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Sustainable & Impact Investing

March 15, 2022

Faith-Based Investing: Opportunities to Align Faith and Finance

Executive summary

  • Faith-based investing can trace its roots back centuries. Investors from Christian, Jewish and Islamic faiths, among others, have long considered the societal impacts of their financial decisions. Many denominations have adopted formal guidelines prohibiting investments that violate their traditions or beliefs.
  • Today, faith-based investing empowers organizations to select investments that align
    with their religious beliefs and organizational values. This can take a variety of shapes, from avoiding industries that conflict with an organization’s beliefs to shifting capital in support of human causes. Faith-based organizations have led the way in using the power of capital for transformation.
  • The significant amount of data available about a company’s performance on environmental, social and governance (ESG) issues helps make it possible to more closely align investments and values while retaining the potential to earn competitive returns.

The history of faith-based investing

The idea of doing well by doing good dates back centuries. In the 1800s, Quakers launched the Free Produce Movement, an international boycott of goods produced by slave labor and one of the first nonviolent protests against slavery. In 1891, Pope Leo XIII penned On the Condition of Labor (Rerum Novarum), his social encyclical addressing the dehumanizing conditions in which many workers labored, noting that the poor “have a claim to special consideration.”¹ By the 20th century, religious organizations from many faiths were at the forefront of the movement to bring about change relevant to their teachings. In 1977, for instance, the Reverend Leon Sullivan, a Baptist pastor and civil rights advocate, drafted a set of corporate responsibility principles that guided divestment from apartheid South Africa. Also, in July 2018, the Third Vatican Conference on Impact Investing called attention to issues facing the poor and the environment and featured several successful projects that put Catholic values into action.2

Faith and finance

The past two decades have seen dramatic advancements in opportunities to align faith and finance. Faith-based organizations want to maximize the impact of their good works, grow their investment portfolios and live their missions more deeply. Many faith-based investment strategies focus on socially responsible investments, often excluding companies deemed immoral, such as producers of alcohol, tobacco, weapons or gambling. Thanks to the growing amount of data available about a company’s performance on ESG issues, it is possible to more closely align investments and values while retaining the potential to earn competitive returns.

WHAT IS ESG?

ESG is a set of data that is increasingly being used in investment decision-making when determining the financially material risks and opportunities associated with a company. Some commonly used ESG considerations include:

  • Environmental factors: Companies’ adaptability to climate issues, natural resource management, pollution and waste.
  • Social factors: Human capital inclusive of treatment of the workforce; diversity, equity and inclusion programs and policies; product liability; and sourcing challenges.
  • Governance factors: Business ethics, compensation practices, board independence and board diversity.

 

Often, the hardest part of mission-aligned investing for an organization is not investment selection itself but defining and adapting goals, both financial and beneficent. Tools like in-depth questionnaires help align and prioritize an institution’s objectives to establish a fundamental decision-making framework. Organizations rooted in the same denomination may have differing interpretations of faith-based values. Thus, it is important to memorialize an organization’s specific strategy in an investment policy statement (IPS). From there, a long-term investment strategy can be customized to the mission-aligned strategy, with careful consideration of the bottom-line performance potential.

A good place to start is with a bird’s-eye view of a company’s ESG performance. The company’s profile is then broken down into individual buckets to evaluate, for example, its human rights track record or responsible lending practices. The key to a powerful portfolio is not just comparing high and low ESG scores but instead looking at the metrics holistically to align investments with the most relevant values of an organization. Context matters.

In developing a strategy, some faith-based organizations choose to follow a de minimis rule, that is, investing no more than 5% of a portfolio in violation of mission-driven principles. This guideline can be outlined in the organization’s IPS. Here is an example from the IPS of one Catholic organization: The Investment Committee recognizes that certain investment vehicles such as mutual funds or exchange-traded funds, or certain asset classes such as high-yield fixed income, may not be fully screened using the established Catholic principles. As such, a de minimis rule shall be applied to ensure that no more than 5% of the total portfolio may be invested in areas that violate the specific guidelines above, and to allow the flexibility for the organization to meet its long-term investment objectives.

Growing an endowment

Faith-based organizations feed the hungry, care for the sick, provide education, broaden spirituality, support healthy communities and take on innumerable other good works. While there have been many victories, there is a continuous need worldwide, putting additional strain on already stretched funds. How can organizations fund a better world while still protecting and growing their endowments?

Responsible financial stewardship extends beyond the balance sheet. Faith-based organizations must examine whether their investments run counter to their missions, and if so, how prudent it is to continue with those investments. Donors and supporters must be assured that the organization, as a fiduciary, has prudent policies and investment guidelines in place, including those that align their dollars with their mission.

