The Bottom Line: Three new ETFs launched last week expand the universe of values-based investment vehicles offering Christian, Islamic (Sharia) and Jewish faiths faith-based funds.
Notes of Explanation: Year-end AUM estimates constructed from multiple sources. Brightlight Listed Markets Research Paper (2024) establishes $100B as the mid-2024 milestone and $130B+ as subsequent total. Figures encompass listed mutual funds and ETFs; EXCLUDE unlisted vehicles, SMAs, insurance general accounts, and endowments. Treat as approximate directional estimates, not audited totals. Sources: Sustainable Research and Analysis LLC.
Observations:
• Last week Faith Investor Services (FIS) launched three new actively managed faith-based ETFs, offering investors options that align with faith-based values. Consisting of two fixed income funds and one equity fund, these investment vehicles expand the number and type of long-term sustainable investment funds that a firm like Morningstar understates in its coverage of such investment vehicles. Yet, these investment funds fall into a widely, but not universally accepted, sustainable investing definition consisting of various approaches ranging from values-based investing to ESG integration, engagement and proxy voting. See below for a listing of sustainable investing approaches and definitions.
• Faith-based mutual funds and ETFs are investment vehicles that align financial decisions with specific religious values and moral principles. Included are Christian, Jewish as well as Islamic (Sharia) faiths that are further divided into Catholic, Methodist, Baptist and Anabaptist/Mennonite faiths that in each instance allow investors to participate in the stock as well as bond markets while ensuring their capital does not support industries or practices that conflict with their faith.
• The newly launched ETFs are listed on NYSE Arca and include the FIS Bright Portfolios Core Bond ETF (ticker: BRIB), the FIS Faith Income ETF (ticker: FTHB), and the FIS Tactical Equity ETF (ticker: ACTS). These are actively managed funds launched by Faith Investor Services, LLC (FIS), a registered investment adviser primarily based in Dallas, TX.
• While individual methodologies for doing so might vary somewhat, the three funds and their managers go through a process by which they identify securities of biblically aligned companies whose products, processes, and priorities align with Christian values and positively impact the world. The Sub-Adviser strives to construct and maintain a portfolio that avoids investments in companies that manufacture or distribute products or services or otherwise engage in activities that that the Sub-Adviser believes conflict or are inconsistent with Christian values, such as abortion, embryonic stem cell research/human cloning, human rights violations.
• At launch, BRIB, FTHB and ACTS reflected $1.3 million, $2.0 million and $0.2 million in seed capital, respectively, and expense ratios of 49 basis points (bps), 65 bps and 69 bps, respectively, as compared to 57 bps for a universe consisting of 31 faith- based ETFs. Without a performance track record and their small capital base, investors should be aware these funds face a meaningful near-term viability question as standalone ETFs.
• These funds expand the segment of faith-based funds that are estimated to include some 65 mutual funds and now 31 ETFs with total net assets of about $130 billion. When added to the long-term focused sustainable mutual funds segment, as defined by Morningstar, total net assts of focused sustainable funds rise to slightly over $500 billion or so.
• Leading firms offering faith-based investment funds, including mutual funds and ETFs, include in descending order: GuideStone Financial Resources, Eventide Asset Management, Amana Funds (Saturna Capital Corporation), Ave Maria Mutual Funds (with funds managed by /Schwartz Investment Counsel, Inc.), Praxis Mutual Funds (Everence Financial), and SP Funds (Sharia Portfolio Group). On a combined basis, these firms manage about $39.5 billion in assets or 30% of the assets attributable to faith-based funds.
Sustainable investing defined
While there is no universally accepted definitions or framework as yet and definitions continue to evolve, today sustainable investing refers to a range of overarching investment approaches or strategies. Most practitioners agree that these encompass the following strategies that may be employed individually or in combination:
Values-based investing. Also referred to as faith-based investing, socially responsible investing, responsible investing, ethical investing or investing based on a set of morals, the guiding principle is that investments are based on a set of beliefs with a view toward achieving a positive societal outcome. Typically, this approach is executed via negative screening, divestiture or divestment.
