Why is ESG investing failing Christian investors?

*Borja Barrragán, CEO of Altum Faithful Investing, for Funds Society. Published on 02/02/2022. Accessed in: https://bit.ly/3sgzeqf

ESG investing as a movement within the investment management industry is failing ethical investors. Particularly those whose ethics are forged by Christianity – the world’s largest religion.

The problem of ESG criteria for committed Christian investors is twofold: on the one hand, there is the lack of consistency on the part of investment firms when it comes to implementing ESG criteria in their investment funds. On the other, ESG criteria fall short when it comes to addressing moral aspects that are at the heart of Christian life such as the dignity of life or religious freedom, considered by a growing number of Christian investors as a fundamental weakness that holds them back in their decision to opt for socially responsible investment.

This has led many investors to seek an alternative: faith-consistent investing (also known as Faithful Investing). Faithful Investing suggests greater objectivity, transparency and clarity, thus offering an additional layer of scrutiny that provides greater depth than ESG-focused investment opportunities can offer. This should come as no surprise to those who observe the investment world as rating agencies, regulators and asset management firms have failed to achieve a consistent, consensual, unified and harmonized approach to the application of ESG criteria.

On the one hand, the lack of consistency has been highlighted by academics who have shown that the correlation between rating agencies is low (see MIT Sloan School of Management’s 2019 study – Aggregate Confusion: The Divergence of ESG ratings). Likewise, a report by the investment firm SCM highlighted that one of the causes contributing to such divergence is for example the fact that few companies submit their sustainability reports to an external audit that actually verifies that all the achievements they announce in them are a true reflection of reality (see: SCM Greenwashing: Missclassification and Mis-Selling of Ethical Investments). In addition, researchers have shown that less than 5% of companies base their ESG objectives on scientific data, highlighting the lack of scientific backing behind the achievements announced in their reports.

On the other hand, in the case of ESG criteria, their determination depends on 3 subjective factors such as i) the scope (when we talk about “sustainability”…what are we referring to specifically?), ii) the measurement (what is the correct way to measure the social impact of the decisions made by a company?) and iii) the weight assigned to the measured variables (is the impact on CO2 emissions of a clothing factory in India measured in the same way as that of a software company in San Francisco?). In addition to this, we must also mention the subjectivity that exists among the individuals or entities that make the decisions as to what does and does not meet their criteria (which may differ from one entity to another). The result of all this is that many investors feel that they are building their portfolios on shifting sands rather than on solid rock.

Faithful Investing

However, Faithful Investing, based on the Catholic Teaching, focuses on investing in assets or companies whose activity and practices do not conflict with certain moral principles. These moral principles and values do not change over time, as they are considered an expression of truth and are therefore permanent, consistent and non-contradictory. This makes them clear, sound and suitable for investment decisions.

It is undeniable that the growth of the ESG world and the adoption of extra-financial criteria to make investment decisions has been a very positive step forward. However, for those seeking an authentic life by aligning their actions with their values, ESG investing alone is not enough. While ESG seeks to add certain objectives such as promoting more sustainable cities and communities, the faith-consistent investor also seeks to promote inherent aspects of the person, respecting human life, the family, the dignity of man and the true value of creation, looking beyond traditional ESG criteria to fulfill his or her own personal values.

In short, Faithful Investing is broader and deeper than solidarity with certain social policies that sound very positive and praiseworthy but unfortunately remain in many cases dead letters. The coherent investor seeks a more solid approach, built on truth, that allows the full development of a Christian culture where the center of the economy and investment is the integral development of the person…. and that is an objective that the current ESG is simply not meeting.

Borja Barragan

Founder of Altum Faithful lnvesting

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