ESG has long been part of the DNA of faith-based pension funds

As the controversy over employing environmental, social and governance factors in investment decisions by institutions continues to swirl, a number of church-based pension funds have asserted that ESG forms a core part of their strategies and raison d’etre.

“Faith-based investors can be seen as the first socially responsible investors beginning with screens against the ‘sin stocks,’” said Josh Zinner, CEO of Interfaith Center on Corporate Responsibility, a coalition of faith- and values-based investors.

Now, Zinner noted, virtually every major faith-based investor has some commitment to align the investments of their pension funds with their faith and values.

“These investors are all able to clearly articulate not only the business case for corporate accountability but also the moral case given their missions and their strong connections to impacted communities around the world,” he added.

The Church Pension Fund is the sponsor and administrator of pension and other benefit plans for the Episcopal Church. CPF and its affiliated companies, collectively the Church Pension Group, provide retirement, health, life insurance, and related benefits for almost 39,000 clergy and lay employees. CPF is one of the largest faith-based pension funds, overseeing about $17 billion in assets.

“At its core, the mission of a faith-based pension fund is the same as that of any other — to act in the best financial interest of its beneficiaries,” said Christopher Rowe, managing director, investments at CPF. “As a faith-based pension fund, there are additional considerations in the context of that fiduciary obligation. We are committed to supporting church values in all that we do. Consistent with that commitment, we manage the investment portfolio to generate long-term returns sufficient to keep the promises made to beneficiaries.”

And as part of that commitment to church values, CPG adheres to a socially responsible investing strategy.

“We seek to make direct investments with a positive social impact, reflect ESG issues in investment analysis where these issues are financially material, advocate for corporate social responsibility, advance best practices in SRI, and catalyze socially responsible investments,” Rowe said.

According to a fund fact sheet, as of March 31, 2023 (the latest date for which data is available), CPFs largest allocations were in fixed income (24%), private equity (22.4%), global equities (17.8%) and hedge funds (12.8%). These were followed by real estate (9.8%), absolute-return strategies (9.7%), private specialty strategies (3.4%) and the remainder in cash.
For the 10-year period ended March 31, 2023, CPF returned an average annualized 8.4%, above its benchmark of 6%.

Jake Barnett is the managing director-sustainable investment strategies at Wespath Benefits and Investments, which serves more than 100,000 active and retired clergy and lay employees of the United Methodist Church and oversees over $26 billion in assets, one of the largest faith-based investors in the world.

“Our investments aspire to align with our church’s values, and seek to support a sustainable global economy, which is essential for healthy financial markets.” Barnett said. “A sustainable global economy seeks to promote long-term prosperity for all, with equal opportunities for advancement; social cohesion, with reliable access to basic necessities; and environmental health, with resilient ecosystems.”

As of Dec. 31, 2% of Wespath’s assets under management were managed in-house, while 98% were managed by external asset managers, said a spokesperson.

Monica Buonincontri, director of marketing and communications at The Board of Pensions of the Presbyterian Church, said her organization provides a full range of employee benefits and serves a total of 65,000 individuals. The Board of Pensions assets totaled $12.5 billion as of Dec. 31.

She said the board is linked to a concept called Mission Responsibility Through Investment, which implements policies on socially responsible investing by engaging corporations in which the church owns stock.

“This is accomplished through correspondence, dialogue, voting shareholder proxies and recommending similar action to others, and occasionally filing shareholder resolutions,” Buonincontri said.

In essence, the concept promotes the pursuit of peace; racial, social and economic justice; environmental responsibility; and securing women’s rights, she added.

ESG has always been an important element of faith-based investing, long before that acronym was even coined.

Rowe said the Church Pension Fund is 100% externally managed and the investment team believes ESG issues can present both material opportunities and risks to investors. “As part of the investment analysis and review process, CPF works with current and prospective investment managers to evaluate how they understand and reflect ESG issues in their analysis,” he added.

CPF also actively engages with companies in their investment managers’ portfolios in order to monitor their progress on issues, said Rowe.

Rowe also noted that CPF’s shareholder engagement efforts “cover a broad range of topics.”

Faith-based pension funds have heavily engaged with companies in one of the key ESG themes — the transition to clean, renewable energy and a gradual reduction in the carbon footprint by corporations.

Led by Catholic and Protestant investors, Zinner said, ICCR members began engaging with “heavy emitters such as Exxon, Chevron and other oil and gas companies in the early 1990s when the irrefutable connection between the burning of fossil fuels and climate change was first established."

