You want a portfolio that matches your morals. Your retirement plan might disagree.

By Kurt Supe

More investors want their money to reflect their values. It feels righteous - but the reality is a lot messier.

Values-based investing is not "set it and forget it." The landscape is constantly shifting - and investors must shift with it.

The honest case for values-based investing - and against it - from someone who builds portfolios for a living.

A frequent question I hear lately goes something like this: Can you build me a portfolio that does not profit from things I am against?

It is a fair thing to want, and it comes from two places. Some people are driven by faith and do not want to fund things that violate their religious convictions. Others are driven by a different kind of conscience. They want their money supporting clean energy and responsible companies, not the polluters and bad actors they read about in the news. Both groups are asking the same underlying question. Can my portfolio reflect who I am?

I see the pull in two very different people. One is the retiree thinking about legacy, who wants the money they spent a lifetime building to reflect what they believe. The other is younger, a millennial or Gen Z investor just coming into real money, who has decided from the start that how they invest should match who they are. Opposite ends of the journey, same instinct.

None of this is new. People have aligned their money with their morals for as long as money has existed. The faith-driven approach goes by names like values-based investing and biblically responsible investing. The environmental and social side travels under socially responsible investing, sustainable investing, and the term you have probably seen most: ESG, short for environmental, social and corporate-governance.

What is new is the momentum. Sustainable and faith-based funds now hold trillions of dollars worldwide, and faith-based options in particular are among the fastest-growing parts of the market right now. A question I used to hear once in a while has become one of the most common requests on my desk.

The question deserves a straight answer, not a sales pitch. So here is the honest case for values-based investing, and the honest case against it, from someone who builds portfolios for a living.

There is an old line that you can do well or do good with your investments, but not both. The truth is more nuanced.

What is 'values-based' investing really about

The socially responsible and ESG side is largely data-driven. It scores companies on environmental, social and corporate-governance factors. It is the lane for the investor who favors clean energy, fair labor practices and strong corporate governance while avoiding companies with poor track records on the environment and how they treat people. Because it follows analyst scores and public sentiment, ESG tends to move with where society's priorities are heading.

The faith-based side is rooted in conviction rather than data. It screens out companies tied to pornography, gambling, tobacco or alcohol, and it is anchored in the moral principles a religious community holds as fixed, rather than in shifting social trends.

One is built on data. The other is built on conviction. And the two are not always headed in the same direction.

One line I draw early with clients: This is about personal, religious and social values - not politics. Trying to build a portfolio that screens out "Republican" companies or "Democratic" companies is a quick way to cut off your nose to spite your face. The screens that hold up over time are rooted in conviction and conscience, not the election calendar.

The case for values investing

Done carefully, you can align your money with your beliefs without obviously wrecking your retirement.

The strongest argument is the simplest. If you have spent a lifetime trying to live by a set of values, there is real peace of mind in knowing your retirement savings are not quietly working against them. For many of my clients, that peace is worth as much as a few tenths of a percent of return.

There is an old line that you can do well or do good with your investments, but not both. The truth is more nuanced. Values-driven funds can and do match or beat the market. But ESG in particular has earned real skepticism, some of it deserved. The label gets slapped on funds that do not agree on what "green" or "responsible" even means, and two ESG funds can hold completely different companies. Faith-based screens, by contrast, tend to be clearer. A fund either excludes alcohol and gambling or it does not.

One caveat: I am not recommending any of the funds I mention here. I name them only to show what the category looks like in practice. Whether any of them belongs in your portfolio is a separate question that depends entirely on your situation.

Consider one example. The Inspire 100 ETF BIBL, a biblically screened fund that holds none of the megacap technology names that drove so much of the market, has been able to track the S&P 500 SPX almost stride for stride over its first four years, returning roughly 17.7% annualized against the index's 17.8%. Owning none of the Big Tech giants and still keeping pace with the market is not what most people expect when they hear the words "values screen."

Sharia-compliant funds make the point even more cleanly. They screen out interest-based finance, alcohol, gambling and a few other categories on fixed religious grounds. Two of the largest U.S. Shariah equity ETFs have returned roughly 18% and 17% a year since launching in 2019, both ahead of the S&P 500 over those same periods. Whether you share the underlying faith or not, it is a clear case of a conviction-based screen that did not cost investors growth.

A word of caution travels with all of these numbers. These funds can match the broad market and, over certain stretches, even beat it. What they have not done is prove they can outperform over long periods. Many are young, with track records measured in years, not decades. Strong early numbers are encouraging, but this is not the same as a proven long-term edge.

The academic record points in the same direction, with caveats. A study by Esmeralda Lyn and Edward Zychowicz, published in The Journal of Investing in 2010, examined 36 faith-based funds and found they mostly kept up with the market and even edged out conventional socially responsible funds. A separate matched-pair study covering 2007 to 2015 concluded that faith-based funds do not systematically underperform comparable secular funds. The honest summary is that the screens themselves do not appear to be what costs you.

So the door is open. Done carefully, you can align your money with your beliefs without obviously wrecking your retirement. That was not something I could have said with a straight face a decade ago.

The part nobody tells you

U.S. Treasurys are the safest investment many retirees own. But what happens when you disagree with what the government is funding?

Purity is a moving target. Dig deep enough into almost any large company and you will find something that troubles someone. The deeper your screen, the shorter your list of allowed investments gets - and a shorter list usually means you are leaning harder on fewer companies. That concentration is a real risk, and it often hides behind a feel-good label.

Take a strict environmental screen. Making semiconductors, the chips that power everything, is one of the most resource-hungry industries on earth. A single advanced chip fab can draw enormous amounts of water and electricity, and chip production as a whole emits well over 100 million tons of carbon equivalent a year. The AI boom is only intensifying that demand. So a strict screen can quietly push you away from the chip-makers and Big Tech stocks that have driven a huge share of the market's growth over the last several years. If your portfolio sat out the names that powered the recent rally, you felt it.

Yet the picture is not simple. Many of those same chip-makers are also among the most aggressive companies anywhere on renewable energy and water recycling, with some pledging to run entirely on clean power and to return more fresh water than they use. So are they the problem or the solution? Depending on which fact you weigh, the same company can be screened out or welcomed in.

The performance story has a darker version. For every study showing faith funds keeping pace, there is another showing that some have delivered lower returns and higher volatility than a simple total-market index fund, with the extra risk going uncompensated. A common reason is that values-based funds tend to be actively managed and more expensive, and active stock picking plus higher fees is a tough combination to beat over time. Results depend heavily on which fund, which screen and which years. That is not a reason to avoid them. It is a reason to choose carefully and keep costs in view.

Then there is the problem almost no one raises: bonds. The ballast of most retirement portfolios is fixed income, and a huge share of that is government bonds. U.S. Treasurys are the safest investment many retirees own. But what happens when you disagree with what the government is funding? Different administrations prioritize very different things. The same Treasury bond can feel right to one person and wrong to another, depending on who is in office. If your conscience extends to your stocks, where does it leave bonds - the safest corner of your portfolio? This is the question I have never seen a faith-fund brochure answer.

The hardest part: the ground keeps shifting

The ratings that drive ESG screens are not fixed laws of nature. They are judgments, and they get revised.

Values-based investing is not "set it and forget it." Companies change. A business that lines up perfectly with your values today can change leadership, change policy or be acquired tomorrow, and the fund that excluded it now owns it, or the reverse.

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