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The robo-advisor phenomenon has swept the investment world. As it has, it’s also been creating a number of very specific investment niches.
One that’s been on the rise in recent years—and works especially well with robo-advisors—is socially responsible investing, or SRI. For that reason, we’ve compiled the five best robo-advisors for socially responsible investing.
Check out the first-ever episode of the Money Under 30 podcast. We’ll discuss Socially Responsible Investing – what is it, should you do it, and what kind of financial returns can you expect with an environmentally-friendly investment portfolio.
What is socially responsible investing (SRI)?
SRI centers on investing in companies that operate businesses with socially desirable products and services. It isn’t about investing strictly for social benefit, but rather investing in companies engaged in SRI that represent profitable investments. These can include areas like clean energy, affordable housing, or improved human health.
At the same time, SRI works to exclude certain companies or industries engaged in products or services that are deemed socially harmful. These can include tobacco, weapons manufacture, gambling, or adult entertainment.
SRI also involves Environmental, Social and Governance (ESG) considerations. Environmental centers on climate change, renewable energy, and sustainability. Social focuses on diversity, labor relations, and conflict minerals. Governance relates to management structure, board independence and executive compensation. It refers not just to what companies do, but how they’re run.
Why robo-advisors are perfect platforms for SRI
It can be extremely difficult for an individual investor to develop a portfolio comprised of SRI compliant companies. There are very few companies that are 100 percent compliant. What SRI attempts to do is to invest in companies that are more compliant than industry average. As well, with companies being so diversified with both product lines and geography, it can often be difficult to identify the most appropriate companies.
There have been mutual funds based on SRI investing for decades. But robo-advisors offer investors an opportunity to invest in a portfolio of either funds or individual stocks that generally meet SRI requirements. In fact, it’s possible to have a complete balanced portfolio with a robo-advisor that offers an SRI investment option.
As well, robo-advisors offer the same investor benefits on SRI portfolios as they do with general investing portfolios. That includes selection of your investment asset allocations, rebalancing your portfolio, reinvesting dividends, and doing it all at a very low fee. Many robo-advisors also offer tax-loss harvesting, which is an investment strategy designed to minimize the tax liability created by capital transactions.
As an investor looking to invest in an SRI portfolio, you can open an account with a robo-advisor which meets SRI criteria that will be fully managed for you. All you’ll need to do is fund your account.
With that in mind, here is our list of the five best robo-advisors for socially responsible investing:
1. Swell Investing
Launched in 2016 Swell Investing is another recent addition to the robo-advisor universe. Like Earthfolio, it isn’t a robo-advisor with an SRI option, but a dedicated SRI platform.
Unlike other robo-advisors, Swell Investing doesn’t invest using funds, but instead uses individual stocks. (For investments in foreign stocks, they use American Depository Receipts, or ADRs.) Each portfolio is comprised of dozens of stocks, and the use of individual securities gives them much greater control over the companies held in the portfolio.
You get a choice of six portfolios, each of which represents a different SRI segment:
- Green Tech: Focuses companies specializing in energy efficiency, desirable building products, and reducing overall energy infrastructure. This portfolio consists of 60 companies.
- Renewable Energy: Includes 65 companies engaged in renewable energy research and production.
- Zero Waste: Focuses on companies engaged in composting, recycling, waste minimization, and materials moving toward zero waste. Includes 38 companies.
- Clean Water: Includes 43 companies engaged in conserving water, cleaning up water supplies, and streamlining water distribution systems.
- Healthy Living: Focuses on companies engaged in food, fitness, and new health technologies. Portfolio includes 50 companies.
- Disease Eradication: Includes 68 pharmaceutical and biotech companies conducting research and development involving novel approaches to combating the world’s biggest health problems.
Each portfolio consists of companies that are virtually household names, as well as many more you’ve probably not heard of. What’s more, you have the option to remove up to three companies from each portfolio, if you don’t agree with their inclusion. Also, it doesn’t appear they provide a bond or fixed income option.
Swell Investing investment details:
- Minimum investment: $50
- Available account types: Taxable investment accounts and IRAs.
- Fees: 0.75 percent of your account balance.
