The Catholic Church and ethical investments.
The Social Doctrine of the Church with the encyclical “Centesimus annus” of Pope John Paul II in 1991, with the encyclical “Caritas in veritate” of Pope Benedict XVI, which calls for an ethics of finance in 2009 and with the encyclical “Laudato si ‘” by Pope Francis in 2015, has always reiterated the importance of developing a global and sustainable economic system.
In Italy, in which there is the Vatican State, the ethically and socially responsible investments according to Catholic moral theology receive a certification from the organization Nummus, after an analysis conducted in accordance with the instructions of the Italian Bishops’ Conference.
The United States Conference of Catholic Bishops or USCCB has dedicated an important study for the drafting of the “Guidelines for socially responsible investment” in order to protect human life against the practices of abortion, contraception and the use of embryonic stem cells and human cloning. The USCCB Guidelines also promote human dignity against all discrimination, access to pharmaceutical products for all, but also indicate not to participate in companies which promote pornography, which produce and sell weapons and encourage investment in companies which pursue economic justice and fair working practices, which protect the environment and corporate social responsibility.
Active shareholding based on the values of faith is also very present in the United States through the “Interfaith Center on Corporate Responsibility”. In 1971, it was the first to file a motion against General Motors for violating human rights by trading with South Africa during apartheid.
Today there are funds and indices that are based on Catholic principles in the evaluation of securities to be included in the portfolio, carrying out screening that follow Catholic morals. There are passive funds that replicate a benchmark index and active balanced funds, classified as ethical and in accordance with Catholic morality, based on ratings that not only follow ESG principles but also the morals of the Catholic Church. Ratings may change from year to year to allow investors and financial advisors to evaluate ethical products over time.
Impact Investing.
The strategy of Impact Investing, which originates from microfinance, has several relevant aspects. Generally it concerns Private Equity, Venture Capital and Green infrastructures, but little by little it is expanding to other forms of investment. Investments in private equity and in venture capital are not accessible to all investors, so the impact investing is also moving towards “public equity”, that is the regulated financial market.
Impact investing in regulated markets allows the presence of all investors, not just the institutional ones, as it happens in private equity investments.
To be classified as impact investing, the listed companies in which there are the investments must meet some material criteria, they must therefore allow the solution of a serious environmental or social problem and they must satisfy an additionality criteria, so they must bring added value. Through their products or services, the companies in which there are the investments must respond to a need that has not been met by the competitors or by the governments. In order to do that, they must use cutting-edge technologies, innovative business models and respond to requests of disadvantaged people.
Furthermore, the private markets alone are unable to satisfy all the demand for social impact investing; investment in shares and bonds traded on regulated markets can satisfy this need, so there is a contribution also at asset class level.
The social impact investing strategy is widely used by institutional Catholic investors because it aims to combat the social inequalities of people from the poorest and most disadvantaged areas of the world while still generating a financial return.
The Catholic Church has developed a great interest in impact investing, with a medium to long-term time horizon, both by seeking profit and solidarity, and in charitable works which will not necessarily produce a financial return.
In my personal opinion, a hybrid approach to impact investing is needed, for example by combining investments in Private Equity and investments in listed companies in a fund, in order to create a good product that combines social impact investment with value investing strategies, looking for undervalued stocks to buy and hold for long periods.
The need to invest without excluding the principles of sustainability and an ethical perspective represents a non-negligible part of investments. There will be people who will argue that the purpose of the investment is merely to make a profit, however the importance of acting responsibly in the financial world is undeniable, for ethical or religious reasons, but also for a future-oriented perspective. Today’s investments must be directed towards the present common good and of the future generations, guaranteeing the investor to obtain both a financial and ethical advantage.
Mr. Michele Mifsud. Chartered Financial Consultant. Assistant Econome General CM