There are several dynamic tools that make it possible to reward ethical companies, influence other companies to do better and earn returns that meet or beat the market. There is ample opportunity, in other words, for organizations to use their economic power to better the world.

Investment strategies

At Glenmede, we offer investment strategies across four distinct approaches within the Glenmede platform:

  • Integrated: Integrated is the explicit consideration of material ESG factors in the traditional investment decision-making process. It does not limit the investment universe, nor is it exclusionary in nature. ESG integration simply serves as an enhancement to existing investment processes by ensuring that material risks are considered alongside other fundamental factors.
  • Mandated: Mandated goes one step further by using screens as part of an organization’s core objective to “explicitly avoid companies with poor ESG criteria or tilt toward those with the strongest characteristics.” This approach encompasses negative screening, which avoids investments in specific industries. It can include positive screening, which tilts toward companies with strong social or environmental characteristics relative to peer companies. While this approach can limit the investment universe by nature, it is typically customized to ensure diversification remains prudent. Because of the flexibility afforded in this combined positive and negative screening approach, Mandated strategies are most commonly used by faith-based organizations. Positive and negative screening is further defined below.
  • Thematic Investing: Thematic Investing seeks to achieve measurable and targeted environmental or social impact alongside at least market-rate returns — a “double-bottom-line” approach. For example, some organizations may have a primary focus on climate awareness or on strategies that specifically promote racial and gender equity. Thematic Investing can incorporate these strategies as part of a broader portfolio.
  • Concessionary High Impact: Concessionary High Impact aims to achieve environmental or social impact through program-related investments (PRIs), community development financial institutions (CDFIs) or similar strategies. Generally, these strategies provide a high impact through below-market-rate financing to others in a community. The tradeoff is a lower rate of return. These strategies are most often used by private foundations to supplement their grantmaking.

Divestment

Asset managers can divest from whole industries or from companies with unacceptable social or environmental practices. Many faiths based in Judaism, Islam and Christianity avoid industries like tobacco, alcohol, gambling, media companies profiting from adult entertainment and weapons manufacturers or distributors. To some, divesting at the first dollar of profits is a critical function. For example, a superstore chain that sells guns even as a small part of revenue may be excluded. Other organizations have divested from fossil fuels or plastics as a means to further their environmental intentions. Whatever the focus, it is possible to divest from whole industries that may conflict with your organization’s goals. As fiduciaries, it is important for your organization’s governing board to understand the potential impact on investment performance. Generally, the larger the percentage of the
market that is up for divestment, the larger the tracking error — or potential deviation over time — from market performance.

Positive screening

Positive screening is a relatively recent innovation to mission-aligned investing that has been shown to generate competitive performance and achieve similar impact without materially changing investment performance potential. Positive screening is the allocation of capital to companies with the most favorable ESG policies, agnostic of sector. For example, this strategy can emphasize companies that have exemplary human rights records, sustainability policies, labor management practices or other positive attributes.

Investors seeking to minimize fossil fuel exposure provide an interesting case study. Negative screening is merely a removal process that may eliminate all energy companies, but it can negate profits along with undesirable stocks. Investors who use positive screening to select investments concentrate their capital in companies considered “best in class” on specific metrics within the energy industry. For example, companies with a commitment to reducing their carbon footprint through cleaner technologies or that convert waste into less harmful emissions may receive higher environmental scores and be viewed by investors as relatively better environmental stewards. There are different ways to positively screen via ESG frameworks: Some investors look for companies that are actively improving their scores, while others favor companies that have already established high scores.3

Many faith-based organizations have since turned to more sophisticated methods incorporating a mix of both positive screening and divestment to eliminate companies or industries to which they are morally opposed and proactively choosing the best stocks that are making a difference in areas they care about.4

As public interest in mission-aligned investing grows and shareholder demand for more ESG data increases, more companies are making relevant data available. This, in turn, permits investment advisors like Glenmede to engineer highly customized portfolios. It is a circle of cause and effect that gives investors more tools and more power each time the wheel goes around.

Investment guidelines by religion

Faith-based investing is unique from other areas of mission-aligned investing in that many religious denominations follow predetermined guidelines available for investors to either use or adapt to their needs. Depending on one’s particular faith or set of values, guidelines may exist from that practice’s leadership that enable the investor to think about best practices and adapt to their own unique interests.

For Example:

  • In November 2021, the U.S. Conference of Catholic Bishops (USCCB) revised its Socially Responsible Investment Guidelines for financial investing. The guidelines are intended to provide policies that guide the USCCB’s investments and other activities related to corporate responsibility. Further, the guidelines provide an accessible framework for Catholic institutions and dioceses that want to make investment decisions. Some organizations may choose to adopt the guidelines in full, while others may choose to focus on certain elements of the guidelines. Still, they provide a starting place for Catholic organizations to consider their own investment policies and mission driven guidelines.5
  • One of the three Jewish values that guides impact investors is tikkun olam. It is the belief that the world is not perfect, but that people have the responsibility to improve it. Investors who are committed to tikkun olam may focus on themes with the goal of repairing the natural world, including conserving natural resources, developing renewable energy or mitigating climate change.

