Every few months someone writes another article arguing that faith-based investing and ESG are basically the same thing. Every time I read one of those, I think the author has not spent enough time actually looking at either. They are related in the sense that both involve non-financial criteria influencing investment decisions. But the similarity is shallow. The underlying philosophies, the actual screening mechanics, the governance structures, and the historical origins are all fundamentally different, and confusing them causes real problems for investors trying to choose between the two.

Let me walk through the comparison in detail and explain why I think faith-based investing is coming out ahead of mainstream ESG in 2026, partly because faith-based investing never bought into the problems that are currently undermining the credibility of ESG.

Origins and philosophy: these two movements come from very different places

Faith-based investing has roots going back centuries. Quaker investors in the 17th and 18th centuries refused to profit from the slave trade. Islamic jurisprudence has been analyzing permissible commerce since the 7th century. Catholic moral theology has discussed investment ethics since Scholastic thinkers like Aquinas wrote about usury and just price. Jewish finance traditions around ribit (interest) go back even further. The point is that faith-based investing is not a 20th century invention. It is the application of long-established moral frameworks to modern investment decisions.

ESG in its modern form is a 21st century invention. The term was coined in a 2004 United Nations-backed report called "Who Cares Wins." It was designed as a framework for institutional investors to integrate environmental, social, and governance factors into investment analysis, primarily as a way of identifying material risks and opportunities that traditional financial analysis missed. The original ESG framework was not about values. It was about risk-adjusted returns. The values framing came later, and it was grafted on after the fact.

This origin difference matters more than it might seem. Faith-based investing starts from the question "what does our moral tradition say about money, wealth, and economic activity, and how do we apply that to public markets?" ESG starts from the question "what non-financial factors affect long-term financial performance, and how do we measure them?" Those are different questions with different answers, and they produce different conclusions about which companies to own and avoid.

Screening methodology: rules-based vs data-driven

The second fundamental difference is how the two approaches actually decide what goes in and out of a portfolio.

Faith-based investing is predominantly rules-based. There are specific criteria, usually grounded in scripture, tradition, or authoritative religious bodies, that companies must meet to be considered compliant. In Islamic finance, AAOIFI standards define specific financial ratio thresholds (debt-to-asset, interest income, non-compliant revenue) plus explicit sector exclusions. In Catholic investing, the USCCB guidelines identify specific industries and practices that are not acceptable and specific values that should be affirmed. In Christian BRI (Biblically Responsible Investing), the exclusions are similarly specific: abortion, pornography, predatory lending, etc.

ESG is predominantly data-driven and quantitative. Companies are scored by ratings agencies like MSCI, Sustainalytics, S&P Global, and ISS on hundreds of data points. These scores are then combined into composite ratings that investors use to construct portfolios. The scoring methodology varies between ratings agencies, which is actually one of the biggest problems with ESG (we will get to that).

The rules-based approach has a big advantage: it is transparent and predictable. If you know the rules, you can check whether a company qualifies. Disagreements come down to "does this company actually meet the rules," not "is the rule itself correct." That makes faith-based investing more auditable by retail investors who want to understand what they are buying.

The data-driven approach is theoretically more flexible because it can incorporate changing conditions and new information. But in practice, the flexibility becomes a liability because two different ratings agencies can give the same company wildly different ESG scores depending on their methodology. A 2023 study from MIT Sloan found that the correlation between ESG ratings from different agencies was about 0.61, compared to roughly 0.99 for credit ratings from different agencies. That is a serious inconsistency problem. If experts cannot agree on whether a company is good or bad on ESG criteria, what exactly are you buying when you buy an ESG fund?

Governance: religious authorities vs corporate ratings agencies

Who decides what counts as compliant is another big difference.

In faith-based investing, the decision-makers are religious authorities or bodies specifically authorized to interpret the tradition. For Islamic finance, that means Shariah scholars sitting on Shariah boards at funds and banks. For Catholic investing, that means the USCCB, the Pontifical Academy of Social Sciences, and related Catholic moral authorities. For Christian BRI, it is a collection of Christian ministry organizations and authorized Christian finance professionals.

These governance structures are imperfect but they have an important feature: the decision-makers are accountable to a community that has a shared understanding of what the tradition requires. If a Shariah board makes a ruling that conflicts with mainstream Islamic scholarship, it will be challenged within the Muslim community. If the USCCB issues guidance, it reflects the formal teaching authority of Catholic bishops. There is a social contract between the decision-makers and the investors.

In ESG, the decision-makers are corporate ratings agencies operating as commercial businesses. MSCI, Sustainalytics, S&P Global, and ISS are not accountable to any values community. They are accountable to their shareholders and their paying clients. This structure creates a bunch of well-documented conflicts of interest: the companies being rated are often paying clients of the ratings agencies, the methodologies are proprietary and not fully transparent, and the ratings can be used by the same agencies to sell index products that compete with clients' own offerings.

