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Dec 2, 2020
How Environment, Social, and Governance (ESG) investing enhances Biblically Responsible Investing (BRI)
“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

What is ESG Investing?

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.  

Common ESG Factors

Environment

Social

Governance

Climate change

Consumer rights

Board structure

Environmental policy

Supply chain mgmt.

Independent directors

Sustainability best practice

Health and safety

Chairman/CEO split

Environmental mgmt.

Product safety

Exec. Pay

Water supply

Labor relations

Shareowner rights

Sustainable transport

Community/ stakeholder relations

Accounting/audit

Waste management

 

Business ethics

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. 

MSCI ESG Rating Comparison: Select Automobile Companies

Company

ESG rating

Peer Percentile* (1% = best)

ESG Lagging

ESG Average

ESG Leader

Honda

A

37%

Product Safety & Quality

Corp. Governance, Labor Mgmt, Product Carbon Footprint, Opp. in Clean Tech

NA

General Motors

CCC

85%

Product Safety & Quality, Labor Mgmt, Product Carbon Footprint

Opp. in Clean Tech

Corp. Governance

Tesla

A

37%

Labor Mgmt

Product Safety & Quality

Corp. Governance, Product Carbon Footprint, Opp. in Clean Tech

*MSCI ACWI Index constituents automobiles, n=41



MSCI ESG Rating Comparison: Select Airline Companies

Company

ESG rating

Peer Percentile* (1% = best)

ESG Lagging

ESG Average

ESG Leader

Southwest

BBB

61%

Corp. Governance, Carbon Emissions, Product Safety & Quality

NA

Labor Mgmt.

Korean Air

B

77%

Corp. Governance, Carbon Emissions

Product Safety & Quality

Labor Mgmt.

Delta

A

28%

Product Safety & Quality

Corp. Governance, Carbon Emissions, Labor Mgmt

Privacy & Data Security

How is ESG data used by investment managers?

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.

Company

Traditional valuation model

ESG integrated model

Economic analysis

Explore GDP growth potential of economy

Explore economy’s access to environmental resources

Industry analysis

Porters Five Forces

Identify consumer trends towards sustainability in response to resources constraints, or changing lifestyles.

Company analysis

Determine core drivers of company growth

Identify how ESG factors affect core drivers

Financial reporting

Reconcile accounting vs. economic reality

Adjust accrual accounting to factor in ESG costs/benefits

Valuation

Discounted cash flow

Adjust discount rate, beta, and risk premiums for ESG factors

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.

Does ESG investing hurt investment returns?

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.

What is BRI investing?

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.

Table of BRI Factors

Abortifacients

Company produces abortifacient drugs. This category includes all pharmaceuticals used to terminate a pregnancy anytime from the moment of conception onward.

Abortion Legislation

Corporate sponsored political, legal or other activism that advocates for or provides abortions.

Abortion Philanthropy

Corporate guided philanthropy to organizations that advocate for or provide abortions. (Excludes employee matching programs.)

Alcohol

Company produces or distributes alcoholic beverages.

Animal Testing

Company involved in animal testing. This category includes testing products on animals, sourcing raw materials which are tested on animals and companies required by law to test products on animals.

Cannabis: CBD only

Business limited to CBD-only products, which do not contain psychoactive THC compounds.

Cannabis: Cultivation/Processing

Cultivates or processes cannabis for retail or wholesale distribution.

Cannabis: Development

Pharmaceutical Development of pharmaceutical drugs derived from cannabidiol compounds.

Cannabis: Retail THC

Produces or distributes retail cannabis products containing THC, which is the psychoactive component of cannabis.

Contraceptives: Barrier

This category includes barrier-type contraceptives such as condoms and diaphragms, which prevent pregnancy by creating a physical barrier rather than hormonal or chemical means.

Contraceptives: Hormonal 

This category includes hormonal contraceptives that only act to prevent fertilization and do not include effects that could prevent a fertilized egg from implanting or otherwise thriving.

Embryonic Stem Cell Research

Company is engaged directly or indirectly in embryonic stem cell research. This category includes companies which perform research on or produce products using embryonic stem cells, companies which provide embryonic stem cells to other entities and companies which utilize propogated stem cell lines which originally derived from embryonic stem cells.

Gambling

Company generates revenue from gambling. This category includes the operation of casinos or other gambling facilities, as well as manufacturing gambling machinery and or other gambling specific equipment.

GMO Products

Company produces or distributes genetically modified organisms (GMO), such as seeds. This category also includes companies using GMO ingredients in their products.

LGBT Legislation

Corporate sponsored legal, political or other activism that advocates for the promotion and acceptance of the LGBT lifestyle.

LGBT Philanthropy

Corporate guided philanthropy to organizations that advocate for the promotion and acceptance of the LGBT lifestyle. (Excludes employee match programs).

Nuclear

Company constructs nuclear reactors, produces nuclear energy or extracts uranium for use in nuclear energy or weapon applications.

Pornography

Company produces or distributes pornography. This category includes all media types, such as film, print and online. Also included are companies that produce AO (Adult Only) rated video games which contain pornographic content.

State Owned Enterprise

Company is owned and controlled by a Nation State/government, including situations where the State has veto power or a "golden share" is owned by the State or State controlled agency.

Tax Fraud Controversies

Company is involved in published controversies linked to tax fraud, parallel imports or money-laundering.

Tobacco

Company derives revenue from growing, manufacture or distribution of tobacco products.

Weapons: Civilian 

Manufactures firearms for civilian use.

Weapons: Military

Manufactures military weapons.

Weapons Components 

Manufactures components which may be used in the construction of weapons, but may also be used in non-weapon applications as well.

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).  

How does ESG investing relate to BRI investing?

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

[8] Inspire ETFs

[9] Inspire Impact Score

*Advisory Services are offered through CWM Advisors, LLC dba Inspire, a Registered Investment Adviser with the SEC. All expressions of opinion are subject to change. This article is distributed for educational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services. Investors should talk to their financial advisor prior to making any investment decision.

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