Creating change from within

Investors — both religious institutions and individuals of faith — can amplify their voices by enacting mission-aligned strategies that couple positive screening with shareholder engagement tactics. For instance, faith-based investors can identify strategies that seek opportunities to vote their shares to advance ESG issues. Glenmede has worked with investors who have Christian, Jewish and other values to vote their shares to ask companies to disclose greater data. Examples include asking how companies are seeking to slash carbon emissions or how they are measuring the efficacy of their diversity, equity and inclusion practices.

In another instance, during the 2021 proxy season, members of the Interfaith Center on Corporate Responsibility (ICCR), a coalition of over 300 global financial institutions advocating for corporate social responsibility, filed nearly 300 shareholder resolutions at nearly 200 publicly traded companies on a range of issues, from racial justice and diversity to human rights and workers’ rights (see sidebar).6



The Interfaith Center on Corporate Responsibility:
PROPOSALS BY ISSUE

In its report Catalyzing Corporate Change 2021, the ICCR detailed the outcomes of shareholder proposals in 2021 by issue. According to the coalition, when shareholders file a resolution, “companies often reach out to request a dialogue with the filers to discuss the proposal. If the company commits to implementing the proposal’s main requests, the proponents will withdraw it.” Following is information from just three of the issues highlighted in the report:

CLIMATE CRISIS:
More than 60% of all climate resolutions filed by ICCR members were settled in advance of the company Annual General Meeting in exchange for corporate commitments.
Example: An asset management firm convinced Bank of America to commit to ending its financing of Arctic drilling.

RACIAL JUSTICE/DIVERSITY, EQUITY AND INCLUSION:
The ICCR focused on workplace policies that target racism. Twenty of the resolutions led to agreements.
Example: Pressure from investors led by the Benedictine Sisters of Boerne, Texas, and joined by the New York City Comptroller’s Office, Trillium Asset Management and Boston Trust Walden, prompted The Home Depot to agree to disclose its EEO-1 data. (The EEO-1 Component 1 report is a mandatory annual data collection that requires all private sector employers with 100 or more employees, and federal contractors with 50 or more employees meeting certain criteria, to submit demographic workforce data.)

WORKER/HUMAN RIGHTS:
Human rights-related filings were the third most active category among members and highlighted issues from the urgent need for paid sick leave for frontline workers to the dangers of hate speech.
Example: A resolution filed by the Franciscan Sisters of Allegany calling on Wendy’s to protect essential workers during COVID-19 was passed by 95% of shareholders. The full report can be found on the ICCR website at https://www.iccr.org/catalyzing-corporate-change-2021.


Conclusion

Faith-based organizations striving to be true to their values have long considered the correlation between their investments and their missions. At the end of the day, mission-aligned investing can fulfill an institution’s financial goals while paving the way for a healthier and more just world. With the path to more good works laid out before them, organizations need only to take the first step.

Please reach out to your Glenmede Relationship Manager or email EFSolutions@Glenmede.com to learn more about how we can customize a portfolio that aligns with your organization’s faith-based values and mission.

This presentation is intended to provide a review of issues or topics of possible interest to Glenmede Trust Company clients and friends and is no t intended as investment, tax or legal advice. It contains Glenmede’s opinions, which may change after the date of publication. Information gathered from third-party sources is assumed reliable but is not guaranteed. No outcome, including performance or tax consequences, is guaranteed, due to various risks and uncertainties. Clients are encouraged to discuss anything they see here of interest with their tax advisor, attorney or Glenmede Relationship Manager.

 

1Major Catholic Social Teaching Documents Activity Cut-outs, an excerpt from Caritas in Veritate youth resource for Catholics Confront Global Poverty, a joint initiative of USCCB and Catholic Relief Services, 2010.
2Brodsky, Sarah. The Vatican Conference on Impact Investing Demonstrates Further Commitment to the Poor and the Environment. Impactivate. Oct. 2, 2018.
3Braverman, Beth. “What Is Positive Screening?” Impactivate. Sept. 19, 2019. https://www.theimpactivate.com/what-is-positive-screening/.
4Ibid.
5“U.S. Bishops Approve Updated Socially Responsible Investment Guidelines.” United States Conference of Catholic Bishops. Nov. 17, 2021.
6Interfaith Center on Corporate Responsibility. “Catalyzing Corporate Change 2021.” https://www.iccr.org/catalyzing-corporate-change-2021.