The Rise Of Faith-Based Investing And Values-Driven Portfolios

Imagine you had a good friend who had a serious gambling problem. Would you lend him money, knowing it would probably make his situation worse? For most people, the answer would be a quick and straightforward “no”. Now imagine you have an opportunity to lend money to the same company that profits from your friend’s gambling addiction. Would you apply the same moral standard? These are values-based investment decisions, and more and more people are making them in their portfolios.

While many investors are solely focused on financial returns, a growing segment wants to align their values with their capital. Unlike ESG strategies that target broad sustainability and progressive social issues, many investors, many of whom hold strong religious beliefs, want to use a faith-oriented strategy to guide investment allocations. Money managers are responding. According to Brightline, there are now 231 faith-based mutual fund and ETF strategies run by 27 managers with assets surpassing $100 billion.

There is the Christian-focused Inspire 100 ETF (ticker: BIBL), which screens out companies associated with abortion, tobacco, alcohol and pornography. There is the JLens 500 Jewish Advocacy U.S. ETF (ticker: TOV), which allocates to pro-Israel firms and excludes companies involved in the Boycott, Divestment, Sanctions movement. There is the Shariah-compliant Wahed FTSE USA Shariah ETF (ticker: HLAL), which screens for compliance with Islamic principles. Each ETF has its own process for screening and excluding companies whose policies, products, or services do not align with its faith-based investment objective.

However, there is still considerable debate around what should and should not be included in these products. Mark Oppenheimer, a professor at the John C. Danforth Center on Religion and Politics at Washington University in St. Louis, explains that there are many versions of what a religiously inspired investment strategy might look like. “It might be a matter of pursuing justice or faithfulness, or it might simply involve avoiding actions that one considers sinful,” he says.

Oppenheimer notes there can be several approaches to values-based investing: “If you’re a Christian pro-life investor, you may have a strong interest in ensuring that none of your money is invested in any company involved in providing abortions. That outlook is very different from choosing to direct your investments proactively toward hunger relief, homeless shelters, or other charitable work.”

Choosing one path over another is why some investors are reluctant to hand over the screening process to a third-party investment manager. Values are deeply personal, and two people can often find themselves on opposite sides of their moral crusade, even if they share the same faith.

Direct Indexing Solves The Screening Problem

The divergence of opinion over values is one driver behind the growing role of direct indexing in faith-based strategies. Direct indexing, or replicating a pre-packaged set of stocks by owning the individual companies rather than a passive ETF that tracks the index, helps investors express their values at multiple levels.

First, investors can create a custom portfolio that excludes companies from an index that are inconsistent with their value system. For example, is cannabis a vice industry comparable to alcohol and tobacco, or a legitimate therapeutic sector? Is all weapons production immoral, or are some forms acceptable to preserve peace? Are LGBTQ+ inclusion policies a moral imperative or a moral violation? The investor decides, not a mutual fund or ETF manager.

Second, direct indexing means direct ownership. Shares are not held in an ETF or mutual fund. With direct ownership, investors can vote on shareholder issues as they see fit, rather than how a proxy firm or an institutional asset manager would vote on their behalf.

Finally, ownership of individual shares provides an opportunity to engage with companies. Few investors are aware that holding between $2,000 and $25,000 in a company’s shares—depending on how long they have been held—entitles them to submit shareholder resolutions for a vote at the annual general meeting.

Without ownership of individual shares, investors had few ways to engage. Someone might even choose to own a company they disagree with and push for change rather than vote with their feet and divest. Values-based investing does not always center around avoidance.

There is no one-size-fits-all in values-based investing. This is why industry veterans such as Nick Stonestreet, former CEO and CIO of Blue Trust and current President of Financial Services at DLP Capital, a leading real estate investment firm that promotes impact investing, use direct indexing. “Each client can build their own portfolio around their conscience, excluding companies they personally object to, rather than accepting a prepackaged ESG or faith-based portfolio,” Stonestreet says.

Direct indexing makes this kind of customized, values-driven approach feasible and tax-efficient. According to Stonestreet, “It is a very elegant way to ask, in light of each person’s faith, which investments they personally find objectionable and would prefer to leave out of their portfolio.”

Isn’t that the goal? Make an impact with your money while earning a market return? A values-based investment strategy allows them to accomplish both, with the added benefit of easing their conscience. Excessive worrying over market direction is one thing. Losing sleep over investing in a company that is antithetical to your beliefs is unnecessary and avoidable.

(Tyler Pilkington helped provide research for this article.)