Chapter 12 Case: Sustainable Investing: Pax World Helping Investors Change the World

12.1 Introduction to Socially Responsible Investing (SRI)

Socially responsible investing (SRI)An investment strategy that considers the social value or merits of an investment in addition to its financial considerations.—also known as sustainable investing—refers to investment strategies that seek to not only provide financial return but also be consistent with moral values and have positive societal impact. SRI can be as straightforward as an investor who avoids investing in any industry they find morally questionable—such as a tobacco manufacturer—to as complex as a billion-dollar fund that screens in or out many different types of investment opportunities based on key performance indicators in environmental and social areas.

SRI recognizes that corporate responsibility and societal concerns are valid and important criteria for investment decisions. While SRI refers to a spectrum of investing activities, in general, SRI will be referred to as a broad-based approach that invests in companies that manage themselves in ways related to sustainability, including environmental protection and human rights. However, as mentioned previously, SRI can also be morally based and avoid so-called sin industries, such as those involved in alcohol, tobacco, gambling, animal testing, or weapons.

SRI roots back to biblical times, as Jewish law provided specific guidance on ethical investment. In colonial times, Quaker and Methodist immigrants to the United States brought with them the concept of values-based investing exercised by their refusal to invest in slavery or war. In the 1700s, Methodist reverend John Wesley (1703–91) outlined his basic tenets of social investing—including not to harm your neighbor through your business practices and to avoid industries, such as tanning, because of their potential to harm the health of workers.

Modern SRI can trace its roots to the 1960s and 1970s in the United States as concerns over civil rights, the Vietnam War, gender equality, the environment, and nuclear power all emerged.“History of SRI,” SRI Conference, http://www.sriintherockies.com/about/historyOfSRI.jsp. Pax World Funds was created in 1971 as the first SRI mutual fund by Luther Tyson and Jack Corbett, both of whom worked for the United Methodist Church, for investors who did not want to invest in companies involved in the Vietnam War.

SRI investment grew dramatically in the 1980s as significant societal events—for example, apartheid in South Africa, the nuclear disaster in Chernobyl, and the oil spill in Alaska by the Exxon Valdez—led millions of people and organizations to invest in companies that were more socially and environmentally responsible. Other social phenomenon in the 1990s, such as Nike’s use of sweatshops, increased respect for indigenous populations, and tropical deforestation, further supported investment in SRI. By 1995, SRI had grown to fifty-five mutual funds with $12 billion in assets under management. Most recently, climate change has motivated new waves of SRI investment by both institutional investorsOrganizations that pool large sums of money and invest those sums in securities, real property, and other investment assets. Examples include banks, insurance companies, college endowment funds, retirement or pension funds, and mutual funds. and individual investors.

SRI mutual funds now span a wide range of investments opportunities, including domestic and international securitiesA fungible (interchangeable), tradable financial instrument representing financial value, such as stocks, bonds, or options.. In addition to mutual funds, a growing number of financial products are becoming available that target SRI, including hedge fundsInvestment funds that are flexible, can be illiquid and leveraged, and tend to be marketed to sophisticated high net worth individual investors and institutional investors. and exchange traded funds (ETFs)Investment fund with features similar to a mutual fund, except that it is traded on an investment fund traded on stock exchanges, much like stocks..

The performance of SRI funds has slowly convinced investors that there is not a significant trade-off—and there even may be some positive correlation—between social and financial performance. At the end of 2009, a review of 160 socially responsible mutual funds found that 65 percent of the funds had outperformed their benchmarks—funds with similar investment objectives.Jason M. Ribando and George Bonne, A New Quality Factor: Finding Alpha with Asset4 ESG Data (New York: Thomson Reuters, 2010). Between 1995 and 2010, SRI had grown significantly.

As of 2010, there were 250 mutual funds using SRI criteria in the United States, with assets of $316.1 billion.“Sustainable and Responsible Investing Facts,” USSIF, http://ussif.org/resources/sriguide/srifacts.cfm. These funds increasingly compete with traditional mutual funds and SRI-focused funds, such as Pax World Funds, and increasingly compete with the mutual funds industry giants, such as Fidelity Investments, Vanguard, and T. Rowe Price, who have started SRI funds as part of their family of funds. Investors in the traditional funds are increasingly likely to move at least some of their assets to an SRI investment approach. How fast they do this and how much of their investments they direct to SRI funds and to mutual fund companies that only engage in SRI, such as Pax World, will depend on how important a sustainability- and moral values–based approach to personal financial investing becomes for households in the United States and in other nations and also on SRI fund performance and marketing.

