By Peter Mastrantuono
The origin of socially responsible investing, aka ESG (Environmental, Social and Governance) investing, reaches back to this country’s colonial era when Quakers sought to align their investments with their values. Today, faith-based investing has grown to include a wide range of mutual funds that invest according to the values of several major religions.
A Quick Overview of Faith-Based Funds
There are approximately 150 faith-based funds available to individual investors that cover four major religions. Each invests according to the principles that guide their faith. For example,
- Catholic faith-based funds invest their assets in line with 10 principles centered on human dignity and the moral law. In practice, this may mean, among other things, avoiding investments in companies that produce weapons of mass destruction, support abortion and contraceptives, engage in stem cell research or are involved in the adult entertainment business.
- Protestant-oriented funds are a bit more varied, reflecting the diversity of views in the branches comprising Protestant Christianity. These principles generally exclude weapons makers, “sin stocks” such as tobacco and gambling and high-interest lending.
- The Islamic faith-based funds follow principles under Sharia law, prohibiting short-term speculation, investments that pay interest, “sin stocks”, companies with heavy debts and pork-related businesses.
- The Jewish religion tends to focus investments on the principles of philanthropy and diversification. The idea of doing good with investments leads to funds that tend to focus on social justice, community development, climate change and the support of Israel.
Pros and Cons of Faith-Based Investing
There are several advantages to investing in faith-based funds, including:
- The emotional benefit derived from knowing that personal investments do not contradict personal values and such investments may help make the world a better place.
- The potential reduction of the overall, long-term risk exposure in a portfolio that comes with avoiding unethical companies or products.
- Competitive returns. The performance record against traditional equity benchmarks is mixed, much like any mutual fund. A well-managed faith-based fund has shown to be able to provide competitive, long-term returns.
There are disadvantages, however, including:
- Such a strategy may not provide optimal returns since it may exclude individual stocks with exceptional performance potential.
- The fees can be higher on faith-based funds., which can eat away at long-term wealth accumulation.
- The execution on faith-based principles is not always well defined, so some investors may need to accept some “grey” area in such funds.
Like any traditional mutual fund, finding a faith-based fund that best serves your financial future can be complicated and confusing, which is why working with a financial advisor to find, screen, and evaluate your choices is so critically important.
Peter Mastrantuono is a contributing writer to MyPerfectFinancialAdvisor, the premier matchmaker between investors and advisors. Peter worked for over 30 years in the wealth management industry, focusing on retirement planning, investing, asset allocation and financial planning.