Catholic Finance - An emerging practice with many possibilities

An event was organised back in 2016 in Luxembourg on the Vatican Bank by the Conférence Saint-Yves. At the time, “Catholic finance” was not discussed to the extent the subject was not yet born or very marginal. Things have changed two years later in 2018 : one of the bodies of the Holy See - the Dicastery for the Doctrine of the Faith - has released a 30 pages long document entitled Oeconomicae et Pecuniariae Quaestiones with the subtitle “considerations for an ethical discernment regarding some aspects of the present economic-financial system”. The Pontifical Academy of Social Sciences furthermore released another document, Mensuram Bonam, in 2022. It aimed to synthesise into one cohesive framework the work of a number of Vatican bodies on aligning investment management with Catholic Social Teaching.

This article aims to explore what is “Catholic Finance” and provides practical insights and examples .

CATHOLIC SOCIAL TEACHING HAS A WORD TO SAY ABOUT FINANCE

Finance in the Catholic social teaching. In addition to the traditional approach that money needs to remain a servant and not a master, Catholic social thinking towards finance can be summarised by the following three core principles (among others) :

The necessary articulation between faith and reason. The right articulation between faith and reason is a constant in Catholic thinking. It has enabled fruitful discussions on the role of money and credit, notably in the works of saint Thomas of Aquinas (criticism of usury), the Franciscans (money at the service of the common good) and the Jesuits (the role of money as liquidity).

The necessity to protect poor debtors. This principle is already embedded in the Old Testament following which a creditor must not exploit a poor debtor. Saint Thomas of Aquinas will declare that when a theft is committed by a poor person (which could be understood as the non-reimbursement of a loan) it could be justified in certain cases. Closer to us, Oeconomicae et Pecuniariae Quaestiones insists that poor debtors should be protected from rapacious creditors by taking the example of heavily indebted poor countries.

The importance of discernment. Catholic discernment is central. A few years ago, most Catholic associations have issued clear statements banning direct or indirect investments in the defence industry. Things have changed with the war in Ukraine. It illustrates how discernment needs to be applied by notably taking into account notions such as the right of legitimate defence or the notion of just war.

Recent detailed guidance on finance issued by the Holy See. The current thinking of the Catholic Church can be found in Oeconomicae et Pecuniariae Quaestiones, Mensuram Bonam, and the Investment Policy Statement of the Holy See.

The first of these is important to the extent it clarifies the position of the Catholic Church on finance after a long silence of the Popes on this issue. This document does not contain any detailed policy proposals. Instead, the text provides a reminder of the social teaching of the Church and then identifies “structuring principles” which could form the basis of actions in the financial sector.

According to Professor Frederic Lobez, Emeritus Professor of Business Management of the University of Lille and author of Credo and Credit (Ed. Les Belles Lettres, 2022), Oeconomicae et Pecuniariae Quaestiones includes an interesting proposition to improve financial markets. It notably suggests creating an instance which would classify all the financial instruments with the aim to only authorize those who have a concrete social value. The document also advocates for a more “relational finance”. This is not an utopia to the extent specific models of banks (like cooperative banks) are more “relational” than purely “transactional”.

Professor Lobez however highlights some limitations. He considers that more regulation is not necessarily the magic solution, as regulation triggers its circumvention. Another proposition relates to the separation of banks between retail banks and investment banks. Prof. Lobez recalls that no strong academic evidence supports the view of such a separation (notably for the protection of small savers). Finally, Professor Lobez has identified two points in the document which require further reflexion : green finance and the issue of « Too big to fail » banks. Both topics are crucial for the current and the future generations.

IMPLEMENTING CATHOLIC FINANCE – AN EMERGING PRACTICE AND MANY CHALLENGES

A view from the Holy See. Following the reform of the Roman Curia in 2022, a Committee for Investments of the Holy See was established. It is “responsible for guaranteeing the ethical nature of the Holy See’s equity investments in accordance with the Church’s social doctrine and, at the same time, monitoring their profitability, propriety and degree of risk” (Art. 227 of the Apostolic constitution Praedicate evangelium of 2022).