- Tax-loss harvesting: Not offered.
- Accessibility: Desktop only.
Betterment is the largest and arguably the most popular independent robo-advisor in the industry. They not only offer SRI investment management, but they impose no minimum initial investment. That opens the platform to investors of any portfolio size.
Betterment uses the same investment methodology for SRI investing as they do for other portfolio models. But they give increase weight to stocks of companies that meet certain social, environmental, and governance criteria.
Betterment’s SRI investing approach lowers exposure to companies considered to have a negative social impact. That includes companies to profit from poor labor standards or environmental devastation. Conversely, they increase exposure to companies considered to have a positive social impact. This includes companies to foster inclusive workplaces or commit to environmentally sustainable practices.
Betterment concentrates SRI investing in two asset classes: US large-cap stocks and emerging market stocks. Since Betterment invests only in low-cost index-based exchange traded funds (ETFs), they use SRI based ETF’s for those two asset classes.
However, the other asset classes they use—US mid-cap and small-cap stocks, foreign developed stocks, and the various bond classes—remain the same as their core portfolios, due to the lack of acceptable SRI alternatives.
Betterment investment details:
- Minimum investment: None
- Available account types: Individual and joint taxable accounts; traditional, Roth, rollover and SEP IRAs; trust accounts.
- Fees: 0.25 percent per year of account balance for the Digital plan; 0.40 percent of account balance for the Premium plan. There is no additional cost for SRI investing.
- Tax-loss harvesting: Yes
- Accessibility: Desktop and mobile for Android and iPhone devices.
3. Personal Capital
Personal Capital offers SRI under ESG. They partner with Sustainalytics, a global leader with more than 25 years in ESG and corporate governance research and ratings.
In constructing SRI portfolios, Personal Capital uses the same methodology and investment philosophies as their core personal strategies. Each portfolio includes each of the six major asset classes, including:
- Domestic Equities
- International Equities
- Domestic Bonds
- International Bonds
- Alternative investments
Personal Capital starts with a “best-in-class” selection of companies within broad indices. They then use Sustainalytics’ scores in categorizations to further identify companies for each portfolio. They select companies with the highest scores.
Portfolio composition will depart from ordinary investing, in that certain sectors may either be over-emphasized in an SRI portfolio, while others are either minimized or completely excluded. For example, energy companies are largely excluded from consideration, since they have heavy concentrations in fossil fuels.
Among excluded industries are adult entertainment, gambling, tobacco-related, controversial weapons, military contracting, and small arms.
Though their extensive research indicates that the performance of SRI is generally comparable to that of traditional investing, they nonetheless warn that excluding certain sectors, particularly energy, can negatively impact portfolio performance.
The one disadvantage with Personal Capital is that their wealth management service requires a high minimum investment that will exclude small investors. But for investors who have the minimum, Personal Capital leads the pack of robo-advisors for socially responsible investing.
Personal Capital investment details:
- Minimum investment: $100,000
- Available account types: Taxable brokerage accounts, IRAs and other retirement accounts, college savings and 529 plans.
- Fees: 0.89 percent per year of assets under management for most investors; sliding scale down to 0.49 percent for portfolios greater than $10 million. There is no additional cost for SRI.
- Tax-loss harvesting: Yes
- Accessibility: Desktop, smartphone, tablet, Apple Watch
Wealthsimple is Canada’s largest robo-advisor (but available in the US), and a relative newcomer to the industry, having been launched in 2014. But it’s a robo-advisor that was specifically designed to offer the types of investment portfolios that most closely match personal preference. For example, not only do they offer an SRI portfolio, but they also offer a Halal portfolio, consistent with Islamic Halal principles.
Wealthsimple’s SRI portfolio is invested in six different sectors, each represented by its own ETF:
- Low Carbon exposure
- Socially Responsible American companies
- Gender Diversity
- Local Initiatives (bonds)
- Affordable Housing (bonds)
Wealthsimple offers three different SRI portfolio types:
- Conservative: More heavily invested in Local Initiatives and Affordable Housing, since those are bond funds. It essentially creates an allocation in which 65 percent of the portfolio is invested in bonds, and 35 percent in stocks.
