Issue 26: 2014

insights

The New Faith-Based Investor

New areas of focus, new approaches and an eye on the bottom line.

Photograph by Jesse Burke

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When most people hear the term faith-based investing, they probably think of investment strategies that avoid “sin” stocks. Or maybe they just think of poor investment performance. While both of these observations may have been true in the past, today’s faith-based investors look and act in ways you might find surprising. Their overarching goals remain the same — that is, to invest in ways that are consistent with their religious values — but their areas of focus have expanded, along with their investment strategies, and the old given of subpar investment returns has definitely gone by the wayside.

From avoidance to engagement

Faith-based investing, sometimes referred to as faith-consistent investing, is investing in accordance with the values of a religious tradition — Christian (including Catholic, Lutheran and many other denominations), Jewish and Islamic, among others. Each of these groups has a slightly different take on how to incorporate its values into investments, and governing bodies of each religion publish specific guidance. But as a broad generalization across faiths, common themes emerge around such areas as stewardship, justice and mercy.

It is true that in the past, much of faith-based investing centered on avoiding certain types of stocks (for instance, companies that make profits from the sale of alcoholic beverages, tobacco or military contracts), and that type of negative screening, or exclusionary approach, is still fairly common.

Many of today’s faith-based investors, however, are increasingly choosing engagement over avoidance. By investing, they seek to have a voice and be a catalyst for change.

Many of today’s faith-based investors are choosing engagement over avoidance.

Today’s faith-based investors want the stocks they own to be a broader reflection of their beliefs about an increasingly wide range of issues. They can often find themselves working alongside various values-based investors, although they inevitably frame things differently. While a values-based investor might focus on ESG (that is, environmental, social and governance) issues, the faith-based investor is more likely to talk about creation care and stewardship of all living things, respect for human dignity or systems for just governance.

One group, the Interfaith Center on Corporate Responsibility (ICCR), has been helping to bring together diverse faith-based groups with businesses as partners to improve corporate practices on vital environmental, social and governance concerns. The ICCR has nearly 300 members, including churches and other religious organizations, universities, unions, banks, foundations, asset management companies and other institutions and individuals with combined portfolios worth an estimated $100 billion. U.S. Trust recently became a member of ICCR.

According to ICCR Executive Director Laura Berry, their mission is to bridge the divide between morality and markets. “ICCR members challenge themselves to challenge the corporate sector to think about how to contribute to a more just and sustainable global community,” she says.

Divestment

An increasingly discussed strategy for faith-based investors is divestment. Efforts by groups like the United Church of Christ (UCC) and the Unitarian Church have led to wide-ranging conversations about faith-based investing, climate change, and the ownership of fossil fuel companies (and those that consume and benefit from fossil fuels).

Given an ever-growing consensus that we’re consuming fuels in ways that threaten to leave the planet unsustainable for future generations, some resolutions have been passed — notably by the UCC — to push all faith-based investment affiliates to move along a path toward divestment from fossil fuels companies.

Active investment

Rather than divesting fossil fuel companies, to continue the example outlined above, activist faith-based investors may instead seek to own companies that have promising technologies for clean energy, or, to own those very same fossil fuel companies in order to show up at shareholder meetings and advocate for change.

A growing number of investment options

Faith-based investing has grown significantly in recent years, representing some $27.55 billion in assets as of 2012,1 and so have the available investment options for organizations and individuals. Historically, faith-based investing has been more or less limited to religious and related institutions that didn’t have any choice but to do it. Increasingly, individuals have come forward to say this is something they want to do.

Here at U.S. Trust, we offer a number of ways for both institutional and individual clients to have religious values reflected in their investments, including impact investments, such as our recent social impact bond.

We also make it easy for clients who own shares in public companies to vote for their proxies at annual shareholder meetings.

In addition, we have created the Religious Voice & Values portfolio, which is part of our broader Socially Innovative Investing (S2I) strategy. S2I scores companies based on more than 400 characteristics reflecting thoughtful management and potential sources of value — such as pay parity, gender and diversity considerations, and environmental stewardship. Similarly, the Religious Voice & Values portfolio reviews corporate management practices relating to the environment, charity, social justice, equality and other values related to religious principles. The approach is customizable, to more accurately reflect your particular values.


