7 Ways to Build a Morally Conscious Investment Portfolio
COMMENTARY: To ensure a Catholic portfolio is truly Catholic often takes more due diligence than simply putting the organization’s investments into a fund that claims to avoid the suggested guidelines.
Religious organizations work hard to balance numerous items including mission and money. Resources are often tight, and dollars need to stretch as far as they possibly can. As if balancing the budget wasn’t enough, CFOs, COOs, executive directors, boards and finance committees of Catholic organizations are tasked with constructing portfolios with a morally responsible component to them, while also hitting their investment objectives.
For Catholic organizations, the U.S. Conference of Conference Bishops (USCCB) guidelines are a helpful starting point for creating a morally responsible portfolio. The USCCB first issued guidance on investing in 1991, and just updated the guidelines in the fall of 2021. In the guidelines the bishops take a strong stance on avoiding investing in areas of pornography, human embryonic stem cells, access to certain pharmaceuticals, protecting our earth, and social issues such as abortion.
It may seem simple to avoid conflict and scandal while constructing a Catholic portfolio, however the reality is that it is more like peeling back the layers of an onion — it can get a little messy at times.
To ensure a Catholic portfolio is truly Catholic often takes more due diligence than simply putting the organization’s investments into a fund that claims to avoid the suggested guidelines. In reality when dollars are being invested in equities, bonds, and alternatives, asking questions that peel back the layers of the onion is truly critical to assuring that the portfolio is respecting Catholic moral teaching on every level.
Let’s continue with the analogy of the onion. The shell, or outer layer, of the process begins by defining the screening criteria that the organization wants to take into consideration. Should the USCCB guidelines be strictly followed, or will there be exceptions?
Once the criteria are defined, it is best to identify the revenue threshold that will be tolerated by the investment committee of the religious organization. For example, a 0% revenue threshold on abortion would limit investing in any company who generates a single dollar from abortion procedures.
Here are seven additional layers to peel back to get to the core of building a truly morally conscious portfolio:
1. Make sure the consultant demonstrates a robust process. A strong, institutional approach starts with recommending investment products that are compelling from a qualitative and quantitative standpoint. These traits would include a solid team, philosophy, a reasonable amount of assets under management, a long-term track record, and absolute and relative performance. Once the process has been proven, it is important to monitor these strategies over time to confirm their viability in the portfolio.
2. Determine if all the funds in the portfolio are really invested in line with Catholic teachings. It is important to note that 95% of religious portfolios are morally conscious, but so are 95% of secular portfolios. For example, in asset classes with limited transparency such as hedge funds, it is difficult to guarantee that the underlying securities do not breach a religious organization’s morally responsible guidelines. Do the due diligence on the remaining 5% and confirm that the fund is all in when it comes to being morally conscious.
3. Guidelines for selecting each fund should be spelled out in the organization’s Investment Policy Statement (IPS). It is important to determine how securities are screened within each fund that is selected within a morally conscious portfolio. Do the due diligence to know all of the underlying investments within a fund and make sure their investment and screening methodologies are in agreement with the organization’s morally responsible guidelines.
4. Be aware of the fund manager’s screening process. In our due diligence for a religious organization, we discovered an investment manager that subtracted the return of a security that violated their morally responsible investing policy from the total return of the fund. This methodology was a creative way for the fund to supposedly comply with a morally conscious mandate. These actions are potentially underhanded and should be researched.
5. With so many choices in today’s market, alignment of values is just as important, especially when following due diligence in investing. For example, if the organization adamantly disagrees with abortion and the portfolio screens out companies who perform abortions, but the consultant firm or manager overseeing the portfolio makes donations to Planned Parenthood, this is a conflict of interest. It is best to do business with like-minded investment managers and consultants. Catholic aligned organizations need to join together to advance our faith.
6. Avoid board member conflicts. For example, some board members may try to sell their proprietary products to the organization and potentially profit off the sale. These actions only hurt all parties involved.
7. Have a sound fiduciary process in place for the organization. A thorough fiduciary process includes listening, analyzing, strategizing, formalizing, implementing, and reviewing the portfolio and IPS.
We’ve seen tremendous growth for religious organizations who jump feet first and peel back each layer of their portfolio to screen for morally conscious investments using this seven-step strategy. It can take detailed work, but in the end can be worth getting to the core of that onion of morally conscious investing for Catholic organizations. The process can also add ammunition for growing the organization in other areas, including with donors. After all, transparency is critical in our world today, and this is just one more way to ensure the transparency of the Church’s work.