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March 23, 2005
Coffee, Tea, or . . . Liqueur? Pax World Alcohol Screen Forces Reluctant Divestment from Starbucks
    by William Baue

While Pax World applies a zero tolerance alcohol screen, other socially responsible investment firms set thresholds for retailers based on the percentage of revenues derived from alcohol sales.


Today, socially responsible investment (SRI) pioneer Pax World Funds announced that its alcohol screen requires it to divest from Starbucks (ticker: SBUX) because the coffee purveyor is licensing its name to Jim Beam Brands for a liqueur with Starbucks coffee in it. Pax World stressed it is divesting "reluctantly," as it holds many of Starbucks' corporate social responsibility (CSR) initiatives in high regard, according to Anita Green, vice president of social research at Pax World.

"We like Starbucks, we think it's a great company, they've done some tremendous work in a lot of good areas--it's just unfortunate they've chosen to go down this path," Ms. Green told SocialFunds.com. "I guess the profits to be made from liquor were simply too tempting."

Starbucks defended its decision, pointing out that social responsibility considerations informed the product development process.

"Prior to the introduction of this product, Starbucks worked diligently to research and understand its potential impact," said Starbucks spokesperson Lara Wyss in a prepared statement. "We engaged with non-governmental and other organizations, such as The Century Council, to help ensure that we acted in a responsible manner throughout product development and launch."

"Starbucks is disappointed in their decision; however we acknowledge that Pax World Funds has a strict policy that it will not invest in companies that derive revenue from the manufacture of liquor," the statement continued.

The move highlights the difference between Pax World, which has a "zero tolerance" alcohol screen, and other SRI funds, which screen alcohol manufacturers but also set a threshold for companies that have less direct connections to alcohol. For example, the Calvert Group screens alcohol manufacturers, but it will invest in restaurants or retailers deriving less than 20 percent of revenues from alcohol sales. Domini Social Investments similarly screens alcohol manufacturers, but sets its threshold for retailers at 15 percent.

"We don't work with a threshold," said Ms. Green. "We recognize that Jim Beam is actually making the liqueur, but it's got the Starbucks name on it, and that triggers our screen."

"It's the same reason why we have removed from our 'buy' lists companies like Olive Garden or Red Lobster, because they have microbrews that are branded under their name," Ms. Green explained. "The way we see it, if you're putting your name on it, you're deriving revenue from the manufacture of it--the name's not going on there for free."

KLD Research & Analytics, the SRI research firm that determines the constituents of the Domini 400 Social Index (DS 400) upon which the Domini Social Equity Fund (DSEFX) is based, screens companies that license the "company or brand name to alcohol products." However, KLD does not apply this screen as strictly as Pax World, but rather assesses the revenues generated from the licensing and any controversy surrounding the action, according to Karin Chamberlain, manager of KLD Indexes.

"For example, Starbucks was not removed from the DS 400 Index for this type of licensing: insignificant revenues, no controversy," Ms. Chamberlain told SocialFunds.com. "Campbell Soup [CPB], a DS 400 Company, licenses its Godiva brand name for a liquor and was not removed from the DS 400 for this action: again, insignificant revenues, no controversy."

Ms. Chamberlain cites a counterexample to illustrate her point.

"In 1999, Hasbro [HAS] was removed from the DS 400 for its licensing of Monopoly and other children's board game names for the use in gambling machines," Ms. Chamberlain explained. "The rationale was that the target audience of board games is children and it was not appropriate to license out children's game names for gambling."

Starbucks apparently addressed this targeting issue in its planning.

"The product is not sold in Starbucks retail stores [but at] locations licensed to sell distilled spirits, such as restaurants, bars, and retail outlets," stated Ms. Wyss. "The price point, branding, and marketing of this product are directed toward mature customers who seek premium products."

However, this foresight may not prevent other social investors from censuring Starbucks. The February 17, 2005 letter Pax World sent to Starbucks CEO Orin Smith outlining concerns over the alcohol product was co-signed by several other social investors, including Citizens Funds.

Starbucks did not respond to the letter, according to Ms. Green.

"It is unfortunate that we did not have the opportunity to speak directly with representatives of the Pax World Funds," Ms. Wyss of Starbucks told SocialFunds.com. "We were in the process of evaluating their letter."

 

 
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