Month: November 2018

Investments: Faith-Based & Environmental, Social and Governance

GOOD INVESTMENT RETURNS & POSITIVE IMPACTS:

Wouldn’t it be great to achieve your investment goals while changing the world for the better?  What’s not to like?  Faith-Based and Environmental/Social/Governance-ESG investments provide a Values-Based strategy to structure investments to be consistent with personal values and to achieve positive impacts.  Examples of positive impacts would include less tobacco and a cleaner environment.  We would certainly not want our investments to support pornography or companies that cause toxic releases into our environment.  For example, it would be desirable to avoid situations like the notorious Union Carbide chemical gas plant toxic release in Bhopal India that killed nearly 3,800 people.  More recently Volkswagen was caught in a scandal where they were cheating on emissions standards for their diesel-powered vehicles.  Currently, Under Armor is receiving bad publicity for corporate reimbursement of employee expenses at strip clubs.  Although it is impossible to know all the bad actors in advance, there are increasing investment opportunities to help match your personal values with positive impacts.  This blog article provides information to help guide your investment decisions to align your investments with your values while helping achieve a greater positive impact.  The Stewardship and Investment Impact gives additional information.

DEFINITIONS:

Investors and the media tend to use various terms and titles interchangeably and there are no set standards, but hopefully the definitions listed below will be helpful.

Values-Based investing falls into two broad categories:

  1. a) Faith-based and
  2. b) Environmental, Social & Governance-ESG. Sustainability is often associated with ESG investments.

Faith-Based investing is based on religious convictions and the strategy generally avoids sin-stocks centered around alcohol, pornography, tobacco and gambling.  Abortion, weapons and nuclear power are other common screens.  Many faith-based investments also consider workplace issues and environmental factors.  Environmental issues are sometimes characterized as evangelical environmentalism or as “Creation Care.” concerns.  Creation Care holds that the earth and its produce and inhabitants belong to God, not to humanity and it is humanity’s role is to be a good steward.  For example, the National Association of Evangelicals encourages restrictions on consumption that are destructive or polluting.

Environmental, Social and Governance Investing-ESG includes:

-Environmental-Climate change, emissions and waste, and resource efficiency.

-Social-Diversity, human capital & safety, product integrity and supply chain management, and community relations.

-Governance-Board & executive diversity, corporate structure, accounting & transparency, executive compensation.

Impact Investing seeks a positive, measurable impact while hopefully achieving a market rate of return.  Faith-based and ESG funds generally include Impact Investing as part of their investment objectives.

Screens are used in investment fund construction/maintenance by fund managers to eliminate certain companies with negative attributes and add companies with positive attributes.

Socially Responsible Investing-SRI is a term that goes back to the 1960s to describe investment funds that were based on social screens as a key part of their investment objectives.  SRI is essentially the forerunner of ESG.

Three general investment strategies to achieve positive impacts:

-First, negative and positive screens are used.  An example of negative screens would be seeking to bar alcohol and tobacco.  An example of positive screens would be to favor companies that have environmentally safe records, good affirmative action policies, community involvement or high charitable giving standards.

-The second strategy involves shareholder activism.  Fund managers can solicit shareholder votes and use proxy statements to advance ethical business practices, such as diversity, fair pay, and environmentally friendly policies.

-The third strategy, direct investment, is used by institutional and large individual investors (like Bill Gates) to invest in companies or technologies to achieve their desired impacts.

HISTORY:

Values-based investing goes back to the 17th century when the North American Quakers refused to profit from weapons sales and the slave trade.  The term “Socially Responsible Investing”-SRI-emerged in the  1960s by shunning sin stocks and then weapons stocks during the height of the Vietnam war.  Luther Tyson and Jack Corbett, associated with the United Methodist Church, worked with investment managers Paul and Anthony Brown to launch Pax World Fund in 1971.  Pax World used social as well as financial criteria in making its investment decisions.  By 1982 The SRI strategy participated in the anti-apartheid movement by banning investments in companies operating with South Africa. Ultimately apartheid ended in 1993 and Nelson Mandela was elected president.  After the anti-apartheid movement was successful, SRI investors focused on human rights, military, labor and the environment.  Christians, and particularly Southern Baptists, were a significant part of the SRI movement.  Although the term SRI is still used, ESG is more common today.

INVESTMENT PERFORMANCE:

Although there is a perception that there is a trade-off between achieving either good investment performance or good impacts, numerous studies indicate good performance is correlated with good outcomes.

-An examination of 25 studies by Morningstar showed that there was no performance penalty.  Between 1990 and 2016 Morningstar found that the MSCI KLD Social 400, a sustainability index, outperformed the S&P 500 index by 0.81%/year.

-The CFA Institute reports that “Innumerable studies have taken various approaches to assess the correlation between high levels of ESG commitment and performance.  Overall, they conclude that there is no performance penalty for ESG integration and it is possible to achieve risk-adjusted returns similar to a traditional portfolio.”

