderately Conservative, Moderate, Moderately Aggressive and Aggressive. While the composition is similar to their core portfolio, Acorns sustainable portfolio offers ETFs that are ESG focused.
What Is Socially Responsible Investing?
Socially responsible investing, or SRI, is essentially “voting with your dollars.” The idea is to invest in companies that match your values. Of course, how you define “socially responsible” is completely up to you. For example, you may want to invest in companies that use environmentally sustainable practices (read more about ethical and sustainable investing here). Or you may want to put your money into companies that create safe and fair workplaces for their employees. Or you may want to invest in companies that have nothing to do with gambling.
You may also hear SRI called “environmental, social, and corporate governance investing,” or “ESG.” This has a stricter definition than SRI in general.
There are three pieces to the ESG pie:
- Environmental considerations — a focus on renewable and sustainable energy
- Social considerations — a focus on fair labor and diversity
- Corporate governance considerations — a focus on how companies are run
No matter how you slice it, socially responsible investing means investing in what you think is ethically sound.
Sounds easy, right?
Not so fast…
Identifying individual companies that align perfectly with your values can be tricky. That's mainly because many publicly listed companies are huge — meaning there might be a few aspects of their operations that certainly don't fit your definition of “ethical”.
Before engaging in socially responsible investing, you first need to define what this means to you.
In a very general sense, socially responsible investing is mostly about avoiding investments in companies engaging in certain industries or business practices you consider undesirable. For example, it may tend to favor “clean businesses,” the type unlikely to discharge pollutants and damage the environment. This may make renewable energy companies highly desirable… but not always.
There are different ways to be socially responsible for a business standpoint. You may find it virtually impossible to find companies (or funds that invest in them) that don't engage in some or all possible negative practices. Some of these include:
- Unethical, or even predatory, business practices.
- Engaging in industries, you consider to be immoral, like gambling.
- Substantial reliance on foreign labor and supplies (offshoring of jobs).
- Poor treatment of employees.
- Use of child labor in developing countries.
- A record of unfair treatment of certain people groups, such as women and minorities.
- Religious positions you don't support.
- Political positions you don't support or condone.
- Undesirable political lobbying activities.
- A history of environmental damage or destruction.
- Creating and maintaining product lines or services, either unhealthy or downright dangerous.
- A history of partnerships with unsavory entities or individuals.
It's not that business is inherently evil, either. Virtually all for-profit businesses operate to make money. As such, being “clean” isn't typically the first order of business.
However, before you go out and plunge all of your money into socially responsible stocks, you may first want to consider the downside of this investing strategy.
The best investments may not be socially responsible. Just as businesses operate to make money, investors invest capital in doing the same. Many of the most profitable companies from an investment standpoint will not fit your definition of socially responsible. If you make it a policy to invest only in socially responsible companies, you may exclude yourself from the most profitable opportunities available. It's something of an “occupational hazard” for the socially responsible investor. And on the flip side…
Socially responsible companies may not be the best investments. Sometimes companies may make decisions that, while they are positive from an ethical standpoint, have a negative impact on their profit-making abilities. For example, McDonald's (MCD) recently made headlines by announcing a switch to cage-free eggs. This is great for the chickens, but is it good for the company's bottom line? After all, cage-free chickens cost more to raise, and McDonald's can't quite raise the prices of its Egg McMuffins to compensate.
Not every business touting socially responsible practices observes them. We live in a world awash in marketing spin. This is to say that nearly every company would like to describe itself as socially responsible. Large companies may even employ marketing and advertising personnel dedicated to creating this image. Whether this is an accurate description of a company is another matter. Marketing is all about creating a positive image, but this image doesn't always square with reality.
One way to engage in socially responsible investing is by using funds focusing on the category. There is a large and growing list of mutual funds and exchange-traded funds (ETFs) participating in the sector.
One advantage with funds is you can focus on the areas of social responsibility you consider to be the most important. Many funds are set up to invest in companies observing very specific criteria.
There are some caveats with funds as well. Once again, it may be challenging to find the one fund most closely matching your concerns. As it is a relatively new sector, you may not find too many funds with more than a few years of investment experience and results.
