ImpactAlpha, November 30 – Robo-advisors are online financial advisors that manage investments primarily using computer algorithms underpinned by the Modern Portfolio Theory. Typically, robo-advisors are much cheaper than their human counterparts, despite offering features like portfolio rebalancing and tax-loss harvesting.
Today, dozens of robo-advisors offer hands-off investment management to U.S. retail investors. With the growing interest in Environmental, Social, and Governance (ESG) investing, many have introduced socially responsible options.
What Do ESG Robo-Advisors Invest In?
SustainFI has reviewed 12 robo-advisors with ESG options for investors looking for more sustainable alternatives. We have found that most sustainable robo-advisor portfolios – typically referred to as socially responsible, impact, or ESG portfolios – hold very similar investments.
Most robo-advisors construct portfolios using “best-of-class” ESG ETFs, or exchange-traded funds. ESG portfolios typically own ESG funds that target a sub-sector of the market, such as U.S. stocks, foreign stocks, or bonds. These funds invest in baskets of stocks, choosing the ones with higher ESG ratings from the ESG rating agencies like MSCI.
One such fund that is popular is the iShares ESG Aware MSCI USA ETF (ESGU), which invests in “large- and mid-cap U.S. stocks with favorable environmental, social, and governance practices.”
Most ESG portfolios still invest in fossil fuel companies or utilities to track the broader market. They do that so that investors’ retirement savings don’t deviate too much from market benchmarks like the S&P 500. But some robo-advisors, notably EarthFolio, are taking a stand against fossil fuels entirely.
You can source sustainable investing options from about a dozen robo-advisors that offer varying degrees of ESG compliance. These include Acorns, Ally Invest, Betterment, EarthFolio, Ellevest, E*TRADE, M1 Finance, Marcus Invest, Personal Capital, Sustainfolio, and Wealthfront.
Each offers socially responsible portfolios that invest in companies with better ESG scores. Let’s take a look at a few of these advisors in more detail.
Betterment Impact Portfolios
Betterment, the first and largest robo-advisor, is a low-cost robo-advisor that offers three impact options. While neither option is fossil-free, each Impact Portfolio provides a high allocation toward ESG funds. According to Betterment, performance should be comparable to non-ESG portfolios, though costs are slightly higher. The portfolios cost 0.13%-0.20% of your assets each year, on top of the 0.25%-0.40% fee Betterment charges for its services. (This is still cheaper than using a human advisor, most of whom charge around 1% of your assets each year.)
As of 2021, Betterment has three impact options:
- Broad Impact, which invests in several large ESG funds,
- Climate Impact, which adds a low-carbon fund and a green bond fund to the mix (though it’s not fossil free), and
- Social Impact, which adds two funds promoting gender and racial diversity.
Wealthfront Socially Responsible Portfolio
Wealthfront rolled out its Socially Responsible Portfolio in September 2021, making it a bit late to the ESG game. The funds in the Socially Responsible Portfolios are the same line-up of BlackRock (iShares) ETFs that Betterment and most other robo-advisors also use. These include an ESG U.S. stock market fund, an emerging market fund, and an ESG developed market fund. Wealthfront also invests in a bond fund, which is not ESG-friendly.
This Socially Responsible Portfolio is well-rated by MSCI and Sustainalytics in ESG factors, though it does invest in fossil fuels. But, if you have more than $100,000 in assets under management at Wealthfront, you can “blacklist” stocks you don’t like with U.S. Direct Indexing.
Acorns is a personal finance app that lets you invest your spare change. If you sign up for their Round-Ups feature, they round up your spare change from everyday purchases to the nearest dollar and automatically invest it in a portfolio of your choice.
The company recently launched ESG portfolios that provide beginner investors with a more sustainable alternative. Acorns also uses low-cost ESG funds from BlackRock’s iShares family, and its ESG portfolios are designed to perform in line with non-ESG options, though they cost slightly more. Unlike other robo-advisors, Acorns doesn’t charge fees based on how much you invest. Instead, they charge membership fees of $3-$5 per month.
EarthFolio is the first sustainable robo-advisor. They also take a different approach to portfolio construction. First of all, they only invest in ESG funds, and they also offer an option that is 100% fossil-free.
However, EarthFolio doesn’t have many bells and whistles, and it is considerably more expensive than the alternatives. The funds in its portfolios can include pricey mutual funds, and EarthFolio’s 0.50% management fee is twice as high as some of its competitors. Additionally, this robo-advisor requires a minimum investment of $25,000 to get started, despite offering no tax-loss harvesting or extra budgeting features.
M1 Finance is a self-directed investment app and robo-advisor with a “pie investing” approach. They let you create your own portfolios, which they call “pies,” or invest in one of the two expert responsible investing options. Their “Responsible Investing Pies” use ESG ETFs from Nuveen, an asset manager. Although the pies have high scores from ESG agencies MSCI and Sustainalytics and don’t invest much in fossil fuels, they are quite expensive and don’t include any bonds. But that is offset by the fact that M1 Finance is free to use (they make money on margin loans and premium memberships). And you can build any “pie” you like, though, for some, that may defeat the purpose of handing off your investments to a robo-advisor.
Most ESG Portfolios Aren’t Fossil Fuel-Free
It may come as a surprise that most ESG portfolios still invest in companies involved in oil and gas exploration.
Why is that? Portfolio performance gets measured against market benchmarks like the S&P500. So robo-advisors worry about selling strategies that deviate too much from the market. While portfolios that invest in oil and gas can track closer to widely used market indices, some investors complain that these portfolios aren’t sufficiently ESG.
No robo-advisor offers a perfect sustainable portfolio (yet). Many of them still contain fossil fuels or companies that struggle with social or governance practices. And those with higher ESG scores overall may cost more or require substantial minimum investments.
That said, as the demand for sustainable investments grows, so will products designed to meet those demands. Investors should welcome the emergence of more sustainable choices.
Anna Yen is a contributor for SustainFi. She has nearly two decades of experience specializing in derivatives, wealth management, and alternative investments. Between marketing derivatives at J.P. Morgan and as a director at UBS, she co-managed a fund portfolio. Currently, she is an investor and financial wellness expert at FamilyFI.
NOT INVESTMENT ADVICE. The content is for informational purposes only; you should not construe any such information as investment advice.