ALAN LAGADU/GETTY IMAGES

 

For example, we created a Fossil Fuel Free Portfolio for an individual investor who wanted to see her assets reflect her values relating to climate change while remaining consistent with her religious beliefs. Additionally, for a large faith-based hospital, we customized a fixed-income approach that addresses its particular commitments while taking advantage of our thought leadership guidance on interest rates and credit research.

A note about performance

As mentioned, it used to be a common belief that, almost by definition, faith-based investment strategies underperformed the broader market — that investors had to sacrifice strong returns to support their values. Negative screenings did tend to reduce available investment opportunities — sometimes eliminating entire market sectors — and they did make outperformance more difficult.

The approach more accurately reflects your particular values.

But with today’s sophisticated approaches and technologies, we’re able to rebalance more easily and look much more thoughtfully at portfolio construction. If a client tells us they don’t want to own a certain type of company, we can design an approach that does that, yet still manages to fit into their risk and return profile.

And, in terms of performance, the Religious Voice & Values portfolio focuses on identifying companies that fit numerous social criteria but which also have excellent fundamentals and the potential to create long-term value. This more inclusive approach is a far cry from the exclusionary screening of the past. So today, it really is possible to invest according to your religious values without having to give up the potential for outperformance.

1 US SIF — The Forum on Sustainable and Responsible Investment — Report on Sustainable and Responsible Investing Trends in the United States, 2012.

IMPORTANT INFORMATION

Investing involves risk. There is always the potential of losing money when you invest in securities.

Some of the featured participants are not employees of U.S. Trust. The opinions and conclusions expressed are not necessarily those of U.S. Trust or its personnel. Any of their discussions concerning investments should not be considered a solicitation or recommendation by U.S. Trust and may not be profitable.

Diversification and rebalancing do not ensure a profit or protect against loss in declining markets.

Always consult with your independent attorney, tax advisor, investment manager and insurance agent for final recommendations and before changing or implementing any financial, tax or estate planning strategy.

OTHER IMPORTANT INFORMATION

Equities
Equity securities are subject to stock market fluctuations that occur in response to economic and business developments.

Stocks of small and mid cap companies pose special risks, including possible illiquidity and greater price volatility, than stocks of larger, more established companies.

Fixed Income
Investing in fixed-income securities may involve certain risks, including the credit quality of individual issuers, possible prepayments, market or economic developments, and yields and share price fluctuations due to changes in interest rates. When interest rates go up, bond prices generally drop, and vice versa.

International Investing
International investing involves special risks, including foreign taxation, currency risks, risks associated with possible differences in financial standards, and other risks associated with future political and economic developments. Investing in emerging markets may involve greater risks than investing in more developed countries. In addition, concentration of investments in a single region may result in greater volatility.

Energy and natural resources stocks have been volatile. They may be affected by rising interest rates and inflation, and can also be affected by factors such as natural events (for example, earthquakes or fires) and international politics.

When most people hear the term faithbased investing, they probably think of investment strategies that avoid “sin” stocks. Or maybe they just think of poor investment performance. While both of these observations may have been true in the past, today’s faithbased investors look and act in ways you might find surprising. Their overarching goals remain the same — that is, to invest in ways that are consistent with their religious values — but their areas of focus have expanded, along with their investment strategies, and the old given of subpar investment returns has definitely gone by the wayside.

From avoidance to engagement

Faith-based investing, sometimes referred to as faith-consistent investing, is investing in accordance with the values of a religious tradition — Christian (including Catholic, Lutheran and many other denominations), Jewish and Islamic, among others. Each of these groups has a slightly different take on how to incorporate its values into investments, and governing bodies of each religion publish specific guidance. But as a broad generalization across faiths, common themes emerge around such areas as stewardship, justice and mercy.

It is true that in the past, much of faith-based investing centered on avoiding certain types of stocks (for instance, companies that make profits from the sale of alcoholic beverages, tobacco or military contracts), and that type of negative screening, or exclusionary approach, is still fairly common.

Many of today’s faith-based investors, however, are increasingly choosing engagement over avoidance. By investing, they seek to have a voice and be a catalyst for change.

