Assessing the US Bishops’ SRI Guidelines: The Evolution of Value-Based Investing
by CFA Member Zung Nguyen
In 2003, the United States Conference of Catholic Bishops (USCCB) released its Socially Responsible Investment guidelines. Over the years, these solid principles have inspired the creation of many new Catholic values funds, new models of training for financial advisors, and innovative new analytical tools for wealth managers. Markets have continued to move forward in a forceful way, to implement what is referred to in a broad brush as Value-Based Investing (VBI), which incorporates many of the elements in the USCCB SRI guidelines. In fact, the VBI market has grown so rapidly that, according to the Forum for Sustainable and Responsible Investment, “The total US-domiciled assets under management using SRI strategies grew from $8.7 trillion at the start of 2016 to $12.0 trillion at the start of 2018, an increase of 38 percent.” Essentially, this means that one out of every four dollars that are professionally managed are now value-based investments.
Of course, much has changed since the release of the USCCB SRI guidelines in 2003. The market has moved rapidly away from “exclusions” or negative filtering to a more actively managed approach. There has been a proliferation of new products both at the institutional and retail level. The availability of products include separately managed accounts, mutual funds and ETFs. And today, there are even a number of services that track the growth and performance of VBI (i.e., Morningstar’s, Morgan Stanley ISI, and the ETF Report).
For investment managers of Catholic SRI funds, as a minimum starting point, they can customize portfolios to avoid companies that are involved with activities that encroach on human life, such as abortion and human cloning. But they can also focus on those companies that protect and promote human life, as well as those that invest in elevating the quality of human life. A perfect example is the availability of ETFs that invest in water-related businesses. And there are also mutual funds that invest consistently using the USCCB SRI guidelines, such as Christian Brothers Investment Services or Ave Maria. In recent years, Pope Francis has inspired a new breed of investors that are more proactive in making investment decisions consistent with their faith and values, and this is certainly not limited to only those who are practicing Catholics. The span of investors range from institutions to individuals. In my own practice, I have had several clients ask me to customize investment portfolios that are consistent with the USCCB guidelines, one example being the Athena Catholic Values Fund.
Given the impressive growth of the VBI market, investment managers have a wider array of choices to construct portfolios based on their value-based mission and priorities. In doing so, they do not necessary sacrifice returns. However, when you have a more concentrated or focused investment mandate, there are certainly associated risks. There have been many academic studies on this very question in recent years, and for the most part, the conclusions have been positive. For instance, a Harvard Business School report in 2011 looked at 180 companies over an eighteen year period. The results showed that companies with higher ESG scores performed better in terms of higher stock prices relative to the benchmark, as well as lower cost of capital overall. Manulife Securities found that ESG companies have reduced operating costs and higher profit margins, while analysts applying ESG filters were able to warn investors about the eventual problems with Equifax, Valeant Pharma, and Volkswagen. Finally, Impact Reporting and Investment Standards (IRIS) looked at the universe of ESG managers and found that 59% met market return or better on a risk-adjusted return, 25% were at or slightly below market return, and 16% were below market return. To put this in perspective, only 18% of all active managers either meet or exceed benchmark return in overall investment cycles.
In conclusion, although the VBI market has grown immensely over the past decade, there are still a number of challenges. First, investors continue to struggle with common standards for classifying and measuring VBI. Second, the industry is still in search of the best way to incorporate VBI into Modern Portfolio Theory. For example, in relation to the normal return-risk tradeoff, would there need to be a third dimension in MPT? One that takes into account the tradeoff between returns and social impact? Finally, and maybe most importantly, someone needs to lead the way. For instance, it would be a great boost to the movement if the dioceses across the country took the lead in investing their own funds along the USCCB SRI guidelines.
Zung T. Nguyen, the principal of ZTN Capital, is a financial executive with over 30 years of experience in global capital markets, wealth management, and business development. His clients range from central banks, multi-national corporations, state and local governments, financial institutions, investment managers, endowments, foundations, and ultra-wealthy families.
As a member of the Catholic foundation Centesimus Annus Pro Pontifice, Mr. Nguyen has studied ways in which Catholic social teaching can inform the world of finance, while actively managing a Catholic values fund as part of his work at ZTN Capital.
The Catholic Finance Association recently interviewed Mr. Nguyen about the investing guidelines of the US Catholic bishops, exploring how the finance community has responded to those guidelines over the years, as well as how they inform his Catholic values fund.
