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
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.
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."
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."
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."