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John W. MillerSeptember 27, 2022
Photo from Unsplash.

This year’s stock market downturn has made people squint a little closer at how to invest their money. One key question: If I try to invest ethically, am I shortchanging myself when a crunch comes?

Believe it or not, investing for profit can be considered a Catholic virtue. The U.S. Conference of Catholic Bishops makes this clear in its principles for its own investments, published last November, which also serves a guide to socially responsible investing for us all. Church leaders “should exercise responsible financial stewardship over its economic resources,” the bishops write. “In practical fiscal terms, this means obtaining a reasonable rate of return on investments.” In other words: You can’t do any good if you torch your money on bad investments. The point of investing, the bishops say, is (in the words of investing gurus and commercials) to keep our money working hard for us.

You can’t do any good if you torch your money on bad investments.

To be sure, the desire for profit should be balanced with the common good. “Decisions about the use of capital have moral implications,” the bishops write, especially for the weak and vulnerable. So they call for investments “that promote community development” or “produce some truly significant social good,” even when these investments “may result in a lower rate of return.”

Similarly, when Pope Francis calls business a “noble vocation,” he is talking about business as a way for humans to interact constructively and healthily. “Business abilities, which are a gift from God, should always be clearly directed to the development of others and to eliminating poverty, especially through the creation of diversified work opportunities,” he writes in “Fratelli Tutti.”

[Related: “Ten things Pope Francis and Catholic social teaching taught me about the economy.”]

In its desire for ethical investing that also delivers “reasonable” returns, the church is close to the movement for ethical investing—often referred to E.S.G., short for environmental, social and governance investing. In practice, what this means is investing in things like electric cars and renewable energy instead of carbon-emitting companies; employers that pay $20 an hour instead of $10; and firms that hire as many women as men for top boardroom jobs. The Catholic version of E.S.G. also includes prohibitions against investing in pharmaceutical firms that use human embryos for research or hospital chains that offer abortions.

E.S.G. assets are expected to top $50 trillion by 2025, representing over a third of the over $140 trillion in global assets under investment.

Pope Francis: “Business abilities, which are a gift from God, should always be clearly directed to the development of others and to eliminating poverty.”

But the traditional definition of E.S.G., focused on the environment and treatment of workers, might be too narrow. It is also important, the bishops write, to look at “investment funds aimed at satisfying basic needs associated with agriculture, access to water, adequate housing and reasonable prices, as well as with primary health care and educational services.” Along those lines, another way to think about ethical investing is to look for companies that provide services that are elemental to everyday life—and that, not incidentally, survive almost every economic downturn.

A rule of thumb for cautious investing that is also ethical investing is simply to consider what people always need. “There are some goods where demand is constant regardless of the economy,” says Mario DiFiore, the director of student investment funds at Fordham’s business school. “We always need to get our groceries.” By contrast, demand for vacation rentals, tickets to “Hamilton” and gas-guzzling luxury cars is elastic, which means demand shrinks during a downturn.

Another way to think about ethical investing is to look for companies that provide services that are elemental to everyday life.

The fear of losing money on bad investments also intensifies during a market downturn. “When times get tougher, everyone sharpens their focus on the bottom line,” writes Matthew Lau in the Financial Post. “Investors want to maintain profitability; consumers demand affordability; employees do everything they can to keep their paychecks.” The problem with E.S.G. and other kinds of “wokeism,” Mr. Lau writes, is that “someone has to pay for it. When economic times are tough, fewer people have the means or willingness to do so.”

Mr. Lau is repeating a common belief that ethical investing is less profitable, but in fact, E.S.G. funds have weathered this downturn, or at least have not lost as much as traditional investments. “ESG equity funds have done better this year, on average, than their non-ESG counterparts,” wrote Bloomberg News in June. And academic studies over a longer period of time have shown that E.S.G. investing is sound.

As for investing in basic goods, in some cases, that strategy has done even better than conventional E.S.G. funds. In the 12 months ending Sept. 6, the S&P 500 index declined by 12.2 percent. The Dow Jones U.S. Food Retailers & Wholesalers Index, however, rose by 10.2 percent.

In other words, when the economy is hurting, it’s thinking about real life, a sense of community and things as elemental as food (without forgetting clean energy and higher wages for workers) that might save your savings.

[Related: “Good Returns: Can you follow your conscience and still beat the S&P 500?”]

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