Also, socially responsible investing is something of a “boutique” offering and may come with higher than usual load fees. And of course, the funds may not be doing as well as an S&P 500 index fund.
Here's a list of the 10 largest socially responsible ETFs in terms of assets (as of March 2018):
| ETF | Ticker |
|---|---|
| iShares MSCI KLD 400 Social ETF | DSI |
| iShares MSCI USA ESG Select ETF | SUSA |
| iShares MSCI ACWI Low Carbon Target ETF | CRBN |
| SPDR SSGA Gender Diversity Index ETF | SHE |
| SPDR S&P 500 Fossil Fuel Reserves Free ETF | SPYX |
| iShares MSCI EM ESG Optimized ETF | ESGE |
| iShares MSCI EAFE ESG Optimized ETF | ESGD |
| Global X S&P 500 Catholic Values ETF | CATH |
| FlexShares STOXX Global ESG Impact Index Fund | ESGG |
| SPDR MSCI EAFE Fossil Fuel Reserves Free ETF | EFAX |
Here's a list of 10 of the best-performing socially responsible mutual funds:
| Mutual Fund | Ticker |
|---|---|
| Fidelity Select Environmental and Alternative Energy Portfolio | FSLEX |
| Parnassus Endeavor Investor | PARWX |
| Eventide Gilead N | ETGLX |
| Calvert Emerging Markets Equity I | CVMIX |
| Calvert International Opportunities I | COIIX |
| Parnassus | PARNX |
| Ariel Fund Investor | ARGFX |
| Eventide Healthcare & Life Sciences I | ETIHX |
| Invesco Summit P | SMMIX |
| American Century NT Emerging Markets Institutional | ACLKX |
If you have the time and patience to pick and choose your stocks, you can make sure you invest only in those stocks, most closely matching your concept of socially responsible business behavior.
Be sure to be thorough in investigating any company you want to invest in. It is highly possible a company with an excellent track record on labor relations and the environment may have significant subsidiary operations involved in businesses outside of your scope.
Also, understand companies are never static. Large ones, in particular, buy and sell operations on an ongoing basis. The acquisition of a single undesirable line of business could change your entire view of a specific company as it relates to social responsibility.
Investing in socially responsible companies is a noble effort. Just be aware of the limitations and understand it will never be a perfect endeavor.
Summary
Whether you want to dedicate your investing experience to improving the world or just put some money here and there into companies with ethically sound business practices, Robo advisors can help you invest in a socially conscious way.
On top of that, all of these services charge lower fees than what you'd find with an old-fashioned personal advisor while handing you the tools you need to plan and save for your future.
Robo advisors have truly democratized the investing sphere. While once only the very wealthy could pick and choose how to invest, now everyone can have this ability with a tap on their cellphone.
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WealthSimple is closing US Operations. I am not sure if that changes this list at all, but I thought I would add this comment in hopes that it is helpful to maybe one person one day
While it may make someone feel better to own a particular stock, buying a stock does very little to help or support the company who issued it. You aren’t buying stock from the company, you are buying it from another shareholder. He is the only one who made any money when you bought his shares. Buying stock gives you participation in future earnings but really does little to benefit the company or to keep it viable. Customers of businesses are the ones voting with their money, which is why social investing is purely symbolic and accomplishes no social change.
Here are ways socially responsible investing does work:
Executive compensation is tied to stock price. If people don’t buy stocks, prices drop and the C-suite’s pay drop. Thus, executives have plenty of incentive to want to want to keep stock prices high.
With less people willing to invest in it, more funding is harder to to get. Tesla is a perfect case. It’s sales are a joke compared to the other automakers but its market cap and ease of fundraising are much better than its competition. While it doesn’t help much in the grand the scheme of things for singular people not to invest, nor does your singular, individual vote in elections. Taken as a whole though, they matter.
You don’t want believe in socially responsible investing and are trying to justify why it doesn’t matter. There is good and bad in the world and good and bad companies. Just because you don’t want to confront the fact that some companies are totally evil doesn’t mean socially responsible investing “accomplishes no social change” as I’ve shown above. On a broad scope, would you not feel a certain (bad) way about holding stock in a Nazi company during WWII?