You don’t have to be a Latin scholar to know that Pax means peace. So why, with the United States bogged down in an unpopular war that claimed its 4,000th casualty a few days ago, is the Pax World family of mutual funds investing in a defense contractor with thousands of employees deployed in the Persian Gulf?
Pax World, a socially-responsible fund group, is designed for investors who want to align their money and their values. It dates back to 1971, when the United States was bogged down in an even more unpopular war. Founders Luther Tyson and Jack Corbett, who had worked on peace, housing and employment issues for the United Methodist Church, opposed America’s intervention in Vietnam and did not want to see their investment dollars supporting companies that were part of the war effort. Pax World’s ads in magazines like Mother Jones say things like “No Weapons†and “Promote Peace.†There’s not a whole lot of ambiguity there.
On Pax’s website, the firm’s president, Joe Keefe, writes,
we avoid investing in companies that are significantly involved in the manufacture of weapons or weapons-related products,
It turns out, however, that Pax shareholders own a slice of a $4.2 billion a year engineering and infrastructure company called AECOM, headquartered in Los Angeles. Take a glance at its website and you see pictures of a hydroelectric plant in Quebec, a bridge in Australia and a dam near Denver. The company says it provides a “blend of global reach, local knowledge, innovation and technical excellence in delivering solutions that enhance and sustain the world’s built, natural and social environmentsâ€â€”whatever the heck that means.
A investment advisor named Eric Bright, who works with clients who want to invest ethically, dug a little deeper and was surprised at what he learned. AECOM, he told me by email, is
an engineering and defense contractor whose business ranges from managing the U.S. Army’s Fort Polk, including its live-fire target ranges, to operating logistics, training and repair depots for the U.S. military in Iraq, Kuwait and Afghanistan, with more than 6,000 employees working for its CSA subsidiary in Kuwait alone. They are defense contractors repairing and maintaining everything from machine guns to computers to communications equipment to tanks.
It didn’t take a whole lot of digging for me to confirm Eric’s findings. This comes from a U.S. Department of Defense website:
AECOM Government Services, Fort Worth, Texas, was awarded on June 1, 2007, a delivery order amount of $47,444,298 as part of a $253,446,296 cost-plus-fixed-fee and cost-reimbursable contract for Iraqi Army maintenance support services. Work will be performed in Iraq, and is expected to be completed by May 31, 2009. Contract funds will not expire at the end of the current fiscal year. This was a sole source contract initiated on Feb. 1, 2007.
And that AECOM subsidiary that Eric referred to? CSA doesn’t stand for community supported agriculture. It stands for “combat support associates†and its website says,
employees at all levels have dedicated themselves to a wide range of assignments, from maintaining tactical equipment such as tanks, to supporting information systems, to conducting force-on-force and live-fire exercise and training programs, to providing security, environmental services, rations, uniforms and even barbed wire, as well as organizing recreational programs and special events for soldiers
On March 19, 2003, U.S. ground military operations against Iraq began. CSA was a tried and tested workforce that had responded to every need of its (customer)…CSA is now entering its ninth year of supporting the largest troop movement since WWII.
Naturally, I got in touch with Joe Keefe. He’s a good guy—we’ve met several times—and he responded to me promptly. Here’s his explanation:
AECOM Technology is currently a holding and therefore meets Pax World’s environmental, social and governance criteria. According to our social research department and database, the company does provide engineering and technical services to the U.S. military but is not significantly involved in the manufacture of weapons or weapons-related products. It does provide management support to the U.S. military, both domestically and in hostile environments such as Iraq and Afghanistan. Among AECOM’s contracts are the training and deployment of civilian police in Haiti, Kosovo, Afghanistan, Jordan and Serbia, as well as force protection, training and security under a Combat Services Support Contract for U.S. forces in Kuwait. According to the company, it also provides support for peacekeeping missions along the Egypt-Israel border, and has led stakeholder engagement teams in peace initiatives in Uganda and Senegal. AECOM Technology’s Form 10 Registration Statement indicates that 28% of FY2006 revenues were from U.S. government contracts, including the Department of Defense and Department of Energy. These services are divided into Professional Technical Services, representing 9% of revenues, and Management Support Services, representing 19% of revenues. Pax World does not consider the services provided by the company to the U.S. Department of Defense to be weapons-related.
