Previously, FaithInvest Executive Chair Dave Zellner explored how faith-consistent investing can challenge the misconception of lower returns and how it aligns with the concept of a sustainable economy. Now, he delves into specific ways faith values can guide effective risk mitigation strategies and potentially lead to enhanced investment performance.
Across various faith traditions, we find common principles that align closely with sustainable economic practices. These include concepts of stewardship, justice, human dignity, and care for creation. When applied to investing, these principles can guide us towards practices that not only uphold our values but also mitigate long-term risks.
For instance, the principle of stewardship encourages responsible management of resources. In investment terms, this translates to a focus on long-term value creation rather than short-term gains. The concept of human dignity can guide investments in companies with strong labour practices and community engagement, potentially reducing risks related to labour disputes or community opposition.
Addressing systemic risks through faith-consistent investing
Faith-consistent investors are uniquely positioned to address systemic risks that can affect long-term investment performance. Let's consider some examples:
Climate Change: Many faith traditions emphasise care for creation. This principle can guide investments in companies that are proactively addressing climate risks and developing clean technologies, potentially positioning portfolios for success in a low-carbon future.
Social Inequality: The principle of justice, common across faiths, can lead to investments in companies that promote fair labour practices and community development. This can mitigate risks associated with social unrest and promote more stable, prosperous communities – which in turn can support economic growth.
Governance Issues: Faith teachings on integrity and accountability align well with strong corporate governance practices. Investing in well-governed companies can reduce risks of fraud, corruption, and mismanagement.
Engagement vs divestment
When confronted with companies that don't align with faith values, investors face a choice: divest or engage. While divestment can be appropriate in some cases, engagement can provide an opportunity to influence corporate behaviour positively.
For example, one faith-based investment organisation engaged with a major retail chain about workplace safety concerns. This engagement led to improved safety policies, benefiting workers and potentially reducing the company's liability risks.
The UK-based Church Investors Group represents the charitable and pension funds of 67 denominations, dioceses, religious orders and Christian based charities, with combined investment assets of over £26bn. It considers its annual recommendations for proxy voting for its membership to be 'one of our most important actions to influence business practice'.
In recent years, it has engaged in topics as varied as climate change, modern slavery, living wage, child labour and tax transparency. It says: 'The ethical investment perspective offered by the Church Investors Group, drawing on Christian ethical principles and the beliefs and traditions of the Christian denominations, is becoming increasingly relevant.
'Ensuring our investments help our organisations meet their financial objectives while promoting the common good is a great responsibility.'
Aligning fiduciary duty with faith values
Some argue that considering faith values in investment decisions conflicts with fiduciary duty. However, as our understanding of risk evolves to include environmental, social, and governance factors, it's increasingly clear that faith-consistent investing can align closely with fiduciary responsibility.
By considering a broader range of risks and opportunities, faith-consistent investors can make more informed decisions that support long-term value creation. This approach is entirely compatible with the fiduciary obligation to act in the best interests of beneficiaries.
The practical link: Values-based investing and returns
While it's challenging to isolate the impact of faith-consistent investing on returns, evidence suggests that it can contribute to positive financial outcomes. For instance:
A faith-based investment firm reported that its equity fund, which integrates religious values into its investment process, outperformed its benchmark over a 10-year period.
Another religious institution found that its affordable housing investments, motivated by faith principles, delivered competitive returns while also creating social benefits.
At my former firm, Wespath Benefits and Investments, we conducted a study that found no meaningful adverse impact from Wespath's approach to the United Methodist Church’s call to make a 'conscious effort' to apply the Church’s values-based investment exclusions. While there were very small positive and negative impacts, these change over time depending on the date of analysis and the performance period selected.
These examples demonstrate that it's possible to align faith values with strong financial performance.
Conclusion
Faith-consistent investing is not about sacrificing returns for values. Instead, it's an approach that uses faith principles as a guide for identifying and mitigating risks while capitalising on opportunities that arise from building a more sustainable and just economy.
By focusing on long-term value creation, addressing systemic risks, and engaging with companies to promote better practices, faith-consistent investors can potentially enhance their returns while staying true to their values. As we face increasing global challenges, this approach to investing may prove not just ethically sound, but financially prudent as well.
This is the third in a three-part series on faith-consistent investing by FaithInvest Executive Chair Dave Zellner. Read part one (challenging the misconception tof lower returns) and part two (a sustainable economy) by clicking below.