Timothy Smith
09/01/2004
For decades, religious investors have worked to reconcile their investment strategies with their faiths. Initially, many simply avoided investing in companies that violated their moral principles. In the early 1970s, however, six Protestant denominations collaborated to take this one step further. They decided to pressure the companies in their portfolios to mend their ways. In 1971, the Episcopal Church filed the first religiously sponsored shareholder resolution for a vote at an annual stockholder meeting. The company was General Motors, and the resolution challenged the automotive giant’s involvement in apartheid South Africa.
Following this example, an expanding number of Protestant, Roman Catholic and Jewish institutions have fine-tuned their approaches to create what we today call faith-based investing. Faith-based investors behave in ways that are similar to other socially responsible investors, although their motivation and values are rooted in their spiritual principles. Typically, they employ three strategies:
Social Screening of Portfolios. If an institution feels its mission conflicts with the behavior of a certain company or industry, it can sell its holdings. For example, a Catholic health care institution may choose to avoid investing in a company that makes cigarettes.
Community Development Investing. Many religious investors choose to allocate a portion of their portfolios—typically 1 percent to 5 percent—to community economic development investments. These might include a low-income loan fund, a micro-loan program or perhaps investments in housing for the poor. Returns on these investments often lag the market (running around 2 percent to 4 percent per year), but some offer a higher return.
Shareholder Advocacy. For more than 30 years, religious institutional investors have used their voices and votes as shareholders to press companies in which they invest to act in more socially responsible ways. Religious investors have filed thousands of resolutions with companies on such issues as the environment, sweatshop labor and human rights.
In recent years, religious investors’ shareholder initiatives have become increasingly effective. Usually one-third of the resolutions filed each year are withdrawn because the company agrees to the proposed reform.
While the vast majority of shareholder initiatives and community investments come from institutions, there are many opportunities for religious individuals and families to act, as well. For example, individual investors motivated by their faith can and do vote proxies, write letters to management and even support regulatory reforms.
Individuals may also allocate a portion of their funds to instruments such as the Calvert Foundation’s Community Development Notes, a pooled community investment vehicle that provides only a modest return, or to socially responsible mutual funds. (A list of such funds is available online at www.socialinvest.org.)
Not many funds
have been created specifically for the individual religious investor, and of the
few that do exist, most have a narrow family-values perspective, rather than a
broader social agenda. Fortunately, the breadth of social investment funds that
exists captures many of the societal concerns that are often the priorities for
individuals of faith.
A crucial question for both institutional and
individual investors is whether they must pay a conscience penalty in the form
of lower returns. This is not necessarily the case. These investments are
generally competitive. Whether the investor is the $12 billion United Methodist
pension board or a small Catholic order, investment committees expect, and have
received, competitive returns from managers working within investing strictures.
Individuals who invest in socially responsible mutual funds also often find
their returns are competitive with traditional investments.
According to the
Social Investment Forum, a trade organization, socially responsible investment
indices performed about as well as the S&P 500 both in 2003 and on a total
returns basis over the past 10 years. The Domini 400 Social Index gained 28.47
percent last year, while the S&P rose 28.66, according to the forum.
This
means that investors can do well as they seek to do good. Through their efforts
they find that together, faith and finance often can make a significant
difference.
 | Timothy Smith is senior vice president of Walden Asset Management, a Boston-based money management firm. |