Joe went on to say that AECOM has never been accused of fraudulently billing the DOD and that it does lots of good stuff like environmental remediation. Cool. I’m sure its execs also help little old ladies cross the street every now and then.
Here’s what I think about all this.
First, as I’ve written before (Socially Responsible Investing’s Silly Screens), I don’t think ethical screens make much sense. They’re a holdover from the 1960s and 1970s. They may make people feel good, but they don’t lead to social change. In particular, I don’t think it makes sense to screen out all military contractors in a post—September 11 world. Whatever you think of the Iraq War (and you can guess what I think), it’s hard to make the case that the U.S. does not need weapons and a national defense.
Another more trivial example of why screens are silly: Pax World divested Starbucks a few years ago because the coffee company got into the liquer business. It may shock you to hear that I have shared a glass of wine or two with some of fund managers who won’t buy alcohol stocks in their funds.
(I’d make an exception, by the way, when funds are asked to screen out companies as part of a big campaign around a vital issue–like the genocide in Darfur. There, selling shares of companies that support Sudan can have an impact because it’s part of a larger social movement. Calvert’s been great on this issue.)
Having said that, Pax should not be investing in AECOM. The fund is called Pax for a reason. I don’t buy Joe’s argument that a company that is supporting the Iraqi army and the “largest troop movement since World War II†isn’t doing “weapons-related work.â€
As Eric Bright told me: “Come on, if you’re the Pax funds, and advertise like you do, shouldn’t you be reflecting your prospectus claims about promoting peace and avoiding weapons?
“I’m certain that more than a few Pax World fund shareholders would be shocked by the investment, as I was,†he added.
There are bigger issues here than one stock in one fund. Paul Hawken has written that so-called green funds don’t deserve the name. In 2005, I wrote Are Green Funds True to Their Colors? in Fortune.) Eric Bright says the Citizens Funds are also invested in a defense and nuclear contractor. He has set up a website called SRIgreen to explore these issues.
Your thoughts?
While I would disagree with Marc’s take on ethical screens, which I believe still have special relevance even in today’s world, Marc and I are in agreement that Pax World should NOT be investing in AECOM. And we agree that this is about more than one stock in one fund family. Socially responsible investing has reached a turning point. Do we invest with purpose according to our ethical values or do we as investors simply harvest “green†profits coincident with our values, or even sometimes in spite of them?
The latter model, misleadingly named “sustainable investing,†has come into fashion among many socially responsible funds. As Joe Keefe writes in a recent, provocative white paper, available on Pax World’s website, “although SRI (socially responsible investing) and sustainable investing are clearly related and share elements in common, they are not the same, nor is sustainable investing simply a subset of SRI. Sustainable investing is actually an emerging investment discipline, founded on the principle that the full integration of ESG (environmental, social and governance) factors into financial analysis and decision making is a strategy for identifying better long-term investments.†In my mind, this approach invests without soul, ethically empty and ultimately in pursuit of growth for the sake of further growth.
Do we stick to our values and invest in a way that can bring about a better future, by avoiding some stocks and advocating for change with others? Joe Keefe argues that it is “virtually impossible to justify in financial terms an exclusionary screen based solely on a value judgment.†Excuse me, my clients and I are doing just fine, and we invest according to set screens (and I’m certain there are plenty of others who can say the same). It’s not about the screens; it’s about playing a skillful effort inside the rules of the game. With hundreds upon hundreds of stocks in the U.S. market alone, depending upon what your market capitalization constraints are, there are plenty of prospective investments available without wading into the muck of tobacco, nuclear or weapons-related stocks.
To close with one last thought from Joe Keefe’s paper: “My only point was that, historically, SRI has been largely defined or understood in terms of its negative screens, and that this positioning is problematic — it tends to repel rather than attract investors, and retard rather than accelerate the industry’s growth.†Dear Joe, are you mostly interested in the growth of your investment industry?
