Pope Francis urges Catholic investors to divest from fossil fuels to seek environmental justice.
In June, the Vatican asked the world’s 1.2 billion Catholics to divest from fossil fuels. The edict came in a 225-page encyclical—a papal letter sent to all bishops of the Roman Catholic Church—called “Journeying Towards Care for Our Common Home.” The release of the document coincided with the fifth anniversary of Pope Francis’s encyclical “Laudato Si” (Praised Be), which he offered to encourage reflection and dialogue on social and environmental justice.
The latest encyclical has yet to be translated into English, but press and industry coverage suggests the pope has moved from reflection and dialogue to action. His call is for Catholics to reduce their footprint on the planet by reducing pollution, decarbonizing the energy and economic sectors, and investing in “clean and renewable” energy—among other socially responsible requests.
The document’s section on finance states that “people could favor positive changes...by excluding from their investments companies that do not satisfy certain parameters.” Those parameters include respect for human rights, child labor bans, and environmental protection. One action point called on Catholics to “shun companies that are harmful...to the environment, such as fossil fuels.” Let’s look at the church’s updated position and the impact it could have on Catholic investing.
Is the new edict a departure from current guidelines?
For Catholic investors in the US, the Vatican’s announcement provides new clarity and a departure from previous guidelines for protecting the environment. US faith-based investors hoping to align their stock portfolios with Catholic values have typically looked to the US Conference of Catholic Bishops (USCCB)—the official US assembly of all current and retired US bishops—for guidance.
The USCCB adopted and implemented socially responsible investment guidelines in 1991. Until 2003 these policies consisted primarily of exclusions that meant choosing not to invest in companies with business that contradicted Catholic teachings. The conference’s established policies of today are “broader, more explicit, active, flexible, and effective in applying the teaching of the Church to the realities of the market.”
To address the market realities, the USCCB suggests three principles: “do no harm,” “active corporate participation,” and “positive strategies.” These principles outline which stocks can’t be owned by Catholic investors, which are subject to conditional restrictions, and which business policies are encouraged.
Do no harm. While the act of doing no harm seems simple—don’t invest in companies with products and policies that contradict Catholic teachings—it’s tougher than it looks. USCCB guidelines don’t offer a list of offending companies, and business activity qualifiers such as “primary,” “significant,” and “purpose” complicate the interpretation. For example, there’s no guidance for the level of revenue that makes a business line “significant.”
This principle is more intuitive. The USCCB wants Catholic investors to “actively use the Conference's position as shareholder to influence the corporate culture and to shape corporate policies and decisions.” This strategy is designed to address companies with both beneficial and offending business activities. For example, a Catholic investor can hold a minimal position with such a company and use their position as a shareholder for influence—as long as there’s reasonable hope for a successful corporate change.
In using positive strategies, the USCCB wants investors to invest in companies with policies and products that align with Catholic values and social teachings while offering “a reasonable rate of return.” These include companies with strong records in areas such as labor relations, affirmative action, affordable housing, and community development.
What do these guidelines mean for Catholic investing going forward?
There's an absolute exclusion of companies that directly participate in or support abortion.
Catholic investors shouldn’t own companies with policies that discriminate against people of varied ethnic and racial backgrounds. As with racial discrimination, the USCCB bans investing in companies with policies that discriminate against women.
Investors shouldn’t invest in firms primarily engaged in the sale of military weapons or the production of weapons in a manner that’s inconsistent with Catholic teachings on war. This includes firms that sell or produce biological and chemical weapons, first-strike nuclear weapons, and other weapons of mass destruction.
Investors should support shareholder resolutions directed toward avoiding the use of sweatshops to manufacture goods, promoting generous wage and benefit policies, and practicing adequate worker safety guidelines.
Investors should support shareholder resolutions that encourage corporations to preserve the planet's ecological heritage, address the rampant poverty among the world’s poorest nations, redirect the quality of development, and create environmentally sensitive technologies.
Catholic investors should support shareholder resolutions that encourage companies to develop social responsibility guidelines and report on social, environmental, and financial performance.
One could expect fossil fuel–related issues such as climate change and pollution to be found in most, if not all six, of the guideline areas. However, environmental concerns are directly called out in only two: protecting the environment and encouraging corporate responsibility. These two areas aren’t addressed by the do no harm principle because there was previously no requirement to avoid fossil fuel–related stocks. In contrast to the new Vatican directive to divest, the USCCB has historically advised active corporate participation or positive strategies for these categories. With the new encyclical encouraging divestment, Catholic investors will have to evaluate how to address fossil-free investing in their equity holdings using the do no harm strategy.
What are the implications of portfolio divestment?
The bottom line
One doesn’t need to be a theologian or have an affiliation with the church to serve the sizable Catholic investing community. Being knowledgeable about the tenets set forth in the guidelines and the potential performance trade-offs is a great first step in successfully working with these investors. There’s no one-size-fits-all approach, and individual and institutional investors may need help working through what can be a highly personal process in determining the right approach.
Through improved company disclosure, comprehensive analytics, evolving shareholder engagement, and advanced portfolio management techniques, thoughtful financial counselors can serve Catholic investors with confidence.