Earlier this month, we introduced Wealthfront’s new Socially Responsible portfolio so you can conveniently invest in a way that’s consistent with your values and beliefs and benefit from Wealthfront’s best-in-class automation features like our Tax-Loss Harvesting. Socially responsible investing (SRI) means different things to different people, so we think it’s important to be transparent and specific about our approach. At Wealthfront, SRI means promoting positive social impact by choosing investments that increase your exposure to companies vetted for their support of environmental, social, and governance (ESG) factors.
Here, we’ll explain exactly what’s in our expert-built Socially Responsible portfolio and show you how it stacks up against our Classic portfolio.
What’s in our Socially Responsible portfolio
Our Socially Responsible portfolio is designed around sustainability, diversity, and equity. Our investment research team analyzed hundreds of funds to balance social responsibility with long-term performance. In building our Socially Responsible portfolio, we chose funds that include companies that are involved in clean and renewable energy and exclude companies that engage in environmentally destructive businesses (like thermal coal, palm oil harvesting, and gas refining). We also chose funds that favor companies that empower women, minorities, and members of other disadvantaged classes. For more details, we encourage you to check out our white paper.
ETFs (or exchange traded funds) are the building blocks of our Socially Responsible portfolio, and we choose an ETF to represent each asset class we include. We’re able to conduct Tax-Loss Harvesting on 100% of the ETFs in our Socially Responsible portfolio. For every SRI ETF in your Socially Responsible portfolio, we’ve vetted an alternative SRI ETF. As a result, you can lower your tax bill effortlessly without compromising on your values.
The table below shows the primary ETFs we use in our Socially Responsible portfolio, as well as our Classic portfolio.
Our Socially Responsible portfolio and our Classic portfolio use the same ETFs for TIPS and Municipal Bonds. That’s because both TIPS and Municipal Bonds are naturally socially responsible, as they typically fund government spending on things like infrastructure, schools, and social programs, as well as day to day operations.
Not every asset class in our Classic portfolio has a good socially responsible ETF that can be used to represent it, so we exclude Emerging Bonds, Dividend Stocks, and Real Estate from our Socially Responsible portfolio. Even without these asset classes, the portfolio stays well diversified and has expected returns that are similar to what you get with our Classic portfolio.
How our Socially Responsible and Classic portfolios stack up
ESG scores for our Socially Responsible portfolio
There are two main ways we quantify how SRI-friendly our Socially Responsible portfolio is. The first is using overall ESG scores. MSCI (an investment research company) publishes these scores for investment instruments based on a range of factors related to environmental, social, and governance practices. Investment instruments are scored on a scale from 0-10 with 10 being the best possible score.
Below, you can see how our Socially Responsible portfolio’s ESG score stacks up against our Classic portfolio for each risk score. The chart below shows the overall weighted-average ESG score for a taxable Investment Account. We excluded Muni Bonds from the calculation because they don’t receive ESG scores.
As you can see, our Socially Responsible portfolios score significantly higher. Across all risk scores, our Socially Responsible portfolio has an average ESG score of 7.2, versus 5.9 for a Classic portfolio. That difference grows even larger for portfolios with higher risk scores.
Carbon intensity scores for our Socially Responsible portfolio
Carbon intensity scores are the second way we quantify how SRI-friendly our Socially Responsible portfolio is. This metric is a bit more tangible than ESG scores because it measures the tons of carbon dioxide emitted by a company per million dollars in sales. For carbon intensity, a lower score is better.
The chart below shows the carbon intensity score for our taxable Socially Responsible portfolio and Classic portfolio. As you can see, our Socially Responsible portfolio is 32% less carbon intensive on average!
The difference is even larger for IRAs — on average, our Socially Responsible portfolio is 52% less carbon intensive than our Classic portfolio.
Invest for good
We know many of our clients don’t just want to grow their wealth — they want to make a difference. That’s why we’ve designed our Socially Responsible portfolio to promote social impact while still providing risk-adjusted returns that are similar to what you’d get with our Classic portfolio. You can also choose to treat our Socially Responsible portfolio as a starting point — it’s fully customizable so you can change the asset allocation, add or remove asset classes, and choose from a wide range of additional investments like ETFs for clean energy and racial equity. We’re here to support you as you build your wealth on your own terms.
The information contained in this communication is provided for general informational purposes only, and should not be construed as investment or tax advice. Nothing in this communication should be construed as a solicitation, offer, or recommendation, to buy or sell any security. Any links provided to other server sites are offered as a matter of convenience and are not intended to imply that Wealthfront Advisers or its affiliates endorses, sponsors, promotes and/or is affiliated with the owners of or participants in those sites, or endorses any information contained on those sites, unless expressly stated otherwise.
Certain ETFs available to Wealthfront’s clients are labelled by Wealthfront as “Socially Responsible”. In order to be labelled as socially responsible, an ETF must meet at least one of the following criteria: (1) The ETF tracks an index marketed as seeking to adhere to socially responsible or ESG principles through the selection and weighting of its constituents (2) The ETF tracks an index which specifically excludes companies involved in environmentally destructive businesses such as oil and gas exploration and refining, thermal coal, oil sands, palm oil harvesting, or unsustainable production of forest products (3) The ETF tracks an index which favors companies, via the selection or weighting of its constituents, engaged in businesses related to: clean or renewable energy; electric vehicles or clean transportation; or sustainable agriculture and/or forestry (4) The ETF tracks an index which favors companies, via the selection or weighting of its constituents with policies and practices supporting of empowerment of women, minorities, or members of any disadvantaged class, or the inclusion of women, minorities, or members of any disadvantaged class in leadership positions. To read more about our methodology please further refer to our white paper here.
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About the author(s)
The Wealthfront Team believes everyone deserves access to sophisticated financial advice. The team includes Certified Financial Planners (CFPs), Chartered Financial Analysts (CFAs), a Certified Public Accountant (CPA), and individuals with Series 7 and Series 66 registrations from FINRA. Collectively, the Wealthfront Team has decades of experience helping people build secure and rewarding financial lives. View all posts by The Wealthfront Team