Part 1 – The Nexus Between ESG Investment Philosophies and Catholic Social Justice Doctrine
It’s hard to spend more than ten minutes perusing an investment-related website or news source without coming across at least one article focused on the topic of ESG-based investing (Environmental, Social and Governance). At roughly $20 trillion, depending on the source, ESG-focused products and strategies represent approximately 15% of total global investments. Though opinions vary about how quickly ESG will grow from here and how large it can ultimately get, its rising importance for all investors is not debatable.
This is largely because younger generations overwhelmingly prefer to invest their assets using ESG criteria, and, according to a recent study by Stanford University, are willing to sacrifice investment returns in order to advance an ESG agenda. As Millennials and Generation Z inherit and control a greater share of global investments, their preference for ESG-focused investment strategies will drive more money into ESG-focused investment products and ESG-focused companies, and away from investment products and companies not considered to be ESG-oriented. Because the price of an investment fluctuates based on whether money is flowing into or out of it, the future performance of every investor’s portfolio will depend in part on its exposure to ESG criteria.
For Catholic investors who wish to align their investments with their faith, this phenomenon is both a blessing and a curse. ESG is rooted in Catholic social justice doctrine, and in that sense, is a welcome advancement towards a more socially just economy. However, the implementation of ESG criteria typically includes certain disordered perspectives about the dignity of the human person, human rights, and morality. As such, a Catholic investor who wishes to align their investment approach with their faith should tread carefully when considering a mainstream ESG investment strategy, lest they find themselves supporting companies and policies that oppose Catholic social doctrine and the intrinsic dignity of the human person.
In this multi-part series, we look at the ESG investment approach, its nexus with and divergence from Catholic social justice doctrine, and how Catholic investors who wish to align their investment portfolio with their faith can go about doing so.
To begin with, it’s important to understand that the debate about ESG is a redux of the decades-old debate about the purpose of capitalism and financial markets. ESG advocates embrace a “stakeholder” perspective that encompasses an audience beyond the investor to include employees, the community, and the environment. The alternative perspective, generally referred to as the “shareholder” perspective, excludes or de-prioritizes the interests of parties other than the shareholders / owners of the business. Beginning in the 1950’s, this public debate largely favored the “shareholder” perspective, but corporate excesses and widening income disparities beginning in the 1980’s set the stage for the resurgence of the “stakeholder” argument and more recently the more specific ESG-focused investment approach.
This “stakeholder” perspective is in fact rooted in Judeo/Christian social justice doctrine, a tradition that spans thousands of years and is formally presented in the Compendium of the Social Doctrine of the Church. Drawing on both the Old and New Testaments, the Compendium lays the foundation for stakeholder capitalism by recognizing the intrinsic dignity and primacy of the human being, created in the image and likeness of God, his material needs, and the dignity of work, through which he glorifies God, serves his fellow man, and obtains what is necessary to satisfy his own material needs in the process.
One can see the foundational elements of Catholic social justice doctrine in each of the three main elements of ESG, which, like Catholic social justice doctrine, recognizes rights and imposes duties upon the primary actors within an economic system. For example, environmental considerations such as air, ground, and water pollution, deforestation, species extinction, waste management and hygienic environmental conditions all explicitly acknowledge the truth about man’s original vocation in the Garden of Eden, the universal destination of goods, and the fact that natural beauty and the majesty of creation call us all to contemplate something transcendent, lifting our souls to God. The Compendium devotes an entire chapter to the topic of Environmental Stewardship and Pope Francis wrote a well-known encyclical about it. We have a duty to, with gratitude and prudence, manage the natural resources we have been entrusted with, and in this regard, ESG and Catholic social justice doctrine are closely aligned.
Social considerations such as the important role work plays in the fulfillment of the human person, an individual’s right to work in a safe environment, receive fair compensation, and pursue personal and professional advancement all testify to the intrinsic dignity of the human being, our communal vocation of work and our inalienable rights to those goods necessary not just to live, but to enjoy life with some degree of comfort, both now and in the future, for ourselves and for those dependent upon us. Socially minded efforts to improve work/life balance, more prominent after the Covid pandemic, reflect God’s commandment to keep holy the Sabbath, to set aside time to spend with Him, to contemplate Him, and to prepare for our eternal lives with Him. Efforts to improve board-level, management-level, and workforce diversity recognize the unique and unrepeatable nature of the human person and their singular potential to positively contribute to the functioning of the organization and the service of its customers. Stock grants to employees help satisfy the Church’s doctrine regarding the relationship between labor and capital, and in particular, affect the distribution of wealth created through innovation and technological advancement, which otherwise, would threaten the role of labor altogether.
Governance considerations such as the adoption of ethical codes of conduct and the implementation of policies and procedures designed to prevent corruption and the use of child labor mirror the Church’s insistence that, although a profit motive is intrinsically moral, it is but one of multiple business purposes that must be pursued, and not the most important purpose to be pursued at that. Governance factors are an admission that those who run organizations have an obligation to be prudent stewards of the organizations they have been entrusted to manage, upon which thousands, and in some cases, hundreds of thousands of people depend. Moreover, in an ESG framework, Governance considerations increasingly extend beyond the corporate entity itself to consider how a corporation engages with its partners, suppliers, and customers, a concept Catholics will recognize in both the Old and New Testaments as works of mercy to admonish and exhort our brothers and sisters.
The degree to which ESG overlaps with Catholic Social justice doctrine is extensive, and at a high level, nearly perfect, because ESG and Catholic social justice doctrine are both fundamentally centered on the ‘S’, the social component. Without first recognizing the principal importance of the human being, the ‘S’, the Environmental and Governance considerations have no meaning. They have no purpose, no goal, and no reason to be of any concern. Environment only matters because creation is God’s gift to all of mankind and mankind’s existence depends upon it. Likewise, Governance only matters because everything material was given to all of mankind throughout the entirety of human history and as such, those of us today are merely stewards of it for a certain amount of time, and will be held accountable for how we leave it for future generations. ESG is fundamentally about the ‘S’ because Catholic social justice doctrine is fundamentally about the ‘S’.
Whether ESG investors realize it or not, their ESG preferences are an expression of the truths previously revealed in the Church’s social justice doctrine, which itself is merely the full expression of millennia of Judeo/Christian philosophy, anthropology, and theology. In this sense then, Catholic investors who wish to align their investments with their faith can look to ESG as a starting point for their efforts, drawing from the ESG community various lessons and approaches with which they can begin to align their investments with their faith.
With that said, as a Catholic investor moves beyond the foundational similarities and into the interpretation and implementation of ESG, they will notice various challenges that are intrinsic to the ESG approach itself and perhaps most importantly, acute contradictions between ESG perspectives of morality and those of the Catholic faith. As such, although ESG, because of its similarities to and adoption of Catholic social justice tenets, can serve as a tempting solution, a thoughtless or universal application of a typical ESG investment strategy would not align their investment portfolio with their faith, a topic we will cover in our next installment of this series.
In the meantime, if you have comments or thoughts, please share them here. And of course, if you have questions, feel free to reach out. We’re always happy to help.