One of the four members of this Committee, Jean Pierre Casey, recalls that this organ seeks to implement Catholic principles into the day-to-day management of portfolios by following its Investment Policy Statement, which was influenced by the previously mentioned texts produced by various Vatican bodies. Mr. Casey noted furthermore that guidelines on the matter have been issued by several Bishops’ conferences across the world (notably, in the United States, Italy, Germany, Austria). Nevertheless, he underlines that there are gaps between theory and implementation, when it comes to the concrete application of these guidelines and principles in portfolio management decisions. He furthermore highlighted that there is no systematic convergence between all of this guidance, which remains quite theoretical.

Jean Pierre Casey has identified various challenges for Catholic finance :
• Excessive reliance on third parties. Many third parties have their own agenda which do not necessarily share the Church’s beliefs, and the issue of data integrity and quality is significant.
• Scalably implementing exclusions screens. It relates to the loss of control when an investor invests in a pooled investment fund such as a SICAV or an ETF. The Catholic investor will lose control of its investments unless he controls the whole collective investment vehicle. If Catholic institutions want to have further control on the ethical nature of their entire portfolio holdings, they need to operate through separately managed accounts, which is not possible for small players.
• Fragmentation. Catholic investment firms have literally exploded recently with many dedicated funds and ETFs. This phenomenon brings a real fragmentation to the extent everyone is working separately and the Church is not having the impact it could have in influencing proxy vote decisions and corporate behaviours potentially if it worked in a unified and harmonized way, including in agreeing a uniform methodology for defining faith-consistent investments.
• Catholic greenwashing. It is similar to greenwashing following which investors purchase units in funds which are labelled “Catholic” but are anything but faith consistent and which are marketing gimmicks or asset-gathering exercises.

To answer these difficulties, Jean Pierre Casey stressed that there is a need to join forces, develop a more strategic mindset as a collective in order to develop harmonized and consistent views about what Catholic faith consistent investments look like.

Practical examples in relation to Catholic investments. The Italian bishop’s conference has drafted in 2020 its own guidelines entitled “The Catholic Church and Management of financial resources”. These guidelines first stress the need for the Church to carefully manage its economic activities and to comply with the principles of sustainability based on the ESG analysis with notably a strong focus on the ethical dimension. According to Alessandro Caffi, the Deputy head in charge of overseeing investments for the Italian Bishops’ Conference, the ethical dimension is applied in a very rigorous way and following strong monitoring protocols by tiding back the UN values with Church values. This method is built on “a four levels ESG-E investing” protocol including : (1) implementing exclusion lists, (2) applying the “ESG-E integration” protocols (with the support of its external advisor Nummus.info), (3) ensuring that it is an “impact investing”, and (4) fulfilling an “Engagement” condition.

Alessandro Caffi provided a concrete illustration with the Catholic index called World Catholic Principles ESG Universal and Environmental Index which translates into an investable universe of global stocks the guidelines developed by the Italian bishop’s conference. Another example is the launch of Catholic Principles Emerging Markets Sovereign Debt UCITS ETF allowing investors to gain exposure to emerging markets in accordance with Catholic principles.

The Archbishopric of Luxembourg has its own guidelines on “Catholic investments”. However, Marc Wagener, the Chief Financial Officer of the Archdiocese of Luxembourg, recalls the need for smaller investors (such as the Catholic Church in Luxembourg) to take the maximum degree of responsibility as owner of physical assets and to be directly accountable to future generations.

Conclusion

Catholic Finance remains an emerging practice with many potentialities. Its guiding principles however need to be further refined and enhanced. A subject to be followed !

See the article « Catholic finance, an emerging practice with many possibilities », AGEFI, Mai 2023, p. 30.

Catholic Finance