(AssetMark) Though faith-based investing isn’t a new concept, many investors aren’t aware that they can align their investments with their religious values. For investors, designing an investment strategy that aligns with the principles and teachings of their religion and promotes positive change presents an enticing opportunity.
This article explains what faith-based investing is, the different approaches investors can take, and how you and your clients can build portfolios for potential profit and purpose.
Top Takeaways:
- Faith-based investing involves aligning an investment portfolio with religious beliefs and teachings.
- No matter their religion, anyone can be a faith-based investor, including individuals and organizations.
- Faith-based investing isn’t a separate asset class. It can fit into any portfolio strategy.
- Investors don’t have to sacrifice returns in order to participate in faith-based investing.
What is faith-based investing, and how does it work?
First and foremost, it is important to remember that faith-based investing is not wholly different than traditional secular investing. The objective is to invest with purpose and deliver compelling returns at a desirable level of risk which directly tie to investor goals. Faith-based investing differs only in the manner in which those investor goals are pursued; namely, it views global markets through a lens that opts for investments that align with the values and teachings of faith—namely the sanctity of life, family, stewardship, health, and safety.
While distinct, Faith-based investing is part of a broader umbrella of values-based investing, which includes, but is not limited to, socially responsible investing (SRI), environmental, social, and governance (ESG) investing, and impact investing. SRI investments typically avoid the stocks of companies involved in activities that are believed to be negative for society, such as gambling, alcohol, tobacco, pornography, or gun manufacturing. ESG, meanwhile, uses screens around factors like climate change, labor practices, and corporate management, to understand the risks that companies might face. For example, a company that pollutes could face regulatory fines and civil lawsuits—a potential risk for investors.
All these approaches believe that investors can reap the financial gain of participating in the capital markets, minimizing involvement risk and without sacrificing their values.
A history of faith-based investing
In one form or another, American Christians have practiced the principles of faith-based investing for hundreds of years.
Before the Civil War, Quakers in the United States started the Free Produce movement to boycott products made from slave labor, including cotton cloth and sugar cane.
In the 1970s and 1980s, Roman Catholics expressed their Christian values by avoiding the stocks of companies doing business with the South African apartheid regime. Many observers credit this divestment movement for ending apartheid.
Around the same time, a group of retired Catholic nunstook a much more hands-on approach to faith-based investing. They used their pooled investments to buy the minimum number of shares needed in order to pressure corporations to adopt better labor and environmental practices by filing shareholder resolutions for actions they wanted to see.
As you can see, there are some overlaps in the investment priorities of different religious groups, but there are also important distinctions. Faith-based investing is a big umbrella and allows different religious communities to find ways to invest in companies that align with their religious beliefs.
Who are faith-based investors?
Although faith-based investing is often associated with Christian values, it isn’t limited to Christian investors. Because every religion has a set of values and beliefs about what kind of activities should be promoted and which should be avoided, faith-based investing gives these investors an opportunity to put those beliefs into action.
For example, Muslim investors may seek to avoid companies involved in money lending with interest and the sale or production of pork or alcohol, all of which are prohibited by Islamic law, or shari’a. In order to participate in the capital markets, Islamic finance has evolved to create special financial instruments, known as sukuk, that do not violate the religion’s prohibition on usury.
In Judaism, the prohibitions on certain economic activities are less explicit, but many Jewish investors choose to express their religious values through more general, socially responsible investing strategies. Investments that address climate change, social justice, and good governance adhere closely to Judaism’s commandments to perform mitzvot, or good deeds.
While individuals may have a personal interest in faith-based investing, institutions can also participate. For instance, a church may have an endowment, but it doesn’t want to financially support activities that go against church teachings.
What is the performance of faith-based investing?
Because there isn’t one definition of faith-based investing, it’s hard to say what the performance record of this investment category is. However, research has looked at the returns of different types of values-based investing.
An increasing number of studies demonstrate that performance results broadly skew towards neutral to positive outcomes for socially responsible investments compared to those of traditional investments. In a meta-analysis of research studies, researchers concluded that corporations that undertake sustainability initiatives have better financial performance because they have better risk management controls.
A 2020 analysis by the Christian Investment Forum looked at the returns of 44 Christian faith-based equity and bond funds and found that the average return outperformed the benchmarks in their categories. The results were consistent over one-, three-, five-, 10-, and 15-year time periods.
Source: Christian Investment Forum
What are different approaches to faith-based investing strategies?
Just as there are many ways to express faith, there are many ways to practice faith-based investing, from investing in individual stocks to using mutual funds and exchange-traded funds. For investors today, the hardest part in implementing a faith-based strategy isn’t in finding investment vehicles but in defining what faith-based investing means for themselves.
Faith-based investors can employ a number of approaches when selecting investments:
- Exclusion screens
Investors may avoid investing in companies and industries they believe are in contradiction to their religious beliefs, such as alcohol, tobacco, firearms, and pornography. In addition, some faith-based investors also want to avoid giving money to companies they believe are harming people and the environment by eliminating companies with poor labor practices or those whose profits come from fossil fuels. - Impact investing
Thanks to new screening tools, investors can actively look for companies making positive changes in the areas of climate change, labor, and governance. For example, Inspire Investing, a company that manages several biblically responsible funds, has a free tool that allows investors to screen 24,000 stocks for unbiblical activities. - Shareholder activism
Some investors want to engage directly with companies to promote positive change. They are able to leverage their status as shareholders to participate in shareholder resolutions and proxy voting.
Investors—as well as mutual funds and exchange-traded funds—can use one of these approaches or a combination of approaches in their overall investment strategy.
How to get started with faith-based investing
Because faith-based investing is so personal, financial advisors must work with each of their clients to understand the issues and values that are most important to them. These two steps will help you structure a faith-based investing strategy that gets at the heart of what matters most to your clients.
1. Understand what faith-based investment means to your clients
Start by asking your clients, “What issues matter most to you?” or “Which activities do you want to avoid?” Not every client who wants to practice faith-based investing will do it in the same way. Some may wish to adhere strictly to the teachings of their religion. Others may take a more lax approach.
2. Choose your investment vehicle
Decide the best way that faith-based investments will fit into your clients’ portfolios to meet their financial goals. There are several options to choose from when providing investment advice:
- Faith-based funds
A convenient way to participate in faith-based investing is through mutual funds. These funds are managed by investment professionals who share your clients’ religious or ethical beliefs, which guide their investment decisions. - Faith-based ETFs
Like mutual funds, exchange-traded funds allow your clients to invest in a basket of stocks that have been vetted by an investment manager to adhere to religious principles. Because ETFs trade throughout the day, they may be a better option for active investors and institutions. - Individual stocks
Some investors may wish to set their own investment criteria and invest in stocks directly. Screening tools available from firms, such as Morningstar, give investors insights into the activities that different companies undertake, helping them find businesses whose mission aligns with their beliefs.
Final thoughts
With many available options, it’s never been easier for faith-based investors to make a positive impact with their money. Whether they’re an individual, family, religious institution, or socially responsible organization, faith-based investors can have both profit and purpose.
Want to know more? Reach out to your asset management consultant.
