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October 26, 2006
Pax World Drops Zero Tolerance Screens on Alcohol and Gambling
    by Bill Baue speaks with Pax World CEO Joe Keefe about changes approved today, including the addition of governance, climate change, and human rights screens.

The 1971 launch of the first socially responsible investing (SRI) mutual fund, the Pax World Balanced Fund (ticker: PAXWX), also marked the introduction of the first social screens, which excluded companies that deal in weapons, tobacco, alcohol, or gambling. Last year, Pax World's "zero tolerance" alcohol screen forced the company to "reluctantly" divest from Starbucks (SBUX), a company widely regarded as a very strong corporate social responsibility (CSR) performer, for licensing its name to a Jim Beam coffee liqueur. Today, a proposal for first-ever changes to its screens received "overwhelming support" from Balanced Fund (87.47 percent), Growth Fund (PXWGX--91.26 percent), and High Yield Fund (PAXHX--91.98 percent) shareowners, according to Pax World CEO Joe Keefe. spoke with Joe Keefe today about the changes, which abandon zero tolerance on alcohol and gambling, add new screens in corporate governance, community, and product integrity, and extend existing screens to explicitly cover climate change and human rights. You're moving away from "zero tolerance" screens on alcohol and gambling--are you setting a threshold based on percentage of revenues as other SRI funds do?

Joe Keefe: We explicitly stated we wouldn't invest in companies whose main business is gambling--whether we use a threshold based on revenue or take a more qualitative approach on companies indirectly involved in gambling is still under discussion. We didn't come right out and say we wouldn't invest in alcohol manufacturers. We will probably subject those companies to a sustainability analysis to come up with their CSR profile and make decisions on that basis. It's quite possible we won't have a threshold there.

SF: So it's conceivable that Pax World could invest in alcohol producers that are top CSR performers?

JK: Yes.

SF: What role did the Starbucks divestment play in the decision to update the screens, and how did this episode illuminate how the SRI and CSR landscape has evolved beyond the original screens?

JK: I have believed for a number of years that SRI needs to evolve so it has a more positive focus on integrating environmental, social, and governance metrics with financial metrics to invest in better companies and to, over time, demonstrate that this is a smarter way to invest. And that's the direction SRI is evolving in. Exclusionary screens have their antecedents in religious investing, and in some instances they are core to SRI--the weapons and tobacco screens remain core to what Pax World is all about.

SF: When the Starbucks decision came out, a lot of people considered it contradictory and ironic that you had to divest from such a solid CSR performers.

JK: Right. Starbucks is not an alcohol stock, so to divest because of an alcohol screen seems absurd. We had a similar issue with Yahoo!, where we had to divest because deep within their portal, one could engage in online gambling. Of course, Yahoo! is not a gambling stock. If Yahoo! otherwise measured up under a rigorous CSR analysis, it should be eligible for investment--it should not be divested because .001 percent of its revenues might be derived from online gambling. Those are two instances where old SRI screens prevented us from addressing contemporary SRI concerns.

SF: Is it likely you'll reinvest in Starbucks?

JK: That's based on what the portfolio managers and the social researchers think. But our decision to change our screens wasn't driven by desire to reinvest in Starbucks. It was driven by realizations of contradictions in SRI where investors exclude alcohol companies and then have a glass of wine with dinner or a beer at a ball game--I think that's hypocritical.

Frankly, I don't think the alcohol screen historically did anything to address product abuse. I would rather look at a company's CSR profile--whether it's involved in responsible or irresponsible advertising, whether it gears its ads toward minors, whether it plasters poor communities with billboards, whether it contributes to alcohol treatment or domestic violence programs or otherwise deal with the social problems resulting from the abuse of its products--and judge the company on that basis rather than opting out of the entire industry. We're trying to take a more proactive, engaged approach because we believe SRI is about trying to impact corporate behavior as a way of impacting markets and society.

SF: Ending zero-tolerance is obviously a high-visibility issue, but what other changes that you're implementing to the screens are equally or even possibly more significant?

JK: Pax World screens were adopted in 1971 and really haven't changed since then. In our prospectus, our environmental screen is called a "pollution control" screen and our workplace screen is called a "fair employment" screen, so even the language is from another era. The world has evolved a lot in 35 years, and the issues SRI needs to address have likewise evolved. For example, we have added three screens where we had no formal screens before--corporate governance, community, and product integrity. We're proud of the fact that Pax World was a leader in introducing the first SRI fund, but it's really important for us to maintain that leadership. Our screens as constructed were more reflective of where SRI had been in the past, and our new screens project where SRI is heading in the future.

Editor's Note:
To the Editor:

I applaud Pax for raising the question of the evolution of the alcohol and gambling screens in a highly public way.

For some SRI investors, alcohol itself will always be a moral question. We will continue to accommodate them. As the reaction to Prohibition recedes, alcohol will become, increasingly, a question of marketing--how is it sold and to whom.

I think alcohol is unique in this regard, in contrast to gambling (and of course weapons and tobacco, which Pax will still bar). That's my personal view; Pax's action on alcohol and gambling will generate responses from our constituencies, which will tell us where social investors are today.

The mainstream press's reaction to Pax's divestment from Starbucks advanced criticism that wasn't necessarily 'off base' so much as it was uncomfortable and thought-provoking.

KLD took a different position from Pax's, and we've taken some heat for it. It's caused us to rethink our screening approaches, and I expect we'll be discussing changes publicly over the next six months. We have a great deal of sounding to do amongst social investors before we move.

It is in the nature of the SRI investor to re-examine their positions, their screens. I regard the current discussions around nuclear power as healthy, though I don't think the bar will or should end.

What's of overriding importance is the social investor's willingness to rethink screens in light of evolving social practices and experience. The substantive changes are of much less importance than the evidence they give to the process of SRI.

Peter D. Kinder
KLD Research & Analytics
Boston, MA


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