From my point of view, it is the values of investors, my clients and yours, whose wishes should be respected. If they don’t want to invest in war contractors, then we shouldn’t invest their portfolios in them. And Pax World certainly shouldn’t be advertising that we “promote peace†and “no weapons†when in fact they slip an AECOM into their portfolios.
Investors may be smart, but we as an investment industry have outsmarted them. We’ve positioned ourselves as intermediaries between them and their ultimate investments. Between investors and their investments are financial planners, brokers, advisers, mutual funds, fund managers and others as well. With so many layers of intermediaries, each obscuring, wittingly or not, the nature of the ultimate investment portfolio and each extracting payment, it’s a wonder any investor knows exactly what they are invested in!
We should better explain to investors what we do, and what we invest in, so that they can decide what they will do. SRIgreen.com has been established with the hope that it will become one of the resources ethical investors can turn to, so that they can better decide how to allocate their portfolios.
The reality is that folks trust our socially responsible investment industry, at least many do, and trust us enough to allow us to manage their money. And they expect us to do right by them.
I’m, glad to have come across your blog. Clearly, SRI investors will frequently disagree about specifics. However, I believe that if everyone does invest according to their personal values, then, since so many of core values are alike — and are supportive of higher ideals — that in the long run, only companies employing these higher values will truly prosper.
Incidentally, I’ve been following socially responsible investing for forty years. For readers interested in the latest global socially responsible and green investing news and research, they might find my site quite helpful. It’s at http://investingforthesoul.com/
Best wishes, Ron Robins
War and Pax: Pax World CEO Responds
Marc Gunther’s recent posting, “War and Pax,†faults my company, Pax World, for holding a company called AECOM in one or more of our investment portfolios. Mark is a good guy, with whom I have indeed shared a glass of wine (as he mentions), but the question is one on which reasonable people can disagree. So, I am rather disappointed that he would write a piece that implicitly – but essentially – charges my company with hypocrisy. Let me try to respond as best I can.
First, when anyone in the mutual fund business constructs investment portfolios they have to make judgment calls. These may be related to financial issues – e.g., a company’s P/E ratio or other quantitative valuation characteristics may be at the upper end of a particular portfolio manager’s acceptable range, requiring a judgment call. (In fact, this happens all the time, which is why stocks are generally selected by analysts and portfolio managers rather than by computers.) Such judgment calls also come into play in analyzing environmental, social and governance (ESG) criteria, or in the application of exclusionary screens such as Pax World’s weapons screen. Under this screen, Pax avoids investing in companies that we determine are “significantly involved in the manufacture of weapons or weapons-related products.†We ordinarily consider “significant involvement†to mean 20% or more of a company’s revenues although the threshold can be lower depending on the nature of the product (e.g., obviously lethal weapons systems). Other SRI firms may employ differing criteria, but in every instance such criteria require analysts and portfolio managers to make judgment calls.
While it is not ordinarily our practice to comment on companies that fail our ESG criteria, I can tell you that over the past year we have found numerous companies to be ineligible for Pax World portfolios under our weapons screen, including:
• A company that offers technology such as sensors, shooters and other systems related to precision strike capabilities for strike platforms, precision engagement applications and Unmanned Aircraft Systems (UAS). We determined that 27% of the company’s revenues were weapons-related.
• A company that helps develop, deploy and maintain weapons systems and military installations, including Naval surface warfare systems such as nuclear submarines and missile programs. We determined that the company’s weapons-related revenues probably exceeded 20%.
• A company that provides computer technology for DOE nuclear weapons laboratories, including computer simulations to predict the physics and effects of a nuclear blast.
• A company involved in a joint venture with Lockheed Martin to help manage the UK Atomic Weapons Establishment (AWE), which provides the warheads for the UK’s independent nuclear deterrent.
• A company whose products and services include wireless networking for tactical communications, night vision equipment, electronic warfare technologies for military aircraft, military air traffic control systems, air defense radars, surveillance systems, aircraft armament systems, undersea warfare technologies such as minesweeping systems and composite structures for a variety of defense systems. We determined that weapons-related revenues were as high as 40%.