- Balanced: Has an even split of 50 percent stocks and 50 percent bonds. With the three different portfolio allocations, not only can you invest in SRI, but you can do so based on your own personal investment risk tolerance.
- Growth: Has a higher concentration in the stock sectors, and particularly Low Carbon, which represents more than 46 percent of the portfolio. Local Initiatives and Affordable Housing represent just 20 percent of the portfolio combined. That results in a portfolio mix of 80 percent stocks, and 20 percent bonds.
Wealthsimple investment details:
- Minimum investment: None
- Available account types: Individual and joint taxable accounts; traditional, Roth, rollover, and SEP IRAs; trusts.
- Fees: 0.50 percent per year of account balances up to $100,000; 0.40 percent per year for balances greater than $100,000. There is no additional cost for SRI investing.
- Tax-loss harvesting: Yes
- Accessibility: Desktop and mobile apps, including Android, iOS and Apple Watch.
MoneyUnder30 has entered into a referral and advertising arrangement with Wealthsimple US, LTD and receives compensation when you open an account or for certain qualifying activity which may include clicking links. You will not be charged a fee for this referral and Wealthsimple and MoneyUnder30 are not related entities. It is a requirement to disclose that we earn these fees and also provide you with the latest Wealthsimple ADV brochure so you can learn more about them before opening an account.
Earthfolio is unlike other robo-advisors in that SRI is specifically what they do. Other robo-advisors are general investment platforms that offer an SRI portfolio service. Earthfolio was built with SRI as a foundation. There is no other portfolio option. What’s more, Earthfolio was founded in 2000, which makes it the longest running SRI investment service on this list. In fact, it’s the world’s first automated investment service dedicated to sustainable investing.
When you invest with Earthfolio your account is actually held with TD Ameritrade. That gives you all the benefits of a world-class investment platform. Earthfolio is also a member of The Forum for Sustainable and Responsible Investments (US SIF)—“the leading voice advancing sustainable, responsible and impact investing across all asset classes”.
Earthfolio invest your portfolio in nine different asset classes: four stock funds, four bond funds, and one money market fund:
- US Large Companies
- US Medium Companies
- US Small Companies
- International Developed Companies
- Money Market
- US Short-term Bonds
- US Intermediate-term Bonds
- High-yield Bonds
- Community Development
Earthfolio invests in sustainable funds, that screen up to 10 different EFG criteria. Those criteria consist of:
- Corporate Governance
- Community Development
- Clean Tech
- Equality and Diversity
- Fair Labor
- Non-violence (no weapons manufacturers)
- Healthy Living
- Human Rights
- Animal Welfare
They disclose that they’re not searching out perfect companies, but rather those that “rise above their peers by demonstrating consistent ethical behavior”. Unlike other robo-advisors, Earthfolio doesn’t use ETFs for the asset classes. Instead, they build portfolios with mutual funds dedicated to SRI investing.
Earthfolio investment details:
- Minimum investment: $25,000
- Available account types: Individual and joint taxable accounts, trust accounts, and traditional, Roth, rollover, and SEP IRAs.
- Fees: 0.50 percent per year of your account balance.
- Tax-loss harvesting: No
- Accessibility: Not indicated.
One of the advantages of investing with robo-advisors is that you can decide exactly how you want to invest. You can either choose to invest 100 percent of your portfolio in SRI, or just a portion of it. That option certainly exists with Personal Capital, Betterment and Wealthsimple, though Earthfolio and Swell Investing are SRI-only platforms.
Robo-advisors are an easy and convenient way to take advantage of conscience-based investing. You certainly want to earn a healthy return on your investing activities. But at the same time, robo-advisors that offer SRI give you an opportunity to do that in a way that will promote a healthy environment, better labor practices, greater energy efficiency, and a host of other socially desirable outcomes.
What’s more, robo-advisors enable even the smallest investors to participate in SRI. You can open an account with just a few dollars, have the portfolio fully managed, and pay a fee of well under one percent per year. That puts SRI in reach of investors at all levels.
This page titled 5 Best Robo-Advisors for Socially Responsible Investing and more fantastic content can be found at this website. It was originally published on 2019-07-18 12:01:30.