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February 28, 2003
The Black and White and Gray Areas of Military and Weapons Screening
    by William Baue

Most social investors screen out companies that derive revenue from military-related products and services or weapons manufacturing. However, a zero tolerance screen is unusual.


Almost all socially responsible investment (SRI) mutual fund firms employ negative screens to exclude companies that manufacture weapons or participate in military contracts. For some SRI firms, the issue is black and white. MMA Praxis Mutual Funds, for example, applies strict military and weapons screening criteria. IPS Mutual Funds, on the other hand, does not consider weapons manufacturing and military contracts to be ethical issues. Most SRI firms fall between the two extremes, recognizing that, when it comes to applying military and weapons screens, there is significant gray area.

"I'm baffled by [military and weapons screening]. This is a non-issue for us," said Dr. Robert Loest, senior portfolio manager of the IPS Millennium Fund (ticker: IPSMX) and the IPS New Frontier Fund (IPSFX). "Countries and individuals have a right to defend themselves."

MMA Praxis approaches this issue from the opposite end of the spectrum.

"I believe MMA Praxis has one of the most stringent screens on weapons/military contracting in the social investment industry," said MMA Praxis Stewardship Investing Services Manager Mark Regier.

MMA Praxis complements its negative screens with positive shareowner action that addresses the underlying problems that often lead to armed conflict. MMA Praxis, which manages a Core Stock Fund (MMPAX), an Intermediate Fund (MIIAX), and an International Fund (MPIAX), is focusing its 2003 shareowner action campaign on the global coffee crisis and on the HIV/AIDS pandemic in Africa .

"It is our intention not so much to avoid military connections as it is to ensure that our investments are targeted toward those activities and sectors that we believe are actively promoting and building a world of peace," Mr. Regier told SocialFunds.com.
"Investments that focus the world's resources on military activities and build-up, we believe, detract from efforts to build greater understanding, trust, mutual goodwill and long-term stability that are the true foundations of peace and prosperity."

MMA Praxis practices "near-zero" tolerance regarding companies with contracts for products or services that are custom tailored to military purposes, according to Mr. Regier. In contrast, many SRI firms exclude major, but not minor, military contractors.

"They make this distinction recognizing that a certain degree of participation in national defense is not necessarily objectionable," states the Domini Social Investments website. "At Domini, we draw the line at two percent of gross revenues."

Domini excludes companies that are major nuclear weapons contractors or that fuel international trade in conventional weapons, such as Lockheed Martin (LMT), Northrop Grumman (NOC), and Raytheon (RTN).

SRI firms use threshold limits because it is difficult to apply absolutes when considering corporate involvement with the military. An historical example illustrates this point.

"When the military was actively involved in Albania and taking on [Yugoslavia President Slobodan] Milosevic, it was an instance of the military doing something in support of human rights, so this brought up the question for some clients, 'Why have a military screen?'" said KLD Research & Analytics Director of Research Eric Fernald. KLD administers the Domini 400 Social Index (DSI), a socially responsible stock index, and SOCRATES, a corporate social research database used by investment professionals and institutional investors.

"Now, in the current instance, where there's such controversy around Iraq, and where the military industries have certainly benefited by arming almost every country in the Middle East, including Iraq at one point, [a military screen] affirms the concerns about the power of military contractors in setting agendas," added Mr. Fernald.

KLD's research on corporate military activity further illustrates a nuanced approach to military screening. While KLD did not add or subtract any companies from the DSI over the past year, the research firm revised SOCRATES Military-Weapons Reports on almost 200 companies. KLD clients use SOCRATES reports to screen investments.

"In the technology field, software and other types of custom-designed products are being used more and more for military purposes," said KLD Military-Weapons Report Research Analyst Karin Chamberlain. "It's a gray area. How customized is the product? Is it specifically used for weapons?"

For example, Anteon International Corporation (ANT) provides information technology and software for use in weapons systems, according to a KLD Military-Weapons Report dated January 24, 2003.

Enacting military screens will only get grayer in the future.

"Something we're looking into is putting companies that do work for the Department of Homeland Security on the Military-Weapons Report," said Ms. Chamberlain. "We don't currently consider sales to the Coast Guard as military-related, but we're going to need to review this due to its change in status this week from the Department of Transportation to the Department of Homeland Security."

 

 
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