• A company that develops, manufactures, and services military helicopters, military aircraft engines, and military aircraft systems including flight, engine control, and environmental control systems. Although the company’s primary business is manufacturing elevators and escalators, HVAC and refrigeration systems, and fire and security systems, and although only 16% of its revenues were weapons-related, we excluded the company from investment based upon the nature of its weapons involvement.
• A company that designs and manufactures combat aircraft engines and propulsion systems for nuclear submarines and fighter jets, including afterburners for supersonic flight, features designed specifically for combat applications. We determined that 22% of the company’s revenues were weapons-related.
• A company that produces engines for military aircraft that have no civilian counterpart, including fighter jets, bombers and reconnaissance aircraft. We determined that as much as 28% of the company’s revenue was probably weapons-related.
• A company that manufactures and services business jets as well as military trainer aircraft. Although the latter account for only 14 % of company revenues, we determined that their use for combat-related training was sufficient grounds for exclusion.
In the case of AECOM, the company provides professional technical and management support services to a broad range of markets, including transportation facilities (bridges, highways, seaports, airports, rail); environmental (water supply, water treatment plants, dams, pumping stations, reservoirs); facilities design and maintenance (hotels, office buildings, manufacturing facilities, public and federal buildings); energy (including wind farms and other renewable energy and sustainable design projects); urban planning and design (plazas, waterfronts, historic districts); and international development assistance (conflict resolution, humanitarian response).
One of the company’s divisions, AGS, does provide logistics services to the U.S. military in Iraq, Kuwait and Afghanistan. Specifically, it recruits, screens, hires and transports US and third-country nationals for maintenance, repair, and inventory functions, including driving fuel tankers and repairing civilian and military vehicles. The company also provides security and force protection services at military bases, including trained dog handlers to detect explosives, security access (e.g., swipe cards) at installations, and crowd control. It trains civilian police forces – but according to company materials it does not provide weapons training to Iraqi soldiers. It also provides support to the multinational peacekeeping forces at the Egypt-Israel border. At Fort Polk, AECOM manages the facility where the military teaches weapons training, and provides similar services at the Center for Security Training in Aberdeen, Maryland. According to the company, it provides logistics and security services (e.g., scheduling, maintenance, access, HVAC, etc.) at these facilities; it is not involved in the weapons training itself. According to our research analysts, a relatively insignificant portion of company revenues – approximately 4 % – is derived from defense contracts (which are not synonymous with weapons contracts).
So, AECOM may have required a judgment call under our weapons criteria, and one can disagree with our decision, but after careful research our ESG analysts determined that the company did not fail our weapons screen – and I think they made the right call. Reasonable people can disagree, but under the circumstances, to suggest hypocrisy on Pax’s part is a bit much.
There are technology companies that provide computers to the US armed forces, and pharmaceutical companies that provide medicines and drugs, and apparel companies that provide uniforms, and food and beverage companies that provide nourishment. For most SRI portfolios, including Pax World Funds, the fact that a company contracts with the US military to provide certain products or support services is not a sufficient reason for excluding the company. The picture is usually more complex than that, as we live in a complex world.
I am as personally opposed to the Iraq War as Marc Gunther is. However, I support legitimate efforts to defend our nation, including combating terror and bringing Osama Bin Laden to justice; and I support the legitimate use of force under international humanitarian law (to prevent genocide, for example), which requires troops and weapons. These are my personal views. I realize that not all socially responsible investors will agree. In fact, SRI investors probably run the gamut – from pacifists to members of the military and their families – and likely hold a diversity of opinions when it comes to national security and defense issues. A weapons screen, though not perfect, also is not “silly,†as Marc Gunther charges (neither is a tobacco screen, in my view). It can be a legitimate tool for SRI investors, like ours, who choose not to profit from violence and war – not a perfect tool, mind you, but a legitimate one.
