October 26, 2006
Pax World Drops Zero Tolerance Screens on Alcohol and Gambling
by Bill Baue
SocialFunds.com 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.
SocialFunds.com 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.
SocialFunds.com: 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?
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
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.
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.
|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.
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.
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