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Values-based investing: Aligning financial and ethical returns

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Unsplash/Pepi Stojanovski

As a reader of the Christian Post, the chances are pretty strong that faith matters to you and it guides how you live and work.

When it comes to raising a family, how you educate your children, how you spend your time, and how you conduct yourself in the workplace, your religious principles drive you. They give you the strength to live your life with conviction, courage, a strong moral compass, and with joy.

Why can't the same be the case for the way you manage your money?

I've spent over 20 years in the financial services industry and in doing so, have been very direct and proud of my faith. Indeed, my own business decisions and the way I've run organizations and worked with clients has been guided by my religious principles and deeply held values. 

What surprises me – although it shouldn't – is that many people of faith don't realize that they can align their investment decisions with their values. They don't know that they can plan for retirement, or build a portfolio, all while maintaining a deep and focused commitment to their religious values.

The idea that one’s investments should align with their religious, social or moral beliefs is hardly new, but it is growing in importance in today’s investment marketplace. Whether you refer to the practice as “values-based investing,” “faith-based investing,” “socially responsible investing,” or “impact investing,” the guiding principle is that people and organizations should invest according to what they believe and how they want to make a positive change in the world around them.

More individuals and institutions than ever before are “investing where their heart is” by taking a values-based approach to their investments. Approximately US$22.8 trillion, or about 26% of the professionally managed assets globally, are now invested according to environmental, social and governance (ESG) principles, according to a McKinsey & Co. study. That percentage is up from 21.5% percent in 2012. And, interest is only increasing. According to our own recent survey, 88% of millennials want to talk about values-based investing with their advisors, and ask their individual advisor about their values.

Making Informed Investment Choices

As interest in values-based investing grows, and more investment choices become available, investors should ask themselves: “What do I care about most?” and “What investment approach best aligns my core values with my financial objectives?” Such investors should take several considerations into account when making investment choices.

Apply Discretionary Screening. Traditionally, funds focusing on values-based investing have employed various screens to avoid investing in companies that are materially involved in alcohol, tobacco, gambling, human rights abuses, weapons manufacturing, abortifacients, pornography, or other activities that may not align with some investors’ faith or values. As an investor, you should clearly identify those activities that are at odds with your ethical and moral positions, and ensure that your standards are adhered to diligently. At Crossmark, for example, clients can opt for investments to be screened according to Faith, Socially Responsible, Environmental, Social and Governance factors. 

Invest for Impact. If you wish to go beyond merely excluding investments that you deem inappropriate, you may want to target your funds in a manner that has the potential to deliver measurable social or environmental impact – an approach known as “impact investing.” For example, Crossmark created an Israel Impact strategy to invest in U.S.-based, large cap companies that actively contribute to and participate in Israel’s economy, through financial investments, strategic investments, cooperation, and other activities. The Israel Impact portfolio thus creates an opportunity to channel investment toward companies that have a direct, positive impact on the economic growth and stability of the country.

Choose Advisors Who Share Your Values. An important way to ensure that your investments will be aligned with your values is to examine the values of those with whom you invest. If an advisor values and promotes integrity, community involvement and diversity in its own business, chances are they will bring those qualities to its investing activities on your behalf. Take a look at how the advisor describes his or her mission, work environment, employment practices, and approach to the community, and decide whether this is consistent with your values. It may be important to you, for example, that your investment manager is employee-owned or structured as a not-for-profit entity, and thus does not have to serve the interests of outside stockholders.

No Need to Sacrifice Returns. Historically, there were concerns that values-oriented investors might have to sacrifice financial performance in order to invest “with their conscience.” Recent studies, however, show that generating an acceptable financial return is compatible with maintaining a sound moral compass as an investor. A study by the index and analytics provider MSCI reveals that high ESG-rated companies are often less exposed to company-specific, operational, and systemic risks, and thus tend to show less systematic volatility and higher valuations over time. 

As with all ethical and moral decisions, values-based investing requires making some complex choices. But if you begin by asking what is important to you, there is a wide range of investment options that will align with your core values.

Michael Kern is President & CEO of Crossmark Global Investments, a Houston-based investment management firm focusing on faith-based investing.

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