Divesting each and every company that has any contracts whatsoever with the US military, regardless of the nature of the products or services involved, would be silly. It is one of the reasons why Pax World revised its former zero-tolerance screen a few years back and substituted a more practical approach. Our colleagues at Calvert recently revised their weapons screen as well, and I would refer you to a very thoughtful release they have put out on the subject. http://www.calvert.com/news_newsArticle.html?article=12814&image=srinews.gif&keepleftnav=SRI+News&RSSFeedName=Calvert+News+All
Finally, as Marc Gunther surely knows, I am largely in agreement with him when it comes to values-based exclusionary screens. I have recently published two articles on the subject – “From SRI to Sustainable Investing†and “Sustainable Investing and Values†– in Green Money Journal (www.greenmoneyjournal.com). (The articles are also available on Pax World’s web site (www.paxworld.com). Under the circumstances, I wonder why he would bother to resurrect the Starbucks example as more Pax World “silliness,†without referencing the fact that we have addressed the issue publicly, have eliminated our alcohol screen, and have been strong advocates for the transition from values-based SRI to ESG-based Sustainable Investing.
I believe Pax World’s weapons screen – along with our tobacco screen – will continue to play a valuable role in our investment approach. As Marc Gunther notes, Pax means peace. We take this work very seriously, and we work very hard at it. Over the past few years, we have taken a number of measures to modernize our ESG criteria and to improve our screening process. We are constantly striving to make further improvements. In the meantime, there will always be judgment calls, and we will make mistakes on occasion. (I don’t think this was one of them.) We are not perfect but neither are we hypocrites, and I don’t think the AECOM example can be the basis for such an insinuation.
Respectfully,
Joseph Keefe
President and CEO
Pax World Management Corp.
All:
If I may wade into this, I have a few comments.
First, I think Joe’s argument that SRI-type logic in investing is giving way to sustainability-based logic is good, but requires a finer point on it. The fact is that both SRI-type and sustainability-based criteria for investing are values-based. Indeed, all investing is. Joe may not happen to agree with the negative screens used by SRI investors, but the preferences held by such investors are no less value-based, nor are his (although more sophisticated, they may be).
So in the end, what we have is a conflict between competing values – negative screens versus positive screens. One mainly excludes on the basis of values, the other mainly includes on the basis of values. I frankly don’t see much a difference here. Just competing values vying for acceptance as the mantel of legitimacy.
That said, I do agree with Joe that (in my words) SRI funds tend to be rather arbitrary and relativistic, whereas sustainability funds (are there any?) tend to be more grounded in a unified view of human well-being. Or as Joe puts it, “Sustainable investing, by contrast, is explicitly progressive: it holds that the best companies (and the best investments) are those that act in the public interest; that serve all their stakeholders, not just shareholders; that do not externalize their costs onto society; and that pursue wealth creation strategies focused on the long term.â€
Still, is he saying that targets of SRI investments are explicitly regressive; consist of companies that don’t act in the public interest; do not aim to serve all of their stakeholders; do seek to externalize their costs onto society; and pursue wealth creation strategies focused on only the short term? Do all tobacco, alcohol, and weapons companies necessarily fit this description? I guess I don’t think so.
Let me be even more specific. I agree with Joe’s orientation towards sustainability as a basis for making investment decisions. But I do not agree that Pax World has a basis for making related investment decisions any more than the SRI crowd that he critiques does. For Pax World to have such a basis, it would have to have a quantitative means of comparing a company’s impacts on vital capitals in the world with normative claims for what such impacts ought to be. I see no such thing in place. Thus, I hear what Joe is saying and I agree with him, but I do not think the walk fully matches the talk. I’d welcome his response to this.
Incidentally, the AECOM criticism of Marc’s is nonsense. No one need make any apologies for supporting national security, and all Joe really needs to say is that investing in it (as one form of vital capital required for human well-being in the U.S.) is completely compatible with a sustainability orientation. All we need to do is think in terms of human well-being, and the preservation of vital capitals required to ensure it. Armed with that, we’d have a solid foundation for sustainable investing. Beyond that, I say let the competing values compete, and let us embrace the competition as just that: a competition between values. There’s no shame in that, but there is in denying it.
Regards,
Mark
Joe, Eric, Mark…thanks for your thoughtful comments. I see two distinct issues here.
First, Should Pax’s weapons screen have kept AECOM out?
Second, do SRI screens do any good?
