Inside Wealthsimple's SRI funds

Robo-advisor's CIO explains why they're launching their own funds and outlines the strategies at work in them

Inside Wealthsimple's SRI funds

Wealthsimple has launched a pair of Socially Responsible Investment (SRI) ETFs to serve what they see as a growing demand for investments that align with their clients’ environmental and social values.

Ben Reeves, Wealthsimple CIO, explained why they launched SRI ETFs of their own, having offered SRI strategies via other fund providers to their clients in years past. He says that by providing their own funds at a very low management fee, Wealthsimple is able to set their own standards for social responsibility and communicate them clearly to their clients. Reeves says that Wealthsimple’s clientele, which skews younger, had shown a strong desire for SRI options. These new ETFs are a means to meet that demand which Reeves says will only grow as a new generation of investors enters the market.

“There is a large and growing proportion of investors that really care about social responsibility as it's reflected in their portfolios and in the stocks they own,” Reeves says. “So having a good option that’s thoughtfully constructed that reflect these values is really important to have in your range of investment offerings. It's not going to be for everybody. But it really is important for a growing number of investors.”

Reeves says that the Wealthsimple team chose to launch their own funds after hearing from clients that the third-party SRI strategies they offered lacked an adequate commitment to gender diversity and environmental values. In the unregulated world of SRI, ESG, and impact investing, he says it made sense for Wealthsimple to set their own standards and offer those strategies to their clients.

The two funds, which offer exposure to North America and developed markets outside North America, are held to a rigorous environmental and social standard. On the environmental side they exclude oil- and gas-related companies, companies involved in thermal coal mining or coal power generation, and companies in the top 25 carbon emitters in their industry. On a geopolitical level they exclude any company in violation of the UN Global Compact, any company with major controversies around human rights violations, as well as all defense contractors and weapons manufacturers.

At a more social level they exclude casino gaming companies, adult nightclub entertainment companies, tobacco and alcohol companies. Wealthsimple is also setting a gender-parity standard for their funds, only investing in companies with at least three female board members or 25 per cent female representation at the board. That standard is backed up by a proxy voting policy where Wealtsimple will vote against slates that would move boards outside of those guidelines.

Reeves says that the standards remain imperfect and is expecting standards to tighten as data improves. He says the Wealthsimple team wanted to include a racial diversity standard, for example, but as of now this remains a difficult area to quantify and incorporate into an ETF. He expects that as company self-reporting around diversity improves, Wealthsimple will be able to set that standard for its SRI funds too.

With these exclusions, Reeves says the North American SRI ETF, traded on the TSX as WSRI at a 0.20 per cent fee, skews more heavily towards Canada than the U.S. relative to what broad market-cap weighting might imply. The developed ex-North American fund, listed as WSRD at a 0.25 per cent fee, skews towards Northern European and Scandinavian countries, where a larger number of firms meet Wealthsimple’s high SRI standard. Both of these funds, Reeves says, are subject to Wealthsimple’s risk-management techniques, giving clients a broadly diversified range of industry exposures.

“That’s really important,” Reeves says, “because when you’re applying these screens you end up with a basket of stocks that might not be as diversified as you’d want it to be. We re-weight the stocks according to industry exposure to deliver that diversity.”

Reeves says that Wealthsimple’s choice to call their funds SRI, rather than ESG or impact, reflects a philosophical choice. Impact, he says, implies an active bet on companies that are going to change the world for the better. As a passive manager, Reeves says Wealthsimple did not want to imply an investment strategy they don’t provide.

ESG, Reeves says, is built around an amalgamated score of data points with investments made in companies that meet a certain points score. Reeves says the Wealthsimple team avoided ESG because the scoring methodologies are “opaque” and the standards vary between ESG scorers. As well, he says that ESG strategies often lead you to invest in the companies with the best practices in an industry. Many Wealthsimple clients, Reeves says, aren’t interested in investing in the oil company with the best environmental record and would rather screen out the industry in its entirety. The clarity and independence of Wealthsimple’s SRI standard, too, avoid the risks of ‘greenwashing’ that can occur inside ESG funds.

Reeves says that at the core of Wealthsimple’s two funds is a desire to meet client needs, especially younger clients they expect to be the future of the investing public.

“We have a number of investors already with SRI accounts, maybe 20 per cent of our clients, and we see that group trend younger,” Reeves says. “What we hear very clearly from this segment of our investors is that they want us to consider what companies they’re investing in and ensure that most of these companies follow practices they agree with.”