Negative/Positive screening or exclusionary strategies. These involve identifying companies or entities which lead or lag in their contributions to environmental, social and governance (ESG) factors and adjusting their portfolio positions up or down; and/or also the exclusion of companies or certain sectors from portfolios based on specific ethical, religious or faith-based, social or environmental guidelines or preferences. Traditional examples of exclusionary strategies cover the avoidance of any investments in companies that are fully or partially engaged in gambling and sex related activities, the production or manufacturing of alcohol, tobacco or firearms, or even atomic energy. These exclusionary categories have been extended in recent years to incorporate additional considerations, for example, firms that are the subject of serious labor-related actions or penalties by regulatory agencies or demonstrate a pattern of employing forced, compulsory or child labor, or firms that exhibit a pattern and practice of human rights violations or are directly complicit in human rights violations committed by governments or security forces, including those that are under US or international sanctions for grave human rights abuses, such as genocide and forced labor. That said, it should be noted that significant policy shifts and investor sentiment are taking place in North America and Europe regarding the treatment of nuclear energy and the defense sector, driven by recognition of nuclear energy’s role in meeting the dual goals of energy security and net zero emissions while the war in Ukraine has been responsible for shifting the perception and interest among institutional investors in the defense sector.
Closely related is the strategy of divestiture or divestment. Divestiture strategies involve current holdings that are liquidated over time as their eligibility is no longer consistent with the owner’s objectives, such as fossil fuel companies. But divestiture strategies may also involve a much broader universe of securities, such as when for example, divestiture strategies were applied to apartheid practices in South Africa in the 60s and 70s. At that time, any company doing business with South Africa was taken off the list of eligible investments.
Impact investing. Still a relatively small but growing slice of the sustainable investing segment, impact investments are incremental (additional) moneys directed to companies, organizations, and funds with the intention to achieve measurable social and environmental impacts alongside a financial return. Impact investments can be implemented in both emerging and developed markets and made across asset classes, such as equities, fixed income, venture capital, and private equity. In each instance, the objective is to direct capital to address challenges in sectors such as sustainable agriculture, renewable energy, conservation, microfinance, and affordable and accessible basic services, including housing, healthcare, and education.
Historically, impact investments have targeted a range of returns from below market to market rate, depending on the investors’ strategic goals. But increasingly, impact investing strategies are expected to at least achieve risk-adjusted market rates of return.
A more widely practiced yet less rigorous definition of impact investing involves providing direct exposure to issuers or projects that managers believe have the potential to achieve social or environmental benefits.
Thematic investing. An investment approach with a focus on a particular idea or unifying concept, for example securities or funds that invest in solar energy, wind energy, clean energy, clean tech and even gender diversity, to mention just a few of the leading sustainable investing fund themes. Investing in low carbon emitting stocks and bonds or green bonds or funds also fall into the thematic investing category.
ESG integration. This is a widely practiced investment approach by which environmental, social and governance factors and risks are systematically analyzed and, when these are deemed relevant and material to an entity’s performance, they will influence decisions on whether to buy or hold a security, and to what extent. Such considerations may lead to the liquidation of a security from the portfolio but at the same time, these factors may also identify investment opportunities.
Shareholder advocacy, issuer engagement and proxy voting. These strategies, which leverage the power of stock ownership in publicly listed companies and, regarding engagement, the power of bond investments, are action-oriented approaches that rely on learning about each company’s ESG practices and related risks and opportunities. These strategies also extend to influencing corporate behavior through direct corporate engagement, filing shareholder proposals and proxy voting.
Structural sustainability. The scope for expressing sustainability objectives through security selection or ownership rights in money market funds is inherently limited by regulatory requirements and liquidity mandates. As a result, many sustainable money market fund offerings pursue sustainability objectives through structural mechanisms that operate outside traditional portfolio construction, such as inclusive intermediation practices (e.g., broker-dealer selection and distribution partnerships) and the allocation of adviser revenues to charitable or social purposes. In this analysis, such approaches are characterized as forms of “structural sustainability,” reflecting their focus on market processes and economic flows rather than on portfolio composition or issuer engagement.
