In today's rapidly evolving financial landscape, investors are no longer content with merely seeking returns on their investments. Increasingly, people are looking to align their financial decisions with their personal values and belief systems. As such, an approach that’s gaining traction is faith-based investing, also known as values-based investing. This unique investment strategy allows investors to put their money to work while staying true to their moral, ethical, and religious convictions.
Here, we delve into the history of faith-based investing, exploring its roots, growth, and impact on the financial industry and society as a whole.
Origins
The concept of faith-based investing is deeply rooted in religious traditions and moral philosophy. Throughout history, various religious and ethical principles have played a crucial role in guiding people's economic behavior. However, it was during the 18th and 19th centuries when the modern roots of values-based investing truly began to take shape.
In the U.S., socially responsible investing can be traced as far back as the 18th century and the emergence of Methodism, a denomination of Protestant Christianity. Methodism stood against the practices of the slave trade, smuggling, and conspicuous consumption and actively avoided investing in businesses engaged in the sale or production of liquor and tobacco as well as companies promoting gambling. This marked the beginning of a movement that sought to align financial decisions with ethical and moral values.1
Soon after, the Quakers, a religious group known for their strong pacifist beliefs and commitment to social justice, also got behind this movement, abstaining from investing in companies associated with the slave trade, war, or any other activity that contradicted their deeply held values.2
During the 20th century, other religious groups and individuals started to adopt similar approaches to investing based on their faith. Christians, Muslims, Jews, and various other religious communities began to develop investment strategies that reflected their beliefs, ranging from avoiding "sin stocks" (companies involved in alcohol, tobacco, gambling, and firearms) to supporting businesses that prioritized social responsibility and environmental sustainability.
Evolution and Growth
The 1970s marked a significant turning point for faith-based investing. As society became more aware of environmental and social issues, investors increasingly sought ways to integrate their values into their portfolios. The Pax World Fund, launched in 1971, is often credited as the first socially responsible mutual fund in the U.S.3 This fund allowed investors to align their investments with their social and environmental concerns.
Throughout the 1980s and 1990s, the concept of socially responsible investing (SRI) gained momentum. Financial institutions began to offer SRI mutual funds and managed portfolios, allowing individuals to invest in line with their values without sacrificing returns. The rise of SRI paved the way for the growth of faith-based investing strategies tailored to specific religious groups.
In the 21st century, faith-based investing saw a surge in popularity. The movement expanded beyond individual investors to include religious institutions, endowments, and even pension funds. Major religious organizations started to establish their own faith-based investment funds, incorporating religious guidelines into their investment decisions.
Key Principles and Approaches
Faith-based investing does not adhere to a single universal approach. Rather, it encompasses a wide range of principles and strategies that vary depending on an individual's or community's beliefs. Some common approaches to faith-based investing include:
Ethical Screens: This approach involves excluding certain industries or companies that violate religious principles or ethical norms. For instance, some investors may avoid companies engaged in abortion, alcohol, or weapons production.
Positive Screening: Instead of avoiding certain industries, positive screening focuses on selecting companies that actively contribute to social, environmental, or ethical causes in line with an investor's beliefs. This approach promotes investments in businesses that embody desired values.
Shareholder Advocacy: Faith-based investors often engage in shareholder activism, using their influence as shareholders to promote positive changes within companies, encouraging ethical practices and responsible corporate behavior.
Community Development: Some faith-based investors prioritize investments that support community development initiatives, seeking to uplift economically disadvantaged areas and populations.
Impact and Challenges
Faith-based investing has had a notable impact on the financial industry and broader society. By promoting sustainable and responsible business practices, it has pushed companies to be more socially conscious and environmentally responsible. The movement has also encouraged greater transparency and accountability from corporations, as investors demand more information about business operations and practices.
However, faith-based investing also faces challenges. One primary concern is the potential trade-off between financial returns and values alignment. Some critics argue that by limiting investment options based on ethical or religious grounds, investors may miss out on profitable opportunities. Balancing both financial and ethical considerations can be a delicate task for faith-based investors.
Another challenge is defining what constitutes "faith-based" values. Religious beliefs and interpretations can vary widely within a single faith community, making it difficult to create universally applicable investment guidelines.
Faith-based investing is a powerful testament to the evolving relationship between finance and personal values. By allowing investors to align their money with their moral and religious convictions, this approach has transformed the investment landscape and spurred corporations to be more socially and environmentally responsible.
Today, Catholic denominational endowments are among the leaders in deploying investment capital in alignment with their values.4 At Dana, we heeded the call of a group of Catholic investors in 2000 when a religious order of women approached us about managing an equity portfolio that implemented specific values constraints. That fund was the first of many equity, fixed income, and balanced strategies we’ve managed for Catholic entities, strategies that allow them to adhere to the pillars of the church while meeting their responsibility as stewards.
Although we’ve seen an increase in the adoption of faith-based investment guidelines, many Catholic investors remain on the sidelines, often confused by industry terms and the impact on performance. We believe the time has come to address these concerns and align mission with money.
If you’re interested in Catholic investing and want to learn more about our work within this market niche, we encourage you to complete our faith-based investing questionnaire and schedule a call with one of our portfolio managers. We also invite you to read our Q&A with Dana's Catholic ESG Strategy Portfolio Manager, Duane Roberts, CFA.
1 John Wesley. Sermon 50 "Use of Money" in The Works of John Wesley, ed. Thomas Jackson via WordsOfWesley.com (Accessed May 11,2020)
2 Ann Prior and Maurice Kirby, “The Society of Friends and Business Culture 1700–1830,” Religion, Business and Wealth in Modern Britain (London: Rutledge, 1998), 79.
3 Jess Liu, “ESG Investing Comes of Age,” Morningstar.com
4 Catholic Impact Investing Collaborative, accessed January 12, 2020, https://www.catholicimpact.org/