-DePaul University professor Daniel Koys and others completed research that indicates that providing better pay, ongoing training, and making employees feel secure-helps companies achieve financial goals.  The rationale is that if companies takes care of their employees, then the employees will be motivated to take care of the customers.

It should be noted that past performance provides no guarantee of future performance, but it is encouraging that past performance has not come at a large investment performance penalty.

CORNERSTONE VALUES-BASED INVESTMENT RECOMMENDATION:

I have completed significant due diligence and analysis related to numerous fund families and over 100 specific funds.  Based on this research, the Vanguard ESG US Stock ETF-(Ticker ESGV) is recommended for individuals interested in a values-based investment holding.  This fund holds a diversified mix of US stocks ranging from large cap to small cap and it provides a mix a faith-based and ESG exposure.  Vanguard’s website says: The fund’s index excludes companies involved with tobacco, alcohol, adult entertainment, firearms, gambling, nuclear power, and unfair labor practices.  In addition, The fund’s index includes companies with superior environmental policies, a strong hiring and promotion record for minorities and women, and a safe and healthy workplace.  Although the fund is new, it is patterned after the Vanguard FTSE Social Index Inv-VFTSX which has the highest 5 Star Morningstar rating (over the last 3, 5 and 10 years).  Although this is a Vanguard fund, it can be purchased through Schwab, Fidelity, and other major brokers.  (In fact, Cornerstone recommends purchasing this fund at Schwab, Fidelity, or elsewhere rather than at Vanguard due to Vanguard’s persistent client service problems.)

 

It needs to be said, that each person has their own values, and a fund that is attractive to one individual may not be attractive to another individual.  Further, not all attributes of a fund may match a person’s values.  Nevertheless, this Vanguard fund looks to offer a reasonable fit for many investors.  Finally, if you have an adviser, you could discuss this fund to see if it fits in your current portfolio.

OTHER INVESTMENT FUND OPTIONS

There is no clear delineation between faith-based strategies and ESG strategies.  In fact, many faith-based funds incorporate significant ESG criteria.  Moreover, many ESG funds have criteria that incorporates aspects of faith-based funds.  To help differentiate between faith-based and ESG investments, I defined faith-based as those funds that proscribed alcohol, adult entertainment and gambling, (regardless of whether or not they also used ESG).  Values-based funds not using these faith-based screens are categorized as ESG.

Values-based investing is growing rapidly and there are many fund families and individual funds to consider.  Examples are listed below to provide greater information and context.  The examples are not at all comprehensive, but they are reasonably representative of the options available.  Obviously, this investment space is large and there are many investments that are not included.  The examples below are not investment recommendations, but are listed to help show what is available.  If any holdings from the examples are being considered, then there should also be a careful determination of which share class is appropriate.

Faith-Based Examples:

Ave Maria funds represent Catholic beliefs.  The Ave Maria Value Fund-AVEMX is their most prominent example.

Eventide Funds constitute a broad mix of faith-based and ESG criterial.  The Gilead Fund-ETILX has been a strong performer.

GuideStone Funds.  Affiliated with the Southern Baptist Convention.  The GuideStone Equity Index Investor-GEQZX has been a strong core holding.

iShares MSCI KLD 400 Social ETF-DSI.  The MSCI KLD 400 Social Index excludes companies operating in the weapons, alcohol, gambling, nuclear power, adult entertainment, and general ESG criteria.

Praxis Funds.  Mennonite fund family that traces its roots to the Anabaptist movement in the 1500s.  The Praxis Growth Index I-MMDEX has been a strong growth fund holding.

New Covenant Funds are based on the social-witness principles of the General Assembly of the Presbyterian Church (USA).  The New Covenant Growth Fund-NCGFX is a main fund.

Timothy Plan.  The Timothy Plan offers a broad-based fund family based on Christian screens.  The Small Cap Value A Fund-TPLNX (TPVIX I share) was their first offering  in 1994 and it remains their top performer.

Vanguard Funds-The Vanguard ESG US Stock ETF-ESGV is a Cornerstone Investment recommendation, and it is similar to the FTSE Social Index-VFTSX.  The Vanguard ESG International Stock ETF-VSGX provides international exposure.

ESG Examples:

Calvert.  Calvert was an early leader in the SRI movement and remains a key player in ESG investing.  The Large Core Responsibility Institutional Fund-CISIX remains a core holding.

Fidelity US Sustainability Index Fund-FITLX-Index that targets highest ESG-rated companies.

MSCI USA ESG Index-SUSA  The MSCI USA ESG Index uses an optimization approach to maximize exposure to companies with strong ESG characteristics.

PAX World Funds-PAXWX.  This is the original PAX fund and it is a balanced fund that maintains a mix of approximately 60% equity and 40% fixed income.

TIAA-CREF has been doing responsible investing for 40 years and the Social Choice Equity Fund-TISCX institutional and TICRX retail funds represent a broad-based ESG strategy.

 

Let me know what you think:

This blog barely scratches the surface of values-based investing and Cornerstone maintains significantly more information.  Feel free to contact me at jjohnson@CornerstoneInvestmentsLLC.com.

 

Jeff Johnson November 9, 2018