This year’s stock market downturn has people wondering how to invest their money. A key question: if I try to invest ethically, am I wrong in a crisis?
Believe it or not, investing for profit can be considered a Catholic virtue. The United States Conference of Catholic Bishops makes this clear in its Principles for Its Own Investing, released last November, which also serves as a guide to socially responsible investing for all of us. Church leaders “should exercise responsible financial stewardship of its economic resources,” the bishops write. “In practical tax terms, that means getting a reasonable rate of return on investments.” In other words: you can’t do anything good if you burn your money in bad investments. The purpose of investing, the bishops say, is (in the words of investment gurus and advertisements) to make our money work hard for us.
You can’t do anything good if you burn your money in bad investments.
Certainly, the desire for profit must be balanced with the common good. “Decisions about the use of capital have moral implications,” the bishops write, especially for the weak and vulnerable. They therefore call for investments “that promote community development” or “produce a truly important social good”, even when these investments “may result in a lower rate of return”.
Likewise, when Pope Francis calls business a “noble calling,” he is talking about business as a way for humans to interact in constructive and healthy ways. “Commercial abilities, which are a gift from God, must always be clearly oriented towards the development of others and the elimination of poverty, in particular through the creation of diversified work opportunities”, he writes in “Fratelli Tutti”. .
[Related: “Ten things Pope Francis and Catholic social teaching taught me about the economy.”]
In its desire for ethical investing that also offers “reasonable” returns, the church is close to the movement for ethical investing – often referred to as ESG, short for environmental, social and governance investing. In practice, that means investing in things like electric cars and renewables instead of carbon-emitting companies; employers who pay $20 an hour instead of $10; and companies that hire as many women as men for management positions. The Catholic version of the ESG also includes prohibitions on investing in pharmaceutical companies that use human embryos for research or hospital chains that offer abortions.
ESG assets are expected to reach $50 trillion by 2025, representing more than a third of the more than $140 trillion in global assets under investment.
Pope Francis: “Entrepreneurial capacities, which are a gift from God, must always be clearly oriented towards the development of others and the elimination of poverty.
But the traditional definition of ESG, focusing on the environment and the treatment of workers, might be too narrow. It is also important, write the bishops, to examine “investment funds aimed at meeting basic needs related to agriculture, access to water, adequate housing and reasonable prices, as well as primary health care and educational services”. In this sense, another way to think about ethical investing is to look for companies that provide essential services for daily life and which, by chance, survive almost all economic downturns.
A rule of thumb for prudent investing that is also ethical investing is simply to consider what people always need. “There are goods for which demand is constant regardless of the economy,” says Mario DiFiore, director of student investment funds at Fordham Business School. “We always need to do our shopping.” In contrast, the demand for vacation rentals, “Hamilton” tickets, and gas-guzzling luxury cars is elastic, meaning demand declines during a downturn.
Another way to think about ethical investing is to look for companies that provide essential services for everyday life.
The fear of losing money on bad investments also intensifies during a market downturn. “When times get tough, everyone’s focus is on the bottom line,” writes Matthew Lau in the Financial Post. “Investors want to maintain profitability; consumers demand affordability; employees are doing everything they can to keep their salaries. The problem with ESG and other types of “wake-ups,” Mr. Lau writes, is that “someone has to pay for it. When economic times are tough, fewer people have the means or the will to do so.
Mr. Lau repeats a common belief that ethical investing is less profitable, but in fact ESG funds have weathered this downturn, or at least haven’t lost as much as traditional investments. “ESG equity funds have done better this year, on average, than their non-ESG counterparts,” Bloomberg News wrote in June. And academic studies over a longer period have shown that ESG investing is solid.
As for investing in basic goods, in some cases this strategy performed even better than traditional ESG funds. In the 12 months ending September 6, the S&P 500 index fell 12.2%. The Dow Jones US Food Retailers & Wholesalers Index, however, Pink by 10.2 percent.
In other words, when the economy is hurting, it’s thinking about real life, a sense of community, and things as basic as food (not to mention clean energy and higher wages for workers ) that could save your savings.
[Related: “Good Returns: Can you follow your conscience and still beat the S&P 500?”]