12.2 Pax World

Pax World’s Portfolio

As of 2011, Pax World Funds had eleven mutual funds and two exchange traded funds (ETFs) with assets under management totaling $2.4 billion. The Balanced Fund was started in 1971. The Growth Fund and the High Yield Bond Fund were started in late 1990s. The newest funds were the ESG Managers Portfolios, ESG Shares (ETFs), Pax World Small Cap Fund, Pax World International Fund, Pax World Global Women’s Equality Fund, and Pax World Global Green Fund.

Figure 12.1 Pax World Assets under Management (in Millions of Dollars)

*As of September 30, 2011.

Source: Image courtesy of the authors.

Overall Pax World offers four different investment products areas:

1. Pax World Funds—a family of actively managed mutual funds across a range of asset classes.

   • Pax World Balanced Fund
   • Pax World Growth Fund
   • Pax World Small Cap Fund
   • Pax World International Fund
   • Pax World High Yield Bond Fund
   • Pax World Global Women’s Equality Fund
   • Pax World Global Green Fund
2. ESG Managers Portfolios—a series of multimanager asset allocation funds with asset allocation, manager selection, and portfolio construction by Morningstar Associates.
3. ESG Shares—the first family of ETFs devoted exclusively to a sustainable investing approach.
4. Separately managed accounts for institutional investors.

Pax World’s Balanced Fund

Pax World’s largest fund, their Balanced Fund, is the oldest SRI fund in the industry. It is the second-largest single SRI fund (at $1.8 billion) after the Parnmassus Equity Income Fund ($3.7 billion) as of September 30, 2011.“Socially Responsible Mutual Fund Charts: Financial Performance,” USSIF, http://ussif.org/resources/mfpc.

Pax World’s Balanced Fund has a $250 minimum investment requirement and an expense ratio of 0.96 percent. As of September 30, 2011, compared to the overall market (S&P 500), Pax World’s largest fund has tended to underperform in the short term but outperform over the longer term. When compared to just other balanced funds (the Lipper Balanced Funds Index), the fund has tended to underperform financially at times.

Table 12.2 Comparison of Pax World Balanced Fund to Comparable Investment Benchmarks

Total Returns » Month Ended September 30, 2011 » Quarter Ended September 30, 2011	Cumulative Returns (%)				Average Annual Returns (%)
	1-Month	Quarter	Year-to-Date	1 Year	3-Year	5-Year	10-Year	Since Inception
Balanced Fund—Individual Investor Class	–7.92	–13.77	–8.90	–1.04	0.98	–0.34	3.24	8.14
Balanced Fund—Institutional Class 1	–7.89	–13.69	–8.71	–0.74	1.23	–0.11	3.36	8.17
Balanced Fund—R Class 2	–7.93	–13.78	–9.04	–1.23	0.73	–0.53	3.14	8.11
60% S&P 500 Index / 40% Barclays Capital US Aggregate Bond Index	–3.93	–7.04	–2.65	3.05	4.44	2.25	4.29	—
S&P 500 Index	–7.03	–13.87	–8.68	1.14	1.23	–1.18	2.82	—
Lipper Balanced Funds Index	–5.36	–9.62	–5.41	0.30	3.94	1.53	4.13	—
Pax World Balanced Fund—Individual Investor Class	–7.92	–13.77	–8.90	–1.04	0.98	–0.34	3.24	8.14
60% S&P 500 Index / 40% Barclays Capital US Aggregate Bond Index	–3.93	–7.04	–2.65	3.05	4.44	2.25	4.29	—
S&P 500 Index	–7.03	–13.87	–8.68	1.14	1.23	–1.18	2.82	—
Lipper Balanced Funds Index	–5.36	–9.62	–5.41	0.30	3.94	1.53	4.13	—

According to Morningstar, one of the leading providers of independent investment research in the world, in the eleven years from 2000 to 2011 Pax World’s Balanced Fund performed in the top quartile among all (not just SRI) funds in its category five of the year, in the bottom quartile five of the years, and in the second lowest quartile in one year.

