Spotlight on Sustainability Series: Betterment’s CEO Sarah Levy

Betterment’s CEO, Sarah Levy, discusses Betterment’s ESG strategies, its customer demand for sustainable portfolios, and how Betterment plans to continue its momentum in the ESG space.

Sarah Levy was named Chief Executive Officer of Betterment in December 2020, beginning her trailblazing tenure as the leader of the innovative financial services company that’s introducing investors every day to ESG portfolios. Levy was previously a senior executive at Viacom where she held a number of C-suite positions, including Chief Operating Officer – Viacom Global Entertainment Group, and Chief Operating Officer – Viacom Media Networks.

In May, Levy spoke with FTI Consulting’s Hamm Hooper and Ryan Windels about how Betterment is building and sustaining ESG portfolios, how the company has evolved its thinking in the space, and specifically how Betterment’s Climate Impact portfolio is meeting the needs of climate-conscious investors in the near and long-term.

Tell us more about Betterment’s primary customer base?

We are experiencing very exciting growth at Betterment and we are ready to capture the moment as the largest digital investment advisor. Over the last year, we’ve added more than 100,000 clients to Betterment, and more than $10 billion in assets. Our clients are smart, agile and many are devoted to investing their hard-earned money in a socially responsible way to better align with their values.

Our socially responsible investment (SRI) portfolios are a big component of our recent growth. We currently offer three socially responsible investment portfolios: Broad Impact, Climate Impact, and Social Impact. Each allows our clients to choose the most appropriate portfolio for themselves based on their individual values. For example, an investor who is concerned over climate-change may be inclined to invest in our Climate Impact portfolio, which invests in ETFs that support companies with lower carbon emissions and the funding of green projects.

We continue to iterate on these portfolios in order to meet consumer demand, while also empowering people to do what’s best for their money so they can live a better life.

With growing concerns over greenwashing and other marketing ploys of non-sustainable funds as ESG-friendly, is Betterment’s ESG focus more about strategy or marketing? How popular are your sustainable portfolios with your customers?

Our independence is a big part of what attracts clients to Betterment. We do not create our own funds, which enables us to consider the entire universe of ETFs without conflict. We thoroughly examine all of the ETFs that we select to include in the portfolios. We regularly review the available options in the marketplace to ensure that we are offering our clients what we view to be the best available options in the market.

Our ESG investment options give those clients an opportunity to take action on the issues they care about. We’ve been dedicating more time and resources to our ESG offerings as investing with impact is top of mind for most of our clients.  On average, our clients who choose to invest in our SRI portfolios skew younger and more female than those investing in our other portfolios.

Do you find that ESG portfolio returns are consistent with market cap benchmarks? Are investors favoring purpose over returns?

Some investors are leery of jumping into a socially responsible portfolio over concerns that investing based on your social ideas and values costs a premium over a normal investment portfolio. However, a recent whitepaper from the Morgan Stanley Institute for Sustainable Investing shows that this is simply not the case. The study’s key takeaway is that there is no discernible trade-off in performance when comparing sustainable and traditional funds. We’ve also found that all three of our socially responsible portfolios perform similarly to our Core, globally diversified portfolio.

Validating our belief that our investors favor purpose, our SRI portfolios recently passed the $1 billion mark in assets under management. 

How has Betterment’s ESG philosophy evolved since it launched its first offering in 2017? Where do you see it going in the next five years?

Launching our first SRI portfolio in 2017, we were very early to the SRI game. Since then, we’ve been guided by two fundamental principles for responsible investing: reducing exposure to companies involved in unsustainable activities across the ESG spectrum, and increasing investments in companies that are addressing solutions for core ESG issues in measurable ways.

However, the beauty of ESG investing is that it continues to evolve and continues to improve.

As an example, there was rightfully a spotlight on racial inequity following the George Floyd and Breonna Taylor tragedies. And many of our investors wanted to start to put their money to work in helping to address this issue.  At Betterment, we have the ability to move quickly and spin up new ideas on the platform. As this movement gained momentum, we quickly introduced our Social Impact portfolio, which offers investors an SRI portfolio that is more focused on supporting social equity and minority empowerment. The portfolio achieves this objective by augmenting the ESG exposure achieved in the Broad Impact portfolio with two additional ETFs, each with a unique focus on diversity, NACP and SHE. This portfolio, along with our Climate Impact portfolio, has had great traction because it’s meeting the moment while also providing an opportunity for younger generations to invest in their values.

In terms of where ESG investing is going in the next five years, I think you will see a changing investor base in ESG and SRI products. For example, of Betterment’s client base investing in ESG and SRI portfolios, one thing we have noticed is that many more women are investing in these portfolios versus our standard portfolios. As there are more opportunities for individuals to invest in issues or causes they are passionate about, I think you will also see a diversification in the types of people who are investing.

Rumor has it the Biden Administration plans to issue an executive order empowering federal agencies to take action on climate-related risks. How is Betterment planning to innovate climate-related portfolios for your investors?

Climate-conscious investing is becoming a greater share of the socially responsible investing ecosystem. Betterment’s Climate Impact portfolio offers those individuals that are passionate about climate the opportunity to put their money in a more climate-focused strategy rather than focusing on different ESG dimensions equally.

For example, half of the stocks in the Climate Impact portfolio are allocated to iShares MSCI ACWI Low Carbon Target ETF (CBRN), an ETF that tracks the global market with a bias toward companies with a low carbon footprint. The other half of the portfolio is allocated to fossil fuel reserve free funds, SPYX, EFAX, and EEMX. We are providing our clients with the ability to invest with their values and see tangible results.

Additionally, we expect that we will continue to see a broader selection of investing products emerge that support climate initiatives. We are following the space closely so that as new quality products and ideas emerge, we can move quickly to make them available to our clients.