Indeed, he cited that these were some of the first investors to engage on the topic and they filed the earliest proposals citing “planetary global warming” as a risk to people and the planet. In some cases, these engagements include a large group of investors who have “respectful and productive dialogues” regularly, and in others, as has been the case with Exxon, they are “contentious, resulting in numerous shareholder proposals,” Zinner said.

Wespath is a member of both Climate Action 100+, an investor group that seeks to have the biggest corporate greenhouse gas emitters in the world take necessary steps to fight climate change, and the Net-Zero Asset Owner Alliance, a group of asset owners that commits to having their investment portfolios attain net-zero emissions by 2050.

Wespath has also adopted a “climate change guideline,” which excludes investments in thermal coal companies, due to their excessive sustainability risk. For example, Wespath will exclude any company that generates at least 50% of its revenues from extraction and/or mining of thermal coal. As of Aug. 31, Wespath excluded 94 companies under the climate change guideline.

In addition, Wespath has partnered with asset managers Wellington Management Co. and Impax Asset Management to actively manage public equity strategies that invest in companies seeking to accelerate the transition to a low-carbon economy. A spokesperson said Wespath has about $2.8 billion invested in low-carbon solutions, including renewable energy, sustainable agribusiness and forestry.

In 2019, the Presbyterian Board of Pensions also became an investor signatory of Climate Action 100+, Buonincontri noted.

Faith-based pension funds are also concerned about other issues such as human and worker rights. Indeed, these have been a “core engagement topic for our faith-based members dating back to our genesis in 1971 when several Protestant groups coalesced around disrupting apartheid in South Africa,” Zinner said.

“They have (also) been actively engaging companies with global supply chains on the risks of forced labor including child labor and on securing better protections for workers here in the U.S. including a living wage and paid sick leave,” Zinner said.

Together with the Heartland Initiative, a not-for-profit research organization that promotes the fundamental rights and freedoms of people impacted by armed conflict, repression and violence, Wespath directly engaged with HeidelbergCement, a German building materials firm, about human rights risks at the company. When talks broke down with Heidelberg, Wespath took action by filing a countermotion at the company, akin to filing a shareholder resolution with a U.S. company. Subsequently, HeidelbergCement resumed discussions and hired a human rights program officer.

In addition, in partnership with ICRR, Wespath helped lead engagements with discount store chains Dollar General and Dollar Tree calling for improved store safety and employee well-being. “These dialogues are still ongoing but have witnessed both companies make pledges to address conditions in their stores,” Barnett added.

“A respect for human rights is a key part of Wespath’s mission to fulfill its fiduciary responsibilities and reinforce its commitment to the values of The United Methodist Church,” Barnett stated. “Wespath’s commitment to human rights is underlined by the terms of the United Nations Guiding Principles on Business and Human Rights, which details how governments and businesses should act to guarantee human rights are upheld.”

In addition, some faith-based funds have also engaged the financial services sector to promote strengthened risk management structures to “prevent the type of reckless behaviors that caused past financial meltdowns and that may exacerbate income inequality,” Zinner noted.

And, they have “a long history of engagements with pharmaceutical companies to ensure that medicines remain accessible and affordable for those that need them,” Zinner said.

Rev. Jeff Thiemann, executive director of Church Benefits Association, a membership association of 50 church pension boards, religious orders and denominational benefit programs for clergy and church professionals, noted that some faith-based pension plans screen out companies engaged in payday loans, which often charge exorbitant interest rates.

“(Medieval German priest and prominent Protestant figure) Martin Luther was critical of usury and viewed excessive interest as exploitative and immoral,” he said. “(Founder of Methodist Church) John Wesley advocated for earning money in a way that does not harm one’s health, mind, or neighbor.”

Other examples of screens include companies engaged in producing pornography, egregious polluters, tobacco, alcohol, and weapons of mass destruction, Thiemann added.

ESG tenets have faced a political backlash, especially from conservative lawmakers in the U.S.

Zinner explained that ICCR members, both faith-based and secular, are long-term investors that are evaluating company performance in relation to their entire portfolio and the context of broader systemic risk. “This will not change because ESG has recently been adopted as the punching bag for corporate-funded politicians looking to score points and sow division,” he said. “The material environmental and social risks created by corporate irresponsibility will still be there, as will a growing group of active investors who take their fiduciary responsibility to mitigate long-term portfolio risks seriously.”

Responsible investors, Zinner added, have “faced periodic headwinds and transcended them.” The common denominator for most investors, he said, is risk mitigation and “ESG is a tool to do precisely that.”