12.3 Pax World’s Approach to Investing

Pax World had primarily relied on exclusion, for example, negative screens, for avoidance of undesired companies to invest in. However, the resistance to the screening out of some companies among traditional investors led Pax World, in 2006, to change their approach from socially responsible investing (SRI) to “sustainable investing.”

To Pax World, sustainable investing is similar to and has its origins in SRI, but it is fundamentally different. For Pax World, sustainable investing involves fully integrating environmental, social, and governance (ESG) factors into investment analysis. So where SRI had tended to define itself by what not to invest in, sustainable investing defines what to invest in.

Pax World’s new methodology allows it to invest in companies that have superior sustainability or ESG performance. By investing in “sustainable” companies, Pax World seeks to reduce risk and deliver competitive long-term investment performance. By combining rigorous financial analysis with equally rigorous ESG analysis, there is an increased level of scrutiny that helps them construct portfolios made up of companies that

• are leaders in their industries,
• are better managed and more forward-thinking,
• are better at anticipating and mitigating risk,
• meet positive standards of corporate responsibility,
• focus on the long term.

The goal is for all the funds to beat the performance of group peer funds, not just other SRI funds. For each of Pax’s funds, this means outperforming on an average return on investment basis funds with similar investment objectives. Pax World’s view is that rigorous financial and ESG analysis will lead to superior fund performance over time. This emanates from the Pax World perspective that companies that do well on both analyses and that execute well on both financial and ESG measures will be the best performers in terms of return for mutual fund investors.

Figure 12.2 Pax World’s Sustainable Investing Approach

Pax World’s Investment Process

Investment analysis is very detailed and difficult work. Pax World’s investment process is a well-defined, systematic, four-step process: (1) top-down analysis, (2) financial analysis, (3) ESG analysis, and (4) portfolio construction. This process takes Pax World from assessing the broad universe of investment opportunities to assessing a selection of investments for its funds. The ESG analysis of the four is the least established and most qualitative.

Figure 12.3 Pax World Investment Process

Top-Down Analysis

Deciding how to invest funds starts with a top-down analysisAn information processing strategy where a system is broken down into smaller subsystems. It can also be thought of as a bird’s eye or high-level view of a system, issue, or problem. of domestic and international economies. This involves analysts identifying long-term economic, social, and political trends and their investment implications. This global economic analysis can include the interest rate environment, consumer sentiment, and unemployment. The top-down analysis helps to determine the broad sectors of the economy for Pax World funds to invest in and, more specifically, to overinvest or underinvest in relative to benchmarks by fund type average.

The major themes in 2011, for example, included aging population demographics in developing nations (including the United States, Japan, and many European nations), the growth of emerging markets (such as China, India, and Brazil), and strong demand for and limited supply of natural resources (which puts price pressure on many commodities).

The top-down analysis also includes identification of some shorter-term factors. In 2011, this included the economic recession and low consumer confidence.

The 2011 themes suggested that Pax World funds invest in industries that benefit from (e.g., sell in or to) aging demographics, commodities, and emerging markets over and above the percentages in the benchmark fund. Specific industries to invest in the 2011 market, for example, would include construction, mining and utility equipment companies with a majority of their sales in emerging nations, and consumer product companies with more than 50 percent of sales in emerging markets.

Fundamental Financial Analysis

The next step involves fundamental financial analysisIn-depth financial analysis performed on an individual security basis to identify superior investment opportunities.. This is in-depth financial analysis on an individual company basis to identify companies that appear to offer above-average relative growth rates, sound business models, strong competitive positioning, and attractive valuations. Pax World financial analysts target individual companies or stocks in their specified industry sectors. Each financial analyst is responsible for three sectors.

Company financial fundamentals are reviewed mostly using financial information that is available for all publically traded companies and required by governmental regulatory bodies including the Securities and Exchange Commission (SEC) in the United States. Companies within industries are compared based on their profitability, growth, valuation, and quality. Income statement and balance sheet information for companies, including returns on equity and assets, long- and short-term growth in earnings, price-to-earnings ratio, and debt-to-capital ratio are considered along with other financial information.

