Sin Stocks, version 2.0

There is a small contradiction in widely-used social screens that is starting to be noticed. 

Most SRI mutual funds in the U.S. automatically exclude the 'sin stocks'.  Sin stocks are usually defined as alcohol, tobacco, and gambling, although pornography and firearms are sometimes put into this category as well.  The sin screen is appealing because it is consistent with the teaching of many religions, it is easy to implement, and the excluded sectors are small enough as a percentage of the overall market that performance impact is not likely to be severe even if these stocks perform well (which they historically have).

But there are some odd things about this view of sin stocks.  First of all, lumping alcohol, tobacco, and gambling together implies some kind of moral equivalency that really isn't there.  It's not clear that alcohol and gambling, in moderation, are harmful to most people, while tobacco clearly is.  The CDC classifies tobacco as the "leading preventable cause of death" in the U.S.  Alcohol and gambling have their downsides, but they aren't in the same league.

And social investment practitioners do not always practice what they preach.  I've been to many social investment conferences.  Drinks are often served, and consumed enthusiastically.

So it must have been difficult last year for the folks at Pax World to drop Starbucks, an otherwise exemplary social performer (I have it as one of the top 8 U.S. companies), because of a relatively small liqueur deal.  Now Pax is asking shareholders to approve a less restrictive policy (thanks to Lorne Abramson for the heads-up on this).

Pax's proposal strikes me as sensible, although not all religious investors will accept it.  This seems to be a case where the perfect can be the enemy of the good.  Why delete Starbucks for minor involvement in a product that is unlikely to be abused ("hurt anyone in his substance" as John Wesley would say)?  I think many clients would be open to owning shares in a wine company run on sustainabity principles (think of Fetzer when Paul Dolan was at the helm), but this option is foreclosed by the zero tolerance policy.

There are risks to opening the door a little bit, though.  Harley-Davidson got into a similar situation a few years ago, when it licensed its name to Lorillard for a cigarette product.  It went badly, litigation ensued.  As great a company as Harley-Davidson is, I would not have considered including it in an SRI portfolio while this was going on, even though the product was economically insignificant.  (With the situation well in the past, HDI is now on both the Domini and Calvert social indexes.)

I would correct one bit of speculation you see in the news stories - I'm certain this has nothing to do with performance.  Pax World's Balanced Fund is well-managed with a superb long-term track record and four stars from Morningstar.  They don't have to lower the bar to pump up their results.