On AECOM, I don’t want to accuse Pax or Joe or Julie Gorte, the firm’s research chief (another terrific SRI person) of hypocrisy. Yes, it’s a judgment call. In my judgment, AECOM is not merely a supplier to the military, selling clothing or food or computers. They have many, many thousands of people in Iraq and Kuwait. They are part of the privatized Army. They are getting sole-source contracts (yuk) in Iraq. See the quotes above. Joe says that a weapons screen is a “legitimate tool for SRI investors, like ours, who choose not to profit from violence and war.†In my judgment, that’s what AECOM is doing. I don’t think a fund that’s called “Pax†and uses thems of “peace†and “no weapons†in its ads should be invested in AECOM. Reasonable people like Joe will disagree.
On screens, I wish I hadn’t described them as “silly.†I respect pacifists, Quakers, Mormons or others with religious beliefs or values who don’t want to be invested in weapons, alcohol, tobacco, gambling and the like. Let them have their own specialized funds, none of which will grow very big.
I also like Joe’s idea of “sustainable investing†which, as I understand it, focuses mostly on seeking out “good†(or at least better) companies that will do well for investors. I think that’s a better strategy, for investors and for the world, than trying to screen out “bad†industries. And I had forgotten that Pax had eliminated its alcohol screen.
I wish Pax and other SRI funds would now take the radical step of eliminating all screens. Here’s why.
My problem with screens is that they create the appearance of making a difference, but don’t. I know they are well-meaning. But if they don’t have an impact–and absent a social movement, like the ones around Darfur or apartheid, they don’t–then what “values” are they in line with? They are about feeling good, when there’s actually no reason to feel good. You haven’t accomplished anything.
What’s more, screens are blunt tools. Do we really oppose all weapons? Or alcohol? Or gambling?
Far more valuable is the shareholder activism carried out by SRI firms, or the ratings of companies done by people like KLD, Innovest and FTSE4Good, which incentivize companies to become more sustainable.
Most importantly, screens limit the growth of SRI. They allows funds to be trivialized as “feel-good funds” or to across as relics of the 1960s. (A great decade, to be sure, but I don’t want my money managed by people wearing tie-dyed shirts.) SRI is too important to be a niche.
Dear Pax World,
I would welcome Joe Keefe to make his case directly to all Pax World funds’ shareholders as he has done here. In the next letter to them, describe the facts regarding AECOM. We can continue this discussion amongst the group of us as long as we like, but the bottom line is that it is not our money at stake.
Let your clients read about it! Reveal the information needed for them to make an informed decision.
Sincerely,
Eric Bright
Marc:
I think the semantics being used here are confused and confusing. You cite the ratings being done by companies like KLD, Innovest, and so forth as contrary examples to screens. But what is a rating system if not a screen by another name? Both consist of value-based criteria for qualifying investment targets. SRI screens tend to be comparatively simplified in that they are binary in form. A company is either selling weapons or it isn’t. Rating schemes tend to be more complex, but they are still screens. The very choice of what metrics to use in such systems is a value-based decision. So all seem to have here is single-variable screens and multi-variable screens.
Regards,
Mark
As a point of information: AECOM is not listed on the KLD database for weapons involvement. If you look at the AECOM company report, it lists no involvement in weapons for AECOM; or if you run a query for all US companies with military involvement, AECOM isn’t on the list. So, KLD apparently agrees with Pax on this issue. As I have said already, this is a judgment call. In this business, we have to make them all of the time, and reasonable people can disagree. With all due respect to Eric Bright, I will probably not follow his advice and do a letter to Pax World shareholders each time he disagrees with one of our decisions.
Respectfully,
Joe Keefe
President & CEO
Pax World Management Corp.
If I may, a brief scanning of AECOM’s web site finds it littered with pictures of tanks, machine guns and military personnel in action. It says among their areas of expertise are:
Ammunition Supply
Convoy Escorts
Force Protection
Last time I checked ammunition is “obviously lethal” but I guess the distinction is manufacturing it versus transporting it? Pax shareholders should be rightly upset that this judgment call has been made on their behalf. I can understand why Mr. Keefe doesn’t care to discuss this with his shareholders as I imagine many of them would be appalled and employ a negative screen towards Pax.
Sincerely,
Bill Rodonski