War and Pax

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 environments" -- 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."

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.

Comments

[JKeefe]

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. Marc 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. Investing in 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. For my complete response (there"s a word limit here) posted to Marc"s blog, visit (http://www.marcgunther.com/?p=346#comments).

[ericbright]

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?
As Joe Keefe defines them in a white paper, available on Pax World"s website, "socially responsible investing" and "sustainable investing" are not the same. The latter approach, the one that Joe Keefe advocates, I believe invests without soul, morally empty in pursuit of growth for the sake of further growth.
Joe Keefe further 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. There are plenty of prospective investments available without wading into 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. And Pax World shouldn"t be advertising that they "promote peace" and "no weapons" when they"ve bought AECOM for their portfolios.
Respectfully,
Eric W. Bright, CFA

[Aaror]

There is a reason they are invested in a war profiteer, in the current economic enviornment there is so much profit to be gained from bilking the government (that is what sole-source contract means, robbing the government) that no sound investor can avoid the scam.

[Cathexis]

At the risk of getting off-topic, I have to disagree with you, Mr Gunther, on whether "ethical investing" makes sense. One may quivbble about some particular set of ethics or another, but "change through $" is one of the few routes that does have an effect, IMO.

I also disagree about the implied unreasonableness of not investing in military functions in a "post 9/11 world." "Terrorism" will never be resolved (and is not even adequately addressed) through military means. Don't buy into the fear-mongering.

[magen]

One day there will be more money to be made off of peace than war. War will be regarded as a waste.

One day there will be more money to be made off of green technology than finding, refining, and burning fossil fuels.

[cynara]

I've been an investor in Pax World Balanced Fund for at least ten years. That said, when I checked out their Growth Fund, a few years back, it was obvious to see that they had huge percentage of shares in energy companies. Not terribly socially responsible. (I checked today, and its seems to have divested into other areas...)