The spotlight on public companies is constantly growing thanks to the internet, particularly social media. Now, more and more people want the companies they’re investing in to not only provide profitable returns but also align with their religious values – a concept known as faith-based investing.
If you want your portfolio to generate a return and make a positive difference, faith-based investing might be for you.
What is faith-based investing?
Faith-based investing is an investment strategy that factors in a person’s religious beliefs. It’s a subset of socially responsible investing (SRI), which, in addition to religious beliefs, also considers an individual’s personal and political views when vetting potential investments.
For instance, SRI gives significant weight to the environmental, social, and corporate governance (ESG) practices of a company. This could be how a company limits its carbon footprint or how it incorporates inclusion and diversity into its workplace.
Like any investment strategy, faith-based investing still strives to maximize a portfolio’s return. However, an investor’s religious principles serve as an investment screener. If a particular company does not align with your values or beliefs, the investment is ruled out — no matter how profitable it’s been. For example, Christian investors are often discouraged from investing in predatory lenders.
Who are faith-based investors?
Anyone and any entity can practice faith-based investing, including individual retail investors, family offices, investment firms, nonprofit organizations, pension funds, and foundations.
It’s actually quite common for funds to abide by broader SRI principles. According to the Forum for Sustainable and Responsible Investment, sustainable investing strategies accounted for $17.1 trillion of assets in 2020.
Does faith-based investing produce good returns?
Can faith-based investing also be a lucrative strategy? Yes.
Can faith-based investing lead to extensive losses? Also yes.
Faith-based investing is still susceptible to the same risks as other investment strategies. Just because you invest ethically or according to your values doesn’t mean you’ll generate positive returns. That’s why it’s important to diligently research what you’re buying before you invest your money.
How to start faith-based investing
Faith-based investing should still follow prudent investing principles. It’s faith-based investing — not blind faith-based investing. For instance, you still need to account for your risk tolerance, goals, and investment horizons. You can get an idea of your risk tolerance by taking this quiz.
Once you get those aspects squared away, then you can use your religious beliefs as a screener for potential investments. We’ve outlined some guidance (not advice) for specific religions below. For the sake of this example, we stuck with the top three religions in America.
Look for investments that align with your religious values
The first step of faith-based investing is compiling a list of investments that comply with your values — and ruling out those that don’t. For instance, if you use a platform like J.P. Morgan Self-Directed Investing, you can use the search function to vet various companies and funds.
While companies often share insights about their ESG practices in annual reports and on their websites, the easiest way to find relevant investments is through existing faith-based funds. These funds are designed around faith-based investing principles.
Determine if the investments align with your financial profile
Whether you handpick investments or choose to invest through a fund, make sure that the investments align with your risk tolerance, goals, and investment timelines — just as you would with any investment.
For instance, let’s assume you plan to put a down payment on a house next year. In that case, it would be unnecessarily risky to put your money in a stock-heavy portfolio — regardless of whether they align with your faith.
Compare returns and fees
Assuming you decide to invest through an ETF or mutual fund, evaluate a fund’s past returns and ongoing fees. How have the funds performed historically? If a fund’s return is routinely underwhelming, especially relative to the general stock market, you may want to look elsewhere.
In addition, faith-based investing funds still have costs in the form of periodic management fees. You can compare the expense ratios of potential funds to one another. If two similar funds generate comparable returns but one’s expense ratio is much lower, that may be the better option for your money.
How to invest according to Christian beliefs
Faith-based investing for Christian investors is also referred to as biblically responsible investing. While there are multiple branches of Christianity, there’s a lot of overlap in terms of what investments are generally acceptable and what goes against Christian values.
For instance, according to the United States Conference of Catholic Bishops (USCCB), there are 10 key principles that comprise the economic framework for Catholics. Collectively, these principles are known as “A Catholic Framework for Economic Life.” The framework is intended to guide Catholic investors to make responsible financial decisions that support broader economic issues, such as poverty and wage gaps.
Although this framework carries the Catholic label, the cause is still universally applicable for other denominations of Christianity.
What investments are encouraged by Christian principles?
Christian investors are encouraged to invest in and support companies that:
- Have environmentally friendly operations.
- Promote clean energy usage.
- Set high labor standards.
- Practice diversity and inclusion.
Biblically responsible investing often aligns with the idea of impact investing. One such example would be investing in a water infrastructure company that strives to help impoverished areas gain access to clean water.
What investments are discouraged by Christian values?
Investors who wish to follow Christian values in their investment decisions typically steer clear of companies that receive significant revenue from certain activities, including:
- Predatory lending.
- Human rights violations.
- Embryonic stem cell research.
- Adult entertainment.
Popular Christian investment firms and funds
There are numerous investment firms that employ investment strategies that align with Christian values. One example is GuideStone Funds, which has several mutual funds that track the U.S. market, international markets, real estate, etc.
Another example is Catholic Investment Services (CIS), which was founded in 2012 by Scott Malpass and Jack Brennan. As of 2021, CIS has over $1 billion of assets under management, serves 45 Catholic institutions, and has a restricted list of 700 companies.
For Catholic investors who would prefer to take a DIY approach through index investing, there are funds that track the S&P 500 Catholic Values Index. One such fund is the Global X S&P 500 Catholic Values ETF (CATH). The index consists of companies within the S&P 500 that follow the Socially Responsible Investment Guidelines outlined by the USCCB — and excludes companies that do not.
Read more: How To Invest In The S&P 500
How to invest according to Islamic beliefs
Investing according to Islamic principles is more commonly known as halal investing (i.e. “permissible” investing). Under these principles, investors are required to share in profits and losses, not purchase interest-bearing investments (which are viewed as usury), and avoid businesses that violate Islamic law, which is known as sharia.
Interest is considered riba, which means “excess.” In this sense, the concept of debtors receiving more than a loan’s principal amount goes directly against sharia. So, companies that have high levels of debt or generate income from lending practices (e.g. financial institutions) are generally non-compliant and deemed “haram,” or forbidden.
What investments are prohibited under halal investing?
Investors who adopt a halal investing strategy are discouraged from investing in companies with high debt, bonds and other interest-based investments, and short-term speculative assets. For instance, frequent trading is often viewed as a form of gambling. With these aspects in mind, halal investing tends to appeal to risk-averse investors.
In addition, the following business activities are considered to violate the principles of Islam and sharia:
- Alcohol manufacturing and marketing.
- Gambling or gaming.
- Conventional interest-based financial services.
- Pork and pork products.
Popular Islamic investment firms and funds
If you want to follow halal investing practices, you have plenty of options. For instance, there are multiple funds that track the Dow Jones Islamic Market World Index (DJIM) — an index of global stocks that adhere to sharia law — such as the HSBC Islamic Global Equity Index Fund.
You could also invest in one of many mutual funds that consist of sharia-compliant companies. Saturna Capital offers several funds that match this description. The firm applies several financial screens to eliminate haram companies, including:
- Companies that derive more than 5% of their revenue from haram sources.
- Companies with total debt of more than 33% of their market capitalization on a trailing 12-month basis.
- Companies with more than 45% accounts receivable relative to their total assets on a trailing 12-month basis.
How to invest according to Jewish beliefs
One way Jewish investors align their investments with their beliefs is by following the concept of tikkun olam — which is Hebrew for “repairing the world.”
In that sense, investments that address societal issues like climate change, social justice, and community development are encouraged. That could be either directly through charitable giving or indirectly through investing in a relevant company — such as a clean energy firm working to reduce carbon emissions. Investors could also align their portfolios to specific geographies, such as developing countries, to help make an impact.
Along the same lines, investors would be discouraged from investing in companies that lack environmentally sustainable operations, contribute to inequality, or violate human labor laws.
Popular Jewish investment firms and funds
One example of an investment vehicle for charitable giving is the Jewish Communal Fund, which offers donor-advised funds (DAFs) that help investors maximize charitable tax deductions. The Jewish Communal Fund manages over $2 billion of charitable assets for 4,200 funds.
An example of a fund that follows Jewish beliefs is RPB’s Reform Jewish Values Stock Fund, which employs a socially responsible investing approach and consists of global large-cap and mid-cap companies.
Faith-based investing is far from a new concept, so there are plenty of routes you can take as an investor. However, it’s important to remember that faith-based investing doesn’t eliminate risk or guarantee performance. Screening investments that don’t align with your values is equally as important as screening investments that don’t align with your risk tolerance, goals, and timelines.