Returns vs. Values: The Fiduciary Experience of the Catholic Church

While controversy over ESG investing and fiduciary duty has only recently reached a fevered pitch in the media and legislative and policy forums across the nation, the Catholic Church has been quietly and consistently practicing its own version of values-based investing for decades. Longstanding investment policy guidelines adopted by the U.S. Conference of Catholic Bishops (USCCB) cite two bedrock principles:

• Principle 1: "Exercise responsible financial stewardship over its economic resources ... This means obtaining a reasonable rate of return on investments."
• Principle 2: "Exercise ethical and social stewardship in investments ... based on Catholic moral principles."

Does this mean the Catholic Church has solved the conundrum of return vs. values in its investing practices?

My colleagues Michael Swope and Kathryn Nusbaum, both in Baird's Institutional Consulting Services division, advise Catholic institutions on how to follow the principles articulated by the USCCB while optimizing investment portfolio return. I asked them for their insights: 

How long has the Catholic Church been formally practicing values-based investing as a matter of policy?

Michael: The U.S. Conference of Catholic Bishops first issued investment guidelines in 1991 – so formally for more than three decades. The guidelines were updated and expanded upon in 2003 and, more recently, in November 2021. The updates provide further clarity on investment policies that align with Catholic values (including expansion into broader areas such as the environment) and a "modernization" of the guidelines. 

The Vatican late last year also published Mensuram Bonam (which translates to "good measure") as its written principles for Catholic investors globally. In either doctrine, it is apparent that the guidelines are not intended to be hard-and-fast rules but rather a flexible framework that can be interpreted (within reason) and implemented based on different religious organizations' unique circumstances. 

Kathryn: When discussing values-based investing, it is important to remind our audiences that this is a broad umbrella term that encompasses different, and often personal, interpretations. Although the Catholic Church has been successful in defining a doctrine to assist in aligning investment implementation to Catholic values, given the personal interpretation of socially responsible investing, we have found most investors continue to struggle with identifying and implementing investment portfolios that align to a strict set of socially responsible and ESG investing guidelines. 

What can both sides in the "return vs. values" debate learn from the fiduciary experience of the Catholic Church in exercising the dual mandates of its investment policy guidelines?

Michael: I think there are multiple takeaways from this debate:

• Values investing will continue to evolve. Both ESG and Catholic values investing have evolved over time and will continue to grow and change in the interpretation of intent and definition. For example, the latest USCCB guidelines incorporate environmental issues and even, for certain uses, military equipment.
• There is a better understanding of the nuance in how these are implemented. We've seen a greater acceptance of various definitions of ESG topics and understanding around the nuances of what makes a company investable or uninvestable. Take fossil fuel companies, for example. Do you not own any? Or is it okay to own oil companies that are champions of change and in the process of "transitioning" to a less carbon-intensive business model?
• The implementation of values-based investing is driven in part by technology. Technology has dramatically improved the ability to implement all forms of socially responsible and values-based investing. You can see this not only on an investable opportunity level, but also in how data is sourced, collected, validated and disclosed, as well as the financial products that are created to capture the investment.
• The details of the investment matter. The scope of the opportunity, the capabilities of the platform, the size of the investment – it all comes into play. A values-based investing opportunity needs to be scalable to a certain size to be implementable in custom portfolios. However, if the assets to be invested are too small, products with predefined interpretations will likely need to be used. In this case, the screening criteria might not meet the exact desired values or ESG outcomes.

As someone who works with religious organizations, how do you help your Catholic clients address the dual return/values mandate of the USCCB guidelines?

Kathryn: We are laser-focused on helping our investment committees maximize long-term, risk-adjusted returns that achieve the investment objectives outlined in their investment policy statement. We do that by (1) ensuring their investments abide by their interpretation of USCCB's guidelines and (2) designing and implementing an investment strategy that optimizes returns within the committee's agreed-upon interpretation of stated value-investing guidelines. This includes implementing custom portfolios, using passively managed products and accentuating active management where alpha generations are viable long-term. 

What's the key ingredient to successfully implementing a balanced approach to the stewardship of financial assets?

Michael: The key ingredient to successful financial stewardship is a clear understanding of the client's desired outcome and goals. 

To achieve best outcomes, a disciplined approach combined with a best-effort mentality are critical. Defining the guidelines upfront and recording them into an investment policy statement results in a level of discipline around the intent and implementation. "Best-effort mentality" means understanding that there is a point at which an overly strict interpretation and implementation of the guidelines can be counterproductive and potentially compromise the investment integrity of the portfolio without significantly increasing the resulting "good" to its community. Materiality and nuance are important concepts here. 

Let's cut to the chase: From your experience working with Catholic values investing, is it possible to achieve the highest possible return within the constraints of social or moral values?

Michael: It would be disingenuous to convey conclusively that one does not have to give up return when implementing a "values-based" investment strategy or to claim that the Catholic values investors have proven that possible. I think this debate – like the one around active vs. passive investing – will be argued for a long time. 

Having said that, there are differences between Catholic values investing and ESG investing. It can be reasonably argued that ESG can add some underlying value-adding features to an investment thesis. But Catholic values investing is a bit more challenging, not least because it necessarily excludes large swaths of the market, specifically within pharmaceuticals. 

The concept of reasonableness applies here. After all, the USCCB guidelines call for "a reasonable rate of return," which is defined as "one that matches the level of the market or at least allows the [Church] to meet its fiduciary responsibilities and maintain its mission." Is it possible for a values-based investment strategy to do that? Absolutely.