A Novel Approach to Materiality Thresholds for Faith-Based Institutions

Abstract

Faith-based eleemosynary and educational institutions today wish to reflect their institutional values in their portfolios. We examine a global equity opportunity set to determine the effectiveness of standard negative screening techniques in excluding prohibited products and services. We conclude the standard approach to materiality thresholds may permit the inclusion of significant numbers of companies with hundreds of billions of dollars in revenues derived from products and services that some institutions may wish to avoid. We propose a novel approach replacing the standard percent of revenue approach with a dollars of revenue approach, which excludes a broader set of companies and revenue, with only a small increase in tracking error. Trustees and fiduciaries of faith-based institutions may wish to consider whether these new research methodologies enhance their ability to effectively align their portfolios with their values. TOPIC:ESG investing Key Findings • We test a broad global equity mandate in the context of four business activities traditionally prohibited by some faith-based institutions and find the standard approach excludes less than two-thirds of the proscribed revenue and only 9% of the companies generating this revenue. • We propose a novel approach to materiality using dollars of revenue from proscribed activities, which eliminates nearly three hundred billion dollars more in proscribed revenue with little increase in tracking error. • Institutions are well-advised to consider whether additional screening methodologies might better reflect the values they seek to inculcate in their investment decisions.