Every so often, the advertisements on my social media feeds become heavily saturated with “socially responsible” or “ESG” investing products. There are also get plenty of “non-responsible” investing products and perhaps even a few overtly “sinful” investing products such as VICE (alcohol, tobacco, gambling, etc.) and TOKE (cannabis!).

Lots of us are going to be in different places in terms of (1) our own awareness of where our investing money is going in the first place, and (2) where we actually want our money going if we’re aware. It’s not my primary goal in this series to draw you into my own position on the ethics, though I will address this to a limited degree. Rather, given my own knowledge and research into the field, I do want to inform you on some of the choices you have and things to watch out for.

I’ll be referring to the concept in general as “socially responsible” or “socially responsible investing” throughout this series, but this is the last time I use quotation marks. I don’t want to use scare quotes, but I also want to make clear that socially responsible investing isn’t always qualitatively socially responsible.

October: This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February.

—Mark Twain

Things to Know From the Start

There has been a recent expansion of investing products, but I’m going to oversimplify here by listing three possible investing approaches. The variations on these will be addressed in the course of the series. These approaches are:

1. Actively-managed mutual funds and ETFs.* If you approach a professional investment adviser with a brick-and-mortar office who works by commissions, you’re likely to get placed into actively managed mutual funds. Actively-managed funds are called this because they pool customers’ money, and a fund manager or team of managers will actively make decisions on how to invest the money.
2. Index mutual funds and ETFs. If you’ve watched the evening news and have seen the latest numbers of the Dow, the Nasdaq, and the S&P 500 get reported, these are stock indices which attempt to track the behavior of the market. Of these three, the S&P 500 is the broadest in terms of number of stocks and diversity of industries, so we’re going to run with this one for simplicity. Instead of buying an actively-managed mutual fund, one can buy an index fund that merely buys all the stocks in the index in proportion to their size. The investor, therefore, has less risk of the fund managers being wrong and no chance of beating the market. This approach also costs less in fees because the fund manager doesn’t have to spend oodles of time and resources on research. More recent innovations have blurred the line between index funds and actively-managed mutual funds. Whereas traditional index funds are weighted on market capitalization (bigger companies get a bigger share), others calling themselves index funds are based on algorithms or methodologies that weigh other factors.
3. Individual stock investing. This option has never been more accessible to the individual investor. Nowadays, nearly all discount brokerages offer free trades (rather than charging a per-trade commission), and some even offer the ability to buy fractions of shares instead of just whole shares. With a significant chunk of time, one could even build one’s own “index fund” and manually exclude undesirable companies.

* ETF stands for exchange traded fund. An ETF goes by a ticker symbol (e.g. ITOT, VOO) and can be purchased in any normal brokerage account without formally opening a separate account with the ETF provider. They are almost always cheaper than traditional mutual funds because they involve less administrative overhead for the fund manager.

You can imagine that approach #3 is going to come with a lot of risk. Whereas an S&P 500 index fund is going to act just like the rest of the market and is diversified in about 500 stocks, you’re not going to sit down and research five hundred stocks this coming Saturday. One may also be susceptible to the temptation of just plain old stock speculation. However, for those who are strongly minded towards ethical investing, individual stock picking also comes with a large degree of control because you don’t have a manager making the decisions for you.

Note that these three approaches are not mutually exclusive for the individual investor. It is not uncommon, for example, to have a majority of one’s portfolio in index funds while also dabbling in individual stocks or actively-managed funds. Even some members of the Bogleheads forum — named for the inventor of the index fund, John C. Bogle — dabble in Tesla.

“Ethical” investing products have gone through some name changes over the years, but two seems to be standing out. In the secular marketplace, the buzz word is “ESG,” which stands for environmental, social, and governance. On the Christian side, there is less consensus.

ESG (Environmental, Social, Governance)

There is no universal standard of what is “ESG,” and not even the companies that promote it have a single standard. Going through even just a few web pages gets really confusing really quickly. I’ll boil this down into two aspects.

The first aspect is screening for negatives. This is where most of our minds probably go when we think of an investment product that promises to be socially responsible. The idea is to screen out companies where customers don’t want to invest and just invest in the ones that passed the test.