I do not think the ESG ratings industry is corrupt in any simple sense. But the incentive structure is genuinely problematic in ways that faith-based investing largely avoids.

What each approach actually excludes

Let me give you a concrete example of how the two approaches produce different portfolios.

Consider Tesla. By most ESG ratings, Tesla is highly rated on the E (environmental) dimension because it produces electric vehicles. Tesla's overall ESG scores are mixed but generally favorable. On the other hand, Tesla fails most Islamic finance financial ratio screens because of how it finances its operations, so it is excluded from most halal ETFs. It also does not fit Catholic BRI frameworks because of broader concerns about corporate governance and labor practices that are more heavily weighted in those frameworks.

Or consider Exxon. Exxon is heavily penalized by most ESG ratings because it is a major fossil fuel producer. But Exxon passes most Islamic finance financial ratio screens. Whether it is held by Islamic funds depends on the specific fund's stance on oil and gas as a sector, which varies. Catholic funds generally include Exxon unless the fund has a specific environmental mandate.

Or consider Walmart. Walmart has mixed ESG ratings, with concerns about labor practices offsetting its scale and environmental improvements. Walmart is generally held by Islamic funds because it passes the financial screens. It is mixed among Catholic funds depending on how they weigh labor concerns.

The point is that the three approaches produce genuinely different portfolios. You cannot substitute an ESG fund for a halal fund or a Catholic fund. They are not the same thing.

The 2024-2025 ESG backlash and why it barely touched faith-based investing

Here is where the story gets really interesting. Between 2022 and 2025, ESG investing went through a serious crisis of legitimacy. Multiple state attorneys general in the US filed lawsuits against major ESG-focused fund managers over alleged anti-competitive behavior. Several large European pension funds publicly reconsidered their ESG commitments after poor relative performance in 2022-2023. Academic research increasingly showed that ESG scores did not reliably predict future financial performance. The Trump administration's 2025 executive actions effectively made it legally risky for ERISA fiduciaries to prioritize ESG factors over pure financial return.

The net effect of all this was that global ESG fund flows turned negative in 2024 and 2025. AUM at ESG-labeled funds declined materially for the first time in the history of the category. Many large managers quietly dropped the ESG branding from their fund names or repositioned their products.

Faith-based investing went through almost none of this turbulence. Islamic fund AUM continued to grow. Catholic fund AUM continued to grow. Christian BRI fund AUM continued to grow. Why? Because faith-based investing was never making the same claim that ESG was making. ESG claimed to improve financial returns while reflecting values. When the returns did not materialize, the whole proposition came under attack. Faith-based investing never claimed to improve financial returns. It claimed to align investments with moral frameworks. The success or failure of the returns did not touch the legitimacy of the value proposition.

This is a really important point that gets missed in most coverage. Faith-based investing has a more sustainable philosophical foundation than ESG because it does not depend on a contested empirical claim about returns to justify itself. The claim is "I want my investments to be consistent with my values, and I am willing to accept whatever financial consequences come from that choice." ESG kept trying to have it both ways, and the attempt eventually collapsed.

Which approach is right for which investor

Practically speaking, here is how I would think about choosing between faith-based and ESG approaches in 2026.

If you have specific religious commitments that you want your investments to reflect, faith-based investing is the clearly better choice. It is more rigorous, more transparent, and more accountable to the tradition it comes from. ESG will give you something vaguely values-adjacent but will not actually satisfy specific religious requirements. A halal investor cannot substitute an ESG fund for a halal fund. A committed Catholic investor cannot substitute an ESG fund for a Catholic fund.

If you have secular ethical commitments around environmental issues, corporate governance, or specific social causes, ESG might still be useful as a starting point, but I would be cautious. The inconsistency of ratings, the governance issues, and the mixed track record should make you skeptical of any fund that is just buying "ESG as a category." Look for funds with specific, explicit criteria that you can actually verify.

If you are primarily trying to improve risk-adjusted returns and think ESG factors matter for that, the academic evidence is mixed and probably not strong enough to justify paying meaningful additional fees for ESG-labeled products. You can get most of the risk benefits of ESG integration through traditional active management at lower cost.

The broader lesson

The ESG crisis is a cautionary tale about what happens when a values-adjacent investment approach tries to make contested empirical claims to justify itself. Faith-based investing avoided this trap because its justification never depended on returns. Whether your values-aligned portfolio outperforms or underperforms the market, the alignment itself is the value proposition.

I think 2026 is going to be a year where more and more investors recognize that faith-based investing is actually a cleaner, more intellectually honest approach than ESG. It is not for everyone because not everyone has specific religious commitments. But for investors who do, it has aged much better than ESG, and its principles are going to continue to be relevant long after the current generation of ESG products has been repackaged or wound down.

ESG vs Faith-Based Investing: The Definitive Comparison in 2026