How pass-through voting empowers faith-based investors
Written by Will Goodwin, co-founder, Tumelo.
Religious institutions often have strict requirements about what their followers can invest in; these requirements also extend to proxy voting.
Investopedia explains that “faith-based investing is just like any other type of investment philosophy, aiming to maximise investor returns. How individual investors choose their investment professionals and vehicles differ from traditional, secular investment plans.
“Individuals who invest using faith-based principles often choose managers, companies, and investments that align with their religious values.”
Below we cover two groups whose faith-based stewardship practices will be impacted — and empowered — by the implementation of pass-through voting.
The foundations of Sharia finance law focus on social justice, ethics, and using finances to help build communities. Anything discouraged or banned by Shariah law is regarded as haram, while suitable activities are halal. Haram activities notably include:
• Conventional finance (non-Islamic banking, finance and insurance, etc.)
• Pork-related products and non-halal food production, packaging and processing, or connected activities
• Adult entertainment
• Weapons and defence
A Sharia-compliant investment fund typically follows an “exclusions” methodology, filtering out companies that do not follow these principles. Additional accounting restrictions also exist, where companies they invest in must maintain a debt-to-equity ratio of less than 33%. In addition, halal-compliant companies must have accounts receivable and cash of less than 50% of total assets.
How pass-through voting helps Islamic investors
Pass-through voting allows an Islamic institution or investor to achieve its aims by disentangling the companies it's invested in from the stewardship of these companies. Muslim investors can align their voting to follow their investment principles.
“Investors who adhere to the Catholic faith may follow principles outlined by the Catholic Framework for Economic Life,” according to Investopedia. “These 10 faith-based guidelines demonstrate how people should take part in the economy and finance — that is, by basing their decisions on ‘human dignity and the moral law’.”
Those who want their money to work in a manner consistent with Catholic values often avoid investing in firms that:
• Engage in gender and/or racial discrimination
• Support abortion and contraceptives
• Promote and/or fund embryonic stem-cell research
• Produce weapons of mass destruction
• Take part in the adult entertainment industry
This same set of principles often extends to their stewardship practices, where they aim to encourage and enhance the companies they invest in, in line with their Catholic values.
How pass-through voting helps Catholic investors
In a pooled fund, Catholic investors had to previously accept the stewardship practices of the fund manager, who acts on behalf of all the investors in the fund. Pass-through voting enables the investor to remain in the pooled fund while directing the voting activity in line with their values. Applying Catholic investment principles to stewardship efforts reinforces the need for specific voting policies. Proxy advisors such as Glass Lewis provide voting policies that enable faith-based investors to ensure that their investment principles are supported effectively.
Pass-through voting enables investors to express their faith through proxy voting. By separating investment decisions from proxy voting, investors will have greater freedom to shape their activities in the way they are most comfortable with. As such, at its core pass-through voting allows investors to better uphold their beliefs and principles, no matter what they are.
To discover how pass-through voting can be beneficial for different types of investors, download our pass-through voting white paper.