Faith Driven Investing 101

Faith driven investing focuses on the Christian faith, though there is a large degree of nuance across various denominations and philosophies. Faith driven investing is also considered to be part of the Socially Responsible Investing movement. However, faith driven investing often varies significantly from a secular Socially Responsible Investing approach. In fact, of the $17 trillion total Socially Responsible assets^[1], less than 1% fits faith driven investing criteria.

What is Faith Driven Investing?

Faith Driven Investing is a means of aligning investment decisions with Christian values as reflected in the Bible. Otherwise stated, faith driven investing represents an opportunity to live out the verse, “Honor the Lord with your wealth (Proverbs 3:9; NIV).”

From a more technical standpoint, faith driven investing, like any form of Socially Responsible Investing, revolves around deciding in which entities/companies to invest. Investors using a faith driven approach are selective in where their money goes and what they support. For charitable organizations, implementing faith-based investing can generate positive feelings from like-minded donors. Given the scrutiny placed on some Christian organizations, another benefit of a faith driven investment program is the reduction in headline risk.

It is important to note that, as in other forms of socially responsible investing, there is variety within the faith driven investment world. Protestant and Catholic approaches create one line of delineation. Even within the Protestant category, many denominations have their own nuances just as there are differences in biblical interpretation. In many cases, an organization may need to aim for a good fit rather than a perfect fit.

Faith Driven Investing Options

There are three primary approaches that a Faith Driven Investing program can pursue.

• Negative screen.  The first, a negative screen, is the most common.  Negative screening involves excluding investments which are deemed contrary to the charity’s mission or values.  The leading example of a negative screening approach is avoiding “sin stocks” in an investment portfolio. The investor is able to identify the screening criteria that are most important.
• Positive screen.  A positive screen represents the pursuit of virtuous investments.  However, this approach represents a difficult option for faith-based nonprofits.  Given the generally secular mission of public companies, few will be strong candidates for a positive screening approach.  As an alternative, organizations may pursue private investments such as Christian private equity funds.  These funds are somewhat rare and require higher minimum investments and a degree of illiquidity (i.e. the cash used for the investment is “locked up” for a period of time).
• Advocacy:  A third avenue toward faith driven investing is advocacy. As the first step, an advocacy approach involves investing in companies engaged in problematic activities. The second and key step is using the investment to gain a “seat at the table” and request that the company change its ways. Again, the use of advocacy is somewhat limited in public market vehicles.

Implementing Faith Driven Investing

While faith driven investing is a more narrow playing field than secular investing, there are a few ways in which a charity can implement this strategy.

• Screened mutual funds and exchange-traded funds (ETFs).  Several fund families exist that specifically cater to faith-focused investors. These companies offer investment products that can be purchased “off the shelf” in a traditional brokerage account. The various fund families have different focuses. Protestant-focused mutual funds and exchange-traded funds are most commonly available, though some Catholic and Mennonite/Anabaptist options can be found. In some cases, non-faith-based companies may offer screened funds that generally comply with a faith driven investment philosophy.
• Separately Managed Accounts (SMAs).  Separately managed accounts allow an investor to own a portfolio of actively-managed stocks or bonds directly.  This is in contrast to a mutual fund or ETF, which provides indirect ownership of the stocks or bonds.  With an SMA, the investor can give the asset manager specific guidance on industries or companies to avoid.  SMAs often have lower fees than actively-managed mutual funds but require higher minimum investment amounts.
• Direct indexing.  Direct indexing is a newer form of investing.  It involves directly purchasing the stocks or bonds within an index like the S&P 500 or Russell 1000.  As with a separately managed account, the investor can select which of the index’s holdings to include or exclude based on the investor’s evaluation of a company’s overall alignment with biblical values.

Faith Driven Investing Decisions

Charities should thoughtfully consider whether to implement a faith-based investment program. Faith driven investing represents a key investment philosophy decision that impacts all of the organization’s investment assets.

An organization that places emphasis on its values is a stronger candidate for using faith driven investing. A faith driven investment approach may also be appealing to liked-minded donors and other stakeholders. As mentioned earlier, the use of Faith Driven Investing may reduce the potential for negative headlines.

Conversely, faith driven investing may create some challenges. One is cost. In many cases, a faith driven investment product costs more than a leading comparable secular product. The second potential challenge is product availability. Not every sub-asset class an investor desires may be covered by a faith driven investment product.

Final Thoughts

Given the importance of the Faith Driven Investing decision, Investment Committee members should carefully weigh values alignment, investment merits, and means of implementing a faith driven investment program. The evaluation process may require a great deal of thought, but the exercise will bring the benefit of additional clarity to the organization’s investment program. While extra care is necessary, employing a faith driven investment program is absolutely feasible.

Is your organization interested in exploring a Faith Driven Investing program? We can help. You can learn more about our investment consulting services, and feel free to contact us for more information!

Learn more about Cornerstone Management’s services: OCIO, Planned Giving, Gift and Estate Consulting, and Asset Management Consulting services.

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[1] US SIF Foundation’s Biennial “Trends Report” published November 16, 2020.