We think it’s important for clients to understand not just what is in their Wealthsimple portfolios, but why it’s there. That’s the reason we put together this guide, which walks you through what goes into our SRI portfolio, why we choose the assets we do, and what you can expect from your investments in different market conditions. We tried to be comprehensive, but if we missed anything and left you with questions, just ask. 

The super-short version: like all of our investing portfolios, our SRI portfolios are broadly diversified and designed for investors to build wealth in the long term. There is no intended trade-off on returns. We believe you can still do well while doing good.

If you want to own a group of companies that are acting in a way that is consistent with the most aggressive climate change goals, and to fund projects that are certified to have positive climate impact, this portfolio is for you.

Wealthsimple’s general investing approach

Our portfolios offer broad market exposure that’s designed to generate returns while limiting risk — and give you better performance than most traditional portfolios, especially during downturns. How do we do that? By diversifying: holding more varied geographic exposures, focusing on lower volatility stocks (which tend to have equal or better returns than high-risk stocks), and by investing in riskier government bonds. The SRI portfolio maintains as much of that diversification as possible, while also screening for socially responsible criteria.

Our SRI investing approach

The goal of the SRI portfolio is to offer investors exposure to companies that are not actively harming the world, and to invest in projects that are actively helping the world. Initially we looked to find this in existing assets. But we didn’t like the way most of the industry thinks about responsible investing — and the relevant funds available to to invest in — so we went ahead and made our own.

The stock part of the portfolio focuses on excluding companies that are behaving in a way that is inconsistent with environmental and social goals. We avoid big polluters, companies with human rights controversies, and companies without at least three women on their board. This is in contrast to most sustainable funds, which view social responsibility as a risk factor to be managed, and will only consider social responsibility if the factor is material to the company’s future performance. 

With our SRI portfolio, you get exposure to a group of companies that, when you consider their emissions as a whole, is consistent with the Paris Agreement and the IEA Sustainable Development Scenario. That means our investors are not profiting from the causes of climate change.

After applying these screens, we apply some risk management techniques to enhance the diversification of the portfolio, in order to adjust for the fact that we are screening out entire industries. For example, there are not a lot of energy producers that qualify to be in our fund. So the few that we do have, such as hydroelectric companies, are given more weight.

For the bond portion of the portfolio, we invest in green and sustainable projects that have a demonstrable impact on the transition to a net-zero economy. They’re all certified by an independent third party and include things like multilateral development organizations working on climate change mitigation; government projects supporting energy resiliency, public transportation and energy efficiency; and private sector renewable energy projects. We also add government bonds and gold to diversify the portfolio further.

Environmental and social screens

Environmental screens:

• Remove oil and gas-related companies
• Remove companies involved in thermal coal mining or coal power generation
• Remove companies with the top 25% of carbon emissions in their industry

Social screens:

• Remove companies in violation of the UN Global Compact (major controversies and human rights violations)
• Remove defence contractors and weapon manufacturers
• Remove casino, gaming, and adult nightclub/entertainment companies
• Remove companies involved in the manufacture of tobacco and alcohol
• Remove companies with too little gender parity at the board level (less than 3+ or 25%+ women)

Performance expectations

It all comes back to maximizing your odds of making money in the long run. 

Investing is trading cash for an uncertain future return. Historically, that’s been a good trade, but there’s no guarantee. That’s why we tell our clients to set themselves up for success — which we define as having enough to spend on the things they want when they want them — and stay prepared for whatever might happen.

As with all of our portfolios, we expect SRI portfolios to provide attractive returns relative to risk-free assets like savings accounts. For growth-focused portfolios, that should mean earning roughly the same amount as the long-term returns of the stock market — typically 4-5% per year — on top of the Bank of Canada interest rate. But again, because we try to narrow your range of outcomes, that return should come with less volatility than an all-stock portfolio. For the most conservative portfolios, we expect about 2% more than you’d get with a savings account, with only ½ to ⅔ of the volatility of our growth portfolios. Assuming long-term cash rates of 2-3%, that means a total expected annual return of 6-7% from our growth portfolios and 4-5% from our conservative portfolios. (This is a significant increase from recent years due to the recent rise in interest rates.)

Again, these are just median return expectations, and investors should expect a wide range of outcomes. In any moment in a given year, significant gains or losses are not unusual for any of our portfolios. Stocks are an excellent bet to outperform inflation over longer time periods, but over shorter time periods, the odds of making money are reduced. The chart below shows the performance of our growth portfolio since inception compared to our expected range of outcomes for the portfolio. 

How to read this chart: Each of the green lines show the likelihood of a potential outcome. For example, the top line shows the 90th percentile, which means we expect fund performance to be below this line 90% of the time. The second line from the top is the 65th percentile, which means we expect fund performance to be below this line 65% of the time. The median line represents the 50th percentile, so we expect performance to be below this line 50% of the time. And so on.

One other thing to keep in mind is that these aren’t funds that track the overall stock market. They can’t, because we’ve already screened out so many of the companies making up the overall market in order to focus only on the companies with a positive impact on the planet. 

At any particular moment, you might see a difference in performance between the SRI portfolio and the S&P 500. Outperforming or underperforming the market at specific times is totally normal. But in the long run, alternative weighting schemes like this one tend to outperform the broader market. 

Why it all matters

We believe that a highly reliable way to achieve your financial goals is by investing in low-cost, diversified portfolios of risky assets — and staying invested in them for the long term. The SRI portfolio adds to that by giving you exposure to companies that are behaving in a way that is consistent with aggressive climate change goals, and funding projects that are certified to have a positive impact on the climate.