Now, investors can put their money where their faith is
Alex Preston on the growing profile of sharia-compliant and faith-based investment vehicles.
At the end of last year, Deutsche Bank launched the first European investment product targeted specifically at Christians - a fund linked to the Stoxx Europe Christian Index. It claims to give "faith- and ethics-based investors the flexibility to invest in line with their beliefs" and it excludes companies involved in tobacco, gambling and other potentially suspect pursuits.
Faith-based investing is already well established in the United States, where more than 30 such funds exist and sharia-compliant investment products have been touted as the next big thing in finance for some years now. These religious funds join the growing range of broader ethical investment vehicles that have developed over the past decade to give investors the opportunity to put their money where their morals are.
With the growth of the Middle East as a financial powerhouse and the increasing importance of local sovereign wealth funds to the global investment markets, sharia banking has become big business. There is already more than $1.2trn invested in banks that comply with strict regulations prohibiting them from either earning or paying interest. Sharia-compliant banking is the dominant form of banking in Iran and it makes up a sizeable share of the market in Malaysia and Saudi Arabia.
Pennies from heaven
Despite the size of the sharia banking and bond markets, complementary investment products have been slow to get off the ground. As Manooj Mistry, UK head of exchange-traded funds (ETFs) at Deutsche Bank, explained to me: "Sharia investing is one of those areas that have received a lot of attention but, in terms of people putting money into products, it hasn't really happened."
The reason for this is clear. For a fund to gain sharia-compliant status, it must screen out any companies that indulge in forbidden ("haram") activities. Conventional banking would come under this interdiction. In Mistry's words: "Professional investors in the Middle East have realised that if you want to screen indexes, you necessarily give up performance profit . . . Are people willing to give up profit in exchange for morality? No, they're not."
The take-up of Deutsche Bank's Stoxx Europe Christian Index ETF has also been slow, with only between €10 and €12m invested since the product was launched in December. This is perhaps understandable. The church pension funds and charitable trusts that are likely to be the fund's main backers are slow-moving, thoughtful investors - and they will want to see evidence of a track record, financial and moral, before they hand over their cash. The fund's returns will be highly correlated with the underlying index, meaning that investors will not have to give up profits to salve their conscience. The exclusion of morally dubious companies will be overseen by the European arm of Christian Brothers Investment Services (CBIS), an American firm that manages $4bn of Catholic investments in the US.
Christian investment in the US relies on two main strategies: avoiding investing in companies whose practices are incompatible with basic Christian values and using Christian investors' position as shareholders to change corporate behaviour. I spoke to Daniel Nielsen, director of socially responsible investing at CBIS, to understand how this works.
He acknowledged that a degree of compromise was necessary in choosing which companies to exclude. "If you look to have a completely pure portfolio, you will end up having an empty portfolio," he said. "The threshold can't be set so high that you penalise the investment universe."
CBIS focuses on excluding companies that violate Catholic "life ethics" (through involvement in abortion, contraception and stem-cell research) or are engaged in pornography, tobacco and "militarism". The Stoxx Europe Christian Index ETF also screens out companies involved in gambling, although Stoxx and CBIS will not release the exact rules by which they construct their portfolio. They did, however, reveal to me the largest holding in the portfolio: Nestlé, a company that has been heavily criticised by faith groups for its aggressive marketing of baby formula in the developing world.
While some might sneer at the inconsistencies and equivocations of faith-based investing, this segment of the global investment markets is having a disproportionate impact on corporate behaviour. CBIS is one of the larger firms within the Interfaith Centre on Corporate Responsibility, a multi-denominational body that attempts to use its members' pooled funds to force companies to improve their record on matters as diverse as animal welfare, child labour and CEO compensation.
CBIS, Nielsen told me, is involved in a movement to persuade America's largest banks to implement human-rights-based lending - refusing, for instance, to make loans to Sudan until the Darfur conflict is resolved. Christian funds have been at the forefront of pressure on companies such as Coca-Cola and Nike with regard to working practices. Walmart has implemented big changes to its supply chain after engaging with faith-based groups.
For those who find the clash of prayer and profits too jarring, Deutsche Bank now offers a secular alternative to its Christian index. The Global Fund Supporters ETF invests only in corporations that support the Global Fund to Fight Aids, Tuberculosis and Malaria (GFATM), an organisation supported by Bill Gates, Bill Clinton, Bono and Kofi Annan, among others. A portion of the ETF's profits goes to further the work of the GFATM - something, perhaps, we can all believe in.
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