Today’s faith-based investors want the stocks they own to be a broader reflection of their beliefs about an increasingly wide range of issues. They can often find themselves working alongside various values-based investors, although they inevitably frame things differently. While a values-based investor might focus on ESG (that is, environmental, social and governance) issues, the faith-based investor is more likely to talk about creation care and stewardship of all living things, respect for human dignity or systems for just governance.

One group, the Interfaith Center on Corporate Responsibility (ICCR), has been helping to bring together diverse faithbased groups with businesses as partners to improve corporate practices on vital environmental, social and governance concerns. The ICCR has nearly 300 members, including churches and other religious organizations, universities, unions, banks, foundations, asset management companies and other institutions and individuals with combined portfolios worth an estimated $100 billion. U.S. Trust recently became a member of ICCR.

According to ICCR Executive Director Laura Berry, their mission is to bridge the divide between morality and markets. “ICCR members challenge themselves to challenge the corporate sector to think about how to contribute to a more just and sustainable global community,” she says.

Divestment

An increasingly discussed strategy for faith-based investors is divestment. Efforts by groups like the United Church of Christ (UCC) and the Unitarian Church have led to wideranging conversations about faith-based investing, climate change, and the ownership of fossil fuel companies (and those that consume and benefit from fossil fuels).

Given an ever-growing consensus that we’re consuming fuels in ways that threaten to leave the planet unsustainable for future generations, some resolutions have been passed — notably by the UCC — to push all faith-based investment affiliates to move along a path toward divestment from fossil fuels companies.

Active investment

Rather than divesting fossil fuel companies, to continue the example outlined above, activist faith-based investors may instead seek to own companies that have promising technologies for clean energy, or, to own those very same fossil fuel companies in order to show up at shareholder meetings and advocate for change.

A growing number of investment options

Faith-based investing has grown significantly in recent years, representing some $27.55 billion in assets as of 2012,1 and so have the available investment options for organizations and individuals. Historically, faith-based investing has been more or less limited to religious and related institutions that didn’t have any choice but to do it. Increasingly, individuals have come forward to say this is something they want to do.

Here at U.S. Trust, we offer a number of ways for both institutional and individual clients to have religious values reflected in their investments, including impact investments, such as our recent social impact bond.

We also make it easy for clients who own shares in public companies to vote for their proxies at annual shareholder meetings.

In addition, we have created the Religious Voice & Values portfolio, which is part of our broader Socially Innovative Investing (S2I) strategy. S2I scores companies based on more than 400 characteristics reflecting thoughtful management and potential sources of value — such as pay parity, gender and diversity considerations, and environmental stewardship. Similarly, the Religious Voice & Values portfolio reviews corporate management practices relating to the environment, charity, social justice, equality and other values related to religious principles. The approach is customizable, to more accurately reflect your particular values.

For example, we created a Fossil Fuel Free Portfolio for an individual investor who wanted to see her assets reflect her values relating to climate change while remaining consistent with her religious beliefs. Additionally, for a large faithbased hospital, we customized a fixed-income approach that addresses its particular commitments while taking advantage of our thought leadership guidance on interest rates and credit research.

A note about performance

As mentioned, it used to be a common belief that, almost by definition, faith-based investment strategies underperformed the broader market — that investors had to sacrifice strong returns to support their values. Negative screenings did tend to reduce available investment opportunities — sometimes eliminating entire market sectors — and they did make outperformance more difficult.

But with today’s sophisticated approaches and technologies, we’re able to rebalance more easily and look much more thoughtfully at portfolio construction. If a client tells us they don’t want to own a certain type of company, we can design an approach that does that, yet still manages to fit into their risk and return profile.

And, in terms of performance, the Religious Voice & Values portfolio focuses on identifying companies that fit numerous social criteria but which also have excellent fundamentals and the potential to create longterm value. This more inclusive approach is a far cry from the exclusionary screening of the past. So today, it really is possible to invest according to your religious values without having to give up the potential for outperformance.

1 US SIF — The Forum on Sustainable and Responsible Investment — Report on Sustainable and Responsible Investing Trends in the United States, 2012.