As you might expect from secular organizations, however, these screens may not necessarily line up with your own personal desires. As a typical example, I’m going to use the iShares ESG Aware MSCI USA ETF (ticker: ESGU). iShares is an extremely popular provider of exchange traded funds (ETFs), and this happens to be their biggest ESG fund — about $13 billion in assets under management. ESGU’s negative screens are the following:

• civilian firearms
• controversial weapons (“including cluster munitions, landmines, depleted uranium weapons, biological/chemical weapons, blinding lasers, non-detectable fragments and incendiary weapons”)
• tobacco
• thermal coal
• oil sands

I’m guessing that most TAU readers might think at least three out of the five are…well…lame. Expect nearly all ESG funds to employ negative screens like these.

The second aspect has more to do with giving more weight towards companies with higher ESG ratings. The marketing claim by many ESG investment products is that we should expect ESG-friendly investments to perform better than their non-ESG counterparts because they are less likely to suffer from lawsuits, adverse legislation, and general malfeasance and skullduggery. iShares ESG MSCI USA Leaders ETF (ticker: SUSL) allocates heavier investments towards companies with higher ESG ratings. You can look up ESG ratings for individual companies at pages such as this one.

Companies are aware of these ratings and funds that track them. Think about that the next time you see a company virtue signaling in its advertisements. This has even given way to the coinage of the term “greenwashing,” when a company intentionally overstates its environmental friendliness.

And by the way, iShares considers funds like these to be index funds because they each follow an index with its own algorithm or methodology. There is no human being picking and choosing individual stocks which he thinks will outperform the market, but they are also not traditional, market cap weighted index funds. This is what I was warning about earlier when actively-managed and index monikers seemingly get conflated.

GuideStone

But since we TAU types are a bunch of unsophisticated, antediluvian prudes who actually believe in Noah’s diluvium, let’s talk about a prominent Christian option. GuideStone, an arm of the Southern Baptist Convention, is “the nation’s largest Christian-screened mutual fund family.”

GuideStone’s Screening Claims

Per their literature:

GuideStone Funds® provides a performance-driven, faith-based approach to investing. Our investment policy has a strong foundation rooted in Christian principles that has been developed and refined over several decades. policy states that:

The Funds may not invest in any company that is publicly recognized, as determined by GuideStone®, as being in the alcohol, tobacco, gambling, pornography or abortion industries or any company whose products, services or activities are publicly recognized as being incompatible with the moral and ethical posture of GuideStone.

By investing in accordance with our Faith-Based Investing Policy, GuideStone is promoting Christian values in seeking not to support industries that have led to family, relational and spiritual declines. As stated above, we focus on companies that are publicly recognized as being in certain restricted industries. Because we understand that it is virtually impossible to invest in absolutely “pure” companies, we do not seek a zero tolerance policy.

Unfortunately for us, GuideStone does not publish its “restricted issuers list” to the general public. This list goes only to the sub-advisers who manage investments within GuideStone’s mutual funds and “other investment service providers.” What we do know of this list from their literature is a typical range of investments that are prohibited. These include:

• 3%–5% of the S&P 500 index by market capitalization. The S&P 500 covers about 80% of the U.S. stock market’s total value.
• 6%–8% of the MSCI EAFE (Europe, Australasia, Far East) index by market capitalization. This is a popular index of stocks based in developed markets outside of North America. Sorry, Canada.
• 1%–2% of the Bloomberg Barclays U.S. Aggregate Bond Index.

Analyzing GuideStone’s Screens

Because we don’t have access to GuideStone’s “Restricted Issuers List,” it’s difficult to look at most of GuideStone’s SEC filings and determine whether the absence of an underlying investment has to do with its moral standing or because the fund managers don’t think it’s a good investment. This, however, is not the case with index funds because we have the entire list of S&P 500 companies. Any company, therefore,  that appears in the list of S&P 500 companies that does not appear in GuideStone’s SEC filing for its S&P 500 index fund is likely a company they have screened out. Based on GuideStone’s September 2020 quarterly report as compared with the S&P 500, the following companies appear in the S&P 500 but are not among the holdings in GuideStone Funds Equity Index (GEQZX):

