A capitalist view of FCI: A guest post by FaithInvest co-founder Mike Even

Over the past few weeks, our Executive Chair Dave Zellner has written a series of articles demonstrating that investing along faith-based guidelines does not necessitate sacrificing return or increasing risk.

In fact, his analysis shows that faith-consistent Investing (FCI), when logically and judiciously applied, can create a stronger portfolio from both fiduciary and investment perspectives while aligning investments with beliefs. In today's column, I aim to extend this analysis by examining how these principles align with market theory and economics.

In the interest of full disclosure, I should note that I am both a capitalist and a libertarian, believing that government involvement in the economy should be minimised. This perspective strengthens rather than conflicts with the case for FCI.

Market theory and FCI

While capitalism is brutally efficient in allocating resources and creating optimal economic outcomes, it does have recognised imperfections. These imperfections create opportunities where FCI can potentially enhance market function and portfolio performance.

Consider the issue of externalities, which represents one of capitalism's notable weaknesses. Carbon emissions provide a clear example: in most global markets, there is no pricing mechanism for carbon emissions*, allowing profit-maximising entities to ignore the social cost of atmospheric carbon release.

When FCI portfolios invest to address environmental concerns such as carbon emission, they are operating in an area where capitalism fails. Such positioning can lead to risk reduction or enhanced performance as regulatory and social pressures evolve.

Agency theory and long-term value

Agency theory provides another example of a capitalistic weakness that may offer FCI opportunities. In capitalism, whenever an owner delegates control of assets to professional management, agency issues can arise. These problems typically manifest when agent incentives do not fully align with the owners’ interests.

In many cases, multiple agency layers exist between assets and asset owners. For example, most foundations, endowments and pension plans have professional asset managers (agents) who invest in corporations run by professional managers (agents).

One example of agency issues is short-term incentives for the agent versus long term goals for the owner. A CEO who is paid based on year-end profits may not want to invest in efforts to better train and retain the workforce since those efforts can cost money up-front and only pay off in the future. An FCI initiative focused on worker job and life quality may work to minimise this agency challenge and improve returns and reduce risk by taking the long-term view.

Market efficiency and FCI

As a committed capitalist, my support for FCI stems from its potential to enhance capital allocation efficiency and improve market function. There are numerous situations where thoughtfully applied FCI policies effectively address market inefficiencies and imperfections.

This suggests that asset owners have both the right and the obligation to pursue these strategies – simultaneously maximising return potential while promoting optimal market function.

Building on Dave Zellner's analysis, we can conclude that FCI not only aligns portfolios with values but can potentially enhance their economic performance by identifying and exploiting systematic market inefficiencies.

• * Mike said in most global markets there is no pricing mechanism for carbon emissions. However, this is likely to change soon as a growing number of countries want to participate in carbon markets to meet climate change goals. Jordan has become the first developing country to build end-to-end digital infrastructure to track and transact reductions in global greenhouse gas emissions. More about the state and trends of carbon pricing here.

• What do you think of Mike's analysis of FCI and capitalism? Is there more that FCI can or should do? If so, what? We'd love to hear from you: info@faithinvest.org