In talking to faith-based asset owners, we find a common concern is that aligning faith values and investments will negatively impact returns. In this first of a three-part series, FaithInvest Executive Chair Dave Zellner challenges this misconception and explores why FCI can actually lead to better long-term investment outcomes.
In the world of investment management, a persistent myth has taken root: that faith-consistent investing (FCI) inherently results in suboptimal investment returns. This belief, while widespread, fails to consider the evolving landscape of responsible investing and the long-term benefits of aligning investments with faith values.
Many investors, including trustees of faith-based asset owners, harbour concerns that incorporating faith values into investment decisions will inevitably lead to lower returns. This fear often stems from the assumption that limiting the investment universe based on faith principles will result in missed opportunities or increased risk due to reduced diversification.
However, this view takes a narrow, short-term perspective that fails to account for the complex realities of today's global economy and the evolving nature of investment risks and opportunities.
A holistic approach
To understand why FCI doesn't necessarily lead to lower returns, we must first recognise the importance of holistic, long-term portfolio management. This approach considers not just immediate financial metrics, but also the broader context in which investments operate.
Faith-consistent investors are uniquely positioned to adopt this holistic view. By considering the long-term impact of their investments on society and the environment, they often gain insights into risks and opportunities that may be overlooked by conventional investment approaches.
The pitfall of short-term thinking
One of the main limitations of current investment practices is an over-emphasis on short-term performance metrics. Too often, asset owners allocate most of their governance 'budget' to maximising results based on near-term benchmarks. They compare their performance to indices and to other asset owners, often making sub-optimal decisions that seek to maximise near-term gains while ignoring systemic issues that may impair long-term results.
This short-term focus creates a 'zero-sum minus' game. It's 'zero-sum' because one investor's outperformance must be matched by another's underperformance. It becomes 'minus' when we factor in the excessive fees paid to asset managers and the transaction costs incurred from frequent trading.
Faith-consistent investors, with their focus on long-term stewardship and values alignment, are well-positioned to avoid this pitfall.
The role of systemic risks
A key advantage of FCI is its recognition of systemic risks – large-scale challenges that affect the entire economic system. These can include climate change, social inequality, and governance issues. While traditional investment approaches might overlook these factors, faith-consistent investors often place them at the forefront of their considerations.
By addressing these systemic risks, FCI can actually enhance long-term returns. For instance, companies that proactively manage their environmental impact may be better prepared for future regulations and resource scarcity. Similarly, firms with strong social practices may benefit from increased employee productivity and customer loyalty.
Transitioning to a sustainable future
Faith-based investors have a unique opportunity – and some might argue, a responsibility – to lead the transition to a more sustainable global economy. This isn't just about moral considerations; it's about creating an economic system that can deliver stable, long-term returns.
By supporting practices that promote social cohesion, long-term prosperity for all, and environmental health, faith-consistent investors can help shape a global economy that is more resilient and better equipped to generate sustainable returns over time.
Let go of outdated notions
The misconception that faith-consistent investing leads to lower returns is based on outdated notions of both investment management and the role of faith in economic decision-making. By taking a holistic, long-term view that considers systemic risks and opportunities, FCI can not only align with investors' values but also potentially enhance long-term financial performance.
In our next article, we'll delve deeper into the concept of a sustainable economy and explore how it can drive better investment outcomes for faith-consistent investors.
Dave Zellner took up the role of Executive Chair at FaithInvest in September after retiring as Chief Investment Officer at Wespath Benefits and Investments, where he oversaw the management of more than US$25 billion in assets on behalf of over 100,000 participants and 150 United Methodist institutions.