Pax financial analysts determine overall rankings of companies in targeted industries by using a weighted composite measure. In most cases, the top twenty-fifth percentile of performers in the targeted industries are identified for potential investment. In addition, financial analysts review the financial performance of all the holdings regularly.

ESG Analysis

If a company passes the financial test and is among the top twenty-fifth percentile in a targeted industry it will go to the sustainability research team, and they will do an environmental, social, and governance (ESG) analysisEvaluation of the quality of corporate management with respect to environmental, social, and governance criteria.. ESG analysis involves an evaluation based on ESG criteria. The ESG analysis includes review of company ESG performance with three views—past performance, current policy, and future trajectory. A company with poor prior performance, improved current policy, and positive future trajectory would be more favorably rated than a company with static moderate performance. The review by ESG analysts results in companies passing, failing, or passing but requiring monitoring. For example, Pax World was monitoring BP just prior to the BP Gulf of Mexico oil spill in 2010.

Environmental considerations include whether there has been company violations of environmental laws (such as the Clean Air Act and Clean Water Act in the United States), the company’s record of management of emissions, climate change–related policies and actions, and renewable energy use or development. On social issues, consideration is given to human rights issues in countries in which companies operate, for example, treatment and rights of women and workforce issues, such as worker safety, child labor laws, and minimum wages. On governance, the key issues assessed include board independence (e.g., the percentage of outside directors), diversity of board (including percentage of females on the board), and executive compensation practices and policies.

The sources of information used for the ESG analysis include company reporting in annual reports and in separate sustainability reports. The latter are increasing in numbers as companies, particularly larger companies and companies in Europe, are providing sustainability reports (see Chapter 4 "Accountability for Sustainability"). Other key sources of information include government data (e.g., from the US government’s Food and Drug Administration [FDA], Occupational Safety and Health Administration [OSHA], and Environmental Protection Agency [EPA]); news coverage and composite reporting of news coverage from Dow Jones Factiva (http://www.dowjones.com/factiva/index.asp); other third-party sources, such as MSCI ESG Research (http://www.msci.com/products/esg/about_msci_esg_research.html), Goldman Sachs, and the Corporate Library (http://www2.gmiratings.com); and nongovernmental organizations (NGO), such as Silicon Valley Toxics Coalition (http://svtc.org/resources/reports).

Smaller companies are harder to get information on, as are many companies in the developing markets. Some countries require a lot of disclosure and some don’t; it varies greatly. In general, publically traded companies in the United States and Western Europe are required to disclose information on financial, environmental, and social factors that will affect their market value but there is significant discretion in doing this.

Big companies, such as General Electric, Exxon-Mobil, Starbucks, and Walmart, have a lot of ESG information available through media attention, NGOs, and other watchdog groups. They’re pretty transparent and increasingly so. But as you go down the capitalization scale, smaller companies are not as transparent, so it can be harder to research a smaller company or a company in an emerging market. These are some of the factors Pax World Management ESG analysts have to deal with. It gets more or less complicated depending on what company they are researching.

Figure 12.4 Examples of Pax World’s ESG Factors

The ESG analysis team’s long-term goal is to be able to assess a larger number of companies on ESG performance (not just those provided to them in the top twenty-fifth percentile according to traditional financial criteria) and, over time, to be able identify companies that are strongest in ESG performance and based on that identifying if the company should be considered for Pax fund investment by the financial analysts. This would enable a more interactive and dynamic investment selection process with more active ESG consideration.

In order to get to this, and to be able to identify companies in percentiles of ESG performance, ESG analysts have to be able to more formally and fully quantify their analysis. While the ESG analysis has made substantial progress in being more quantitative, structured, and rigorous from its start in 1971, the ESG analysis remains limited to quantitative final assessment of pass or fail, without precise definition or measurement of ESG performance. Part of this is a result of the limited data available and the difficulty of collecting the data that might be available, but it might more strongly reflect the relative newness of ESG analytics compared to traditional financial investment analysis, