“The premise underlying sustainable investing is elegant in its simplicity: companies that do a better job of integrating environmental, social and governance (ESG) standards into their business models are better positioned than their less enlightened competitors to provide investment performance over the long term. Therefore, identifying and investing in those companies is arguably a smarter way to invest—avoiding the risks associated with substandard ESG performance while capturing the returns associated with sustainability leadership.”
—Joe Keefe, President & CEO, Pax World Management
ESG stands for Environment, Social, and Governance. When used by investment managers, it is a “code word” to signify that they are incorporating non-financial data, such as employee satisfaction, or the carbon footprint of a company, into their investment decision-making.
The goal of ESG investing is to earn excellent long-term returns through identifying stable, well-functioning and well-governed social, environmental and economic systems. Practically, ESG investing integrates “ESG factors” into the traditional calculations of risk and return in order to determine the fair price of an investment opportunity.
Today, there are over $100 trillion of assets under management where managers have said that they will incorporate ESG data into their investment process. This explosion of ESG investing has been made possible by a surge in readily available ESG data. Companies have made this ESG data available in response to the consistent demands of investors for more corporate social responsibility (CSR) reporting.
CSR reporting, often referred as the “triple-bottom-line,” is a voluntary financial report that is disclosed alongside a mandatory U.S. GAAP report. Once this data becomes available, many third-party companies then compile it into an ESG rating (e.g., MSCI, Bloomberg, TruValue Labs, SPGlobal, Morningstar).
For example, see the two tables below for how MSCI uses ESG data to create an ESG rating for a few select companies.
ESG investing estimates the fair value of a company by, first, using a traditional valuation model, and, then, enhancing that model through accounting for scarcity of resources, future regulatory directions, and social tensions.
For example, Neuberger Berman’s Socially Responsible Investment Fund excluded Coca-Cola from their portfolio when they asked the question, “is the production of the Coca-Cola product intrinsically sustainable given how much water is required to produce it?” The answer was “no” for Neuberger since they argued that any product that requires a lot of water will become more expensive to produce over time (given population growth and global warming themes), depressing margins below an acceptable level.
Over 2,000 research studies have explored the relationship between a company’s ESG performance and its financial performance. Of these studies, 63% found a positive link between a company’s ESG performance and its financial performance, 27% of the reports were inconclusive, and 10% found a negative link. Many of the studies that show a negative relationship between ESG investing and performance are based on negative screening, which is the least sophisticated way of incorporating ESG information.
Biblically responsible investing (BRI) allows Christians to incorporate Biblical non-financial data, such as “imago dei” (we are made in God’s image) and vice-regent (people are meant to act on God’s behalf), into their investment decision-making. It is important to note that the current ESG investing movement can be traced back to Christians who wanted to include a social component into their investing process. For example, in the mid-1900s, the Quakers banned any investment in stocks that were involved in the slave trade.
More recently, the Faith Driven Investor (FDI) estimates that there are over 70 mutual funds that integrate faith into their investing with roughly $20.0 billion of assets under management. The FDI estimated that the marketplace for Biblically Responsible Investment (BRI) products is roughly $8.0 trillion. Just as the growth of ESG investing was helped by a growth in ESG data, BRI investing has been helped by a growth in Biblically Responsible Investing data.
Inspire Insight is one particular source of BRI data that has been useful to many faith-based investment managers.
In general, BRI data can be grouped into the following factors.
These BRI investment factors are used by Christian investment products in many different ways. Some products may focus on BRI factors consistent with traditional Catholic moral values (e.g., Ave Maria, Knights of Columbus) while other products may focus on the BRI factors consistent with traditional Evangelical moral values (e.g., Inspire, Eventide).
ESG and BRI investing are very compatible.
In fact, Christian investors should strive to use both ESG and BRI factors into their investment process. One example of an investment company using both ESG and BRI factors in their investment process is Inspire Investing and their passive ETF products. The Inspire Impact Score includes both positive inclusionary screens (using ESG data) and negative exclusionary screens (using BRI data) in their scoring process. The result is a rules-based system that seeks to overweight companies that are “best-in-class” in managing God’s creation and loving people while also excluding companies whose policies or actions are incompatible with biblical values.
Incorporating ESG factors into an investment process is like a near-sighted archer putting on prescription glasses; the enhanced ESG dataset gives a Christian investor a clearer picture of their return target and surrounding risks. Borrowing from the same archer analogy, incorporating BRI factors into an investment process, given its faith-integration, is like adding a crowd of dearly loved ones to witness the archer’s efforts; the archer’s heart is filled, and centered, realizing that every effort made to hit the target is not done in isolation.
Let us use both ESG and BRI data in our investment process so that we may strive to invest with both clear eyes and full hearts.
—
[1] https://www.unpri.org/pri
[2] A blueprint for responsible investment
[3] Mercer,“Responsible Investment’s Second Decade: Summary Report of the State of ESGIntegration, Policy, and Reporting,” presented at the CalPERS Global Peer IESGExchange, 2011.
[4] Louche,C., Arenas, D., and Van Cranenburgh, K. C. (2012). From preaching to investing:Attitudes of religious organisations towards responsible investment. Journal ofBusiness Ethics, 110(3), 301-320.
[5] Formerly known as the Christian Investment Forum.
[6] Christian Investment Forum. (2018, May 23)
[7] https://www.faithdriveninvestor.org/cif-chart-of-funds
Shane Enete has worked as an assistant professor of finance at Biola University since 2015. Prior to that, Enete was an investment research professional for 10 years for large institutional asset managers. His duties included valuing public stock securities, modeling asset allocations, and serving as a forensic accountant. Enete currently holds the Chartered Financial Analyst (CFA) designation and was awarded the Chartered Alternative Investment Analyst (CAIA) designation in 2014 (lapsed). Enete holds a B.S. in Finance from the University of Southern California and a M.S. in Mathematical Finance from the University of North Carolina, Charlotte. Enete also received a Ph.D. from the financial planning program at Kansas State University. His research interests include Biblically Responsible Investing (BRI), charitable giving, modeling financial well being, and behavioral finance.
Shane is married to Tammy, and is father to Sage and Silas. He enjoys any activity near the beach, or in the water, including surfing, swimming, beach volleyball, and triathlons. He hopes that when his kids turn 5, which is the minimum surfing age, they will both fall in love with surfing so that he can have whole family surf sessions.
