Markets In Action

Faith-Based Investors Chart a Fresh Path to Social Impact

In recent years, many investors have embraced social impact investing in an effort to align their financial goals with their values. By steering their investment dollars towards private or non-profit ventures that reflect their beliefs and ethical commitments, investors hope to create positive social change in the world while realizing financial returns.

Project Invested has tracked the growing popularity of this innovative form of investing, which seeks to harness the power of markets to address intractable challenges like improving education, renewing urban areas, tackling poverty and protecting the environment.

It’s worth noting, though, that investing steered by ethical principles isn’t an entirely new practice. The rise of today’s impact investing can be traced back to long-established practices of faith-based investing, which seeks to reconcile investors’ financial goals with the tenets of their religious belief.

Faith-based investing has a long history. A 2016 Morgan Stanley report on faith-based investing practices looks back at how 19th century American Methodists and Quakers enacted investment strategies grounded in the values of their faiths:

Methodists were firmly opposed to the slave trade, smuggling and conspicuous consumption. In accordance with these values, Methodist religious entities avoided investments in companies that manufacture alcohol, tobacco or promote gambling. 

Around the same time, guided by Quaker testimonies and values such as peace, simplicity, integrity and justice, the Friends Fiduciary Corporation established guidelines that avoided investments in companies that manufacture alcohol, tobacco and weapons. These guidelines established centuries ago have carried forward, alongside other evolving approaches, to Quaker and Methodist institutional and individual investment approaches today. 

These are prominent examples from American history, but it’s important to note that faith-based investing principles are widespread among diverse faiths—there are similar principles to guide investors who adhere to the various sects of Protestantism, Catholicism, Islam, Judaism and other spiritual traditions.

A 2013 Wall Street Journal article explores the variety of methods used by faith-based funds to screen their investment choices. Many use “negative” screening processes that identify companies and industries to be avoided if they’re involved in practices that conflict with a faith’s tenets.

A fund aimed at, say, conservative Protestants may screen out companies involved in production and distribution of alcohol or pornography; funds that that seek to reflect Islamic tenets may opt out of investing in companies involved in pork production or money lending; a fund based on Catholic principles may avoid investments in companies linked to contraceptive products, abortion or human embryonic research.

Faith-based investors may also opt for “positive” screening that allows them to direct their capital toward social goals like protecting human rights or addressing poverty. These approaches often cut across the standard “liberal vs. conservative” ideological lines—for example, many faith-based approaches emphasize environmental protection as a moral commitment to stewardship of the earth.

In many cases, church organizations provide specific guidance on how to invest in accordance with the faith’s tenets. For example, the U.S. Conference of Catholic Bishop’s 2003 guidelines for socially responsible investment don’t recommend specific investments or stocks, but do provide guidance for investors aimed at “protecting human life; promoting human dignity; reducing arms production; pursuing economic justice; protecting the environment, and encouraging corporate responsibility.”

(Of course, we’ll note here that one need not be an adherent of a particular religion to invest in a particular faith-based fund, if you find the fund’s investing principles align with your goals and values).

The faith-based investor is animated by a similar spirit to that of the social impact investor who steers their funds toward green bonds to protect the environment, or who invests in companies that dedicate part of their profits to fighting poverty. In both cases, the investor is motivated to align their financial goals with their values.

As interest in faith-based and other forms of social impact investing has grown, more investment options are entering the market to meet the increase in demand.

“[A] group of funds has definitely emerged as a growing and distinct subset of the [socially responsible investing] world,” Michael Herbst, a mutual fund analyst for Morningstar who focuses on faith-based investing, says in a recent interview with The Balance. “What we’re seeing is a growing awareness among individual investors that there may be faith-based offerings that coincide with their own spiritual beliefs perhaps more closely than there had been options in the past.”

As with other forms of social impact investing, faith-based investing does not necessarily mean lower returns. In fact, some experts suggest values-based investors may benefit from longer-term commitments.

“When you have stronger ties to an investment because it’s also expressing your values, you’re more likely to stick with it for the longer term,” Jon Hale of Morningstar’s North American fund research team tells Kiplinger.

At the same time, you should recognize that just because an investment strategy corresponds to your values doesn’t mean it’s necessarily the right investment for you—social impact and faith-based strategies are subject to the same market risks as other investing approaches. If you’re interested in these investing approaches, consult with a financial professional who can help you to think through ways to incorporate faith-based or other social responsibility strategies into a diversified portfolio that reflects your investing goals, time frame and risk tolerance.

Faith-based investing, like other forms of impact investing, isn’t just a valuable alternative for individual investors—these types of investing are intended to be tools for creating social change. Impact investing is likely to play a vital role in helping to address difficult social problems at a time when governments at all levels are too often constrained by tight budgets or partisan gridlock. It’s worth looking at how these creative forms of investing can shape the future.

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