• Pfizer (pharmaceutical)
• Merck (pharmaceutical)
• AbbVie (pharmaceutical)
• Philip Morris (tobacco)
• Altria (tobacco)
• Las Vegas Sands (gambling)
• Brown-Forman (alcohol)
• Constellation Brands (alcohol)
• AmerisourceBergen (drug distributor; notably sued for its contributions to the opioid crisis)
• The Cooper Companies (surgical products)
• MGM Resorts International (gambling)
• Wynn Resorts Ltd (gambling)
• Molson Coors Beverage Company (alcohol)
• Perrigo (private label OTC pharmaceuticals, pharmaceutical active ingredients)

However, GuideStone’s screens don’t take out everything to which you might object. Within the Equity Index fund, I found entertainment companies that have put out a myriad of morally questionable products:

• AT&T (parent of WarnerMedia, HBO, Cinemax, et al. Is Game of Thrones pornography?)
• Comcast (owns NBCUniversal)
• DISH Network
• Netflix — Notwithstanding any other films on the service that contain nudity, the service released Cuties on September 9th, well enough before GuideStone’s SEC filing date of September 30th to screen it out.
• Take-Two Interactive (which owns Rockstar Games, most notable for the Grand Theft Auto franchise)
• Walt Disney Corporation
• ViacomCBS

Moreover, GuideStone’s international holdings (as revealed elsewhere in the most recent quarterly report) include not merely stocks of companies in China (where the state may own significant portions of such companies) but also Chinese government bonds.

These issues above are merely what I found in my own perusing the quarterly report. Inspire Investing, a competing Christian investment firm, offers a search tool that allows investors to enter any ticker symbol and find objectionable investments based on its own criteria. Lo and behold, this tool finds more objectionable investments that GuideStone’s screens do not cover.

Inspire’s screens may in fact be too much for some investors who wish to be socially responsible. I don’t think I know anyone who would object to investing in casual dining chain restaurants because they serve alcohol. However, the report does poke holes in GuideStone’s own screening claims. Inspire finds the following within the same Equity Index fund:

• LGBT philanthropy — 172 securities (out of 489)
• LGBT legislation — 115 securities
• pornography (9)
  • Apple
  • Amazon
  • AT&T
  • Charter Communications
  • Comcast
  • DISH Network
  • Netflix
  • Target
  • Verizon
• alcohol (3)
  • Archer Daniels Midland, which manufactures grain neutral spirits for alcoholic beverages
  • Darden Restaurants (whose Olive Garden and other casual dining chain restaurants serve alcohol)
  • Starbucks (?)
• gambling (5)
  • Carnival
  • Hilton Worldwide Holdings
  • Marriott International
  • Norwegian Cruise Lines
  • Royal Caribbean Group
• embryonic stem cell research (3)
  • General Electric
  • Johnson & Johnson
  • PerkinElmer
• abortifacients (1)
  • Johnson & Johnson

To be fair, GuideStone makes no claims to screen for “LGBT” advocacy, and many investors would find such a screen to be overzealous. But they do claim to screen for pornography, alcohol, gambling, and abortion, and those screens appear to have failed at several points here.

In sum, GuideStone’s screens do not appear to be terribly effective. Whereas socially responsible investing is an individual decision to make, individuals and institutions who do invest with GuideStone — surely a great many Southern Baptist pastors and churches — rightly expect that screening to happen effectively and consistently. Sure, Olive Garden serving wine alongside unlimited salad and breadsticks clearly is not as objectionable (if at all) as Game of Thrones, but GuideStone claims to screen for alcohol and pornography and clearly missed on the latter. It’s sort of like LifeWay promoting Beth Moore.

What Now?

There is definitely more to talk about including GuideStone’s major competitors, the question of China and other authoritarian regimes, and the question of investment screening in the very first place. And can you place a dollar value on social investment screening? Does Guidestone’s average 0.92% fee of one’s investments per year really make a big difference in the long term? Spoiler alert: I don’t use any of these funds, but some are certainly better than others.

See you in part 2.

Disclosure: I am not a licensed investment advisor or financial planner. I am not your licensed investment advisor or financial planner.

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