Update on Socially/Biblically Responsible Investing

We have never been persuaded that basing investing choices on the moral purity (or impurity) of various companies is the best approach to applying one's faith to the investing marketplace, especially for mutual-fund investors. (Austin explores this topic in chapter 28 of the The Sound Mind Investing Handbook.)

Nonetheless, we hold practitioners of Biblically Responsible Investing (BRI) - a subcategory of Socially Responsible Investing (SRI) - in high regard, and even gave them space in the current edition of the SMI Handbook to present their case.

It is in that fair-minded spirit that we alert you two new articles about BRI and SRI. The first, in the Aug. 29 issue of WORLD magazine, is by reporter (and BRI fan) Warren Cole Smith. Excerpts:

My frequent WORLD co-writer Howard "Rusty" Leonard, whose investment firm Stewardship Partners is one leader in the field of Biblically Responsible Investing, estimates that 20 percent to 30 percent of large-cap companies engage in activities that evangelicals would find objectionable....

Leonard is part of a small but growing BRI industry that is beginning to be taken seriously because of the growth of so-called Socially Responsible Investing. There has been some form of SRI in the United States for centuries. In 1758, the Quakers of Philadelphia prohibited their members from doing business with companies involved in the slave trade. In the 19th century, John Wesley warned against engaging in business practices that "harmed your neighbor" and specifically criticized the tanning and chemical industries.

However, Socially Responsible Investing didn't really become its own asset class until the 1960s. Meeting with some success, the effort expanded. Mutual funds and other investment tools sprang up to implement the goals of SRI, which usually involved military spending, environmental issues, human-rights abuses, alcohol, tobacco, and gambling. In 2007, according to the Social Investment Forum, more than $2.7 trillion was invested in SRI financial instruments.

The second article, from Morningstar, reports that 165 SRI funds are now in operation, compared with fewer than 100 in 1999. Many of these recent additions to the SRI universe are "faith-based" funds.

Secular SRI funds dominated the universe a decade ago, but faith-based offerings have been launched at a fairly rapid rate in the 2000s and now make up more than half the total of all SRI funds....

The three main types of faith-based funds are Catholic, Protestant, and Islamic.... All of these funds shun companies involved with alcohol, gambling, tobacco, and pornography. The funds vary considerably, however, in their overall philosophies and in some of their specific screens....

[C]onservative Catholic and Protestant faith-based funds tend to have zero or minuscule stakes in the media sector because of their "anti-family" screens. Some of the more-liberal faith-based funds have relatively moderate positions in the commodity-related sectors as a result of their environmental screens....

Because social screens vary...it's necessary for investors to review the intricacies of funds' screens, principles, and activities to make sure that they're consistent with their values. Also, given the sector biases of many SRI funds and the limited number of strong offerings in some categories, investors will find that it remains difficult to build well-diversified portfolios constructed entirely of good-quality [SRI] funds.

In the WORLD article, Rusty Leonard of Stewardship Partners disputes the idea that having fewer companies to invest in necessarily means that BRI funds can't serve up competitive returns. "[People] forget that both God's laws and market forces tend to reward admirable companies and punish evil-doers over time," he argues.

Our own research on Socially Responsible Investing, conducted less than a year ago, found that SRI funds (of which BRI funds would be considered a subcategory) slightly trailed the returns of the S&P 500 for the five years ending Sept. 30, 2008.

Still, this comes down to a matter of personal conviction. As I noted at the outset, we are not persuaded that BRI is the best approach to incorporating Christian values into one's investing. But, as Austin writes in the SMI Handbook, if you are persuaded otherwise, you "should certainly investigate the BRI fund options."

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Joseph Slife is a contributing author and editor for SMI. Visit www.soundmindinvesting.com to learn more.