On Feb. 1, 2021, Boris Khentov, senior vice president of operations at New York City-based robo-advisor Betterment, wrote a blog post about how and why the company created what it calls its Climate Impact portfolio, which was split away from its main ESG portfolio last October.
In that blog, Khentov said the Climate Impact portfolio is as much a process as it is a product. “We see it as a continuation of a conversation with our customers, who told us in no uncertain terms, that climate change matters to them,” Khentov wrote.
Since 2017, Betterment had offered one “Socially Responsible Investing” option, constructed from Environmental, Social and Governance-tilted funds, although not necessarily tailored to a specific investor’s values.
After attending a Jan. 2020 rally focused on the role of financial institutions in the climate crisis in Washington D.C. at the request of a climate scientist friend, Khentov said he was moved by the passion of the crowd’s rallying cry of cutting off the flow of capital to the fossil fuel industry.
“In that moment, seeing the power and conviction of thousands who were mobilized by climate change, our sole ESG offering no longer felt like enough,” wrote Khentov, who, while not being an expert in climate change, does have a degree in Computer Science from Harvard and a J.D. from Northwestern Law.
Upon returning to New York, work soon began in earnest on adding a climate-specific portfolio at 11-year-old Betterment, which currently has more than 500,000 customers and $22 billion under management. Broadly speaking, during its months-long research the team focused on integrating three distinct approaches to climate-conscious investing:
- Divestment (i.e. excluding companies holding fossil fuel reserves)
- Low carbon exposure (i.e. overweighting carbon footprint leaders within each industry)
- Impact (i.e. financing environmentally beneficial activities directly)
While Khentov goes into much greater detail on the three approaches in his blog, he also notes that within three weeks of launch, it passed $100 million in total assets, which he said is “far faster than any brand-new portfolio in Betterment’s 10-year history.”
The Climate Impact portfolio invests in ETFs with a specific focus on mitigating climate change. Half of the stocks in the portfolio are invested in a global low-carbon stock ETF, per an Oct. 22, 2020 blog from Betterment Director of Investing Adam Grealish.
The other half of the stocks in the portfolio are invested in fossil fuel reserve free ETFs. These ETFs replicate broad market indices, while divesting from owners of fossil fuel reserves, defined as crude oil, natural gas, and thermal coal. By investing in the Climate Impact portfolio, Grealish said investors are actively divesting assets away from holders of fossil fuel reserves while cutting their investments’ carbon emissions.
The other change from the Core portfolio is investing in a global green bond ETF, funding projects that support alternative energy, energy efficiency, pollution prevention and control, sustainable water, green building, and climate adaptation.
3 different SRI portfolios
The Climate Impact portfolio is actually one of three different SRI portfolios, each with a different focus within the realm of ESG investing. The idea is to enable socially conscious investors to choose investments that reflect their personal values without sacrificing the aspects of the platform’s advice that protect their returns the most: proper diversification, tax optimization, and cost control.
The others are the Broad Impact portfolio, launched in 2017 and offering increased exposure to companies that rank highly on all ESG criteria equally, and the Social Impact portfolio, more focused on supporting social equity and minority empowerment, which is new like the Climate Impact portfolio.
Millennials impacting SRI investing
Getting back to the Climate Impact portfolio, it is notable that the median investor is three years younger than the median Betterment customer.
Indeed, younger investors who put a greater priority on sustainable investing could hasten an already-happening shift. Millennials, who are starting to hit their investing stride, are beginning to realize their investment decisions can further their sustainability concerns and influence climate change policy.
After all, what’s the point of saving for a comfortable retirement if the earth can’t provide a “comfortable” retirement existence by the 2060s? (This is loosely the premise of a recent article about Betterment’s Climate Impact portfolio in The Atlantic).
Recent Morningstar data found that the $51.1 billion net flow into sustainable investing open-end mutual funds and ETFs during 2020 was by far a record, more than doubling 2019’s $21.4 billion and surpassing 2018’s $5.4 billion by nearly 10 times.
Khentov wrote that none other than the head of ESG at MSCI believes that its sustainable indexes will eventually overtake its traditional offerings, and that trends suggest the shift will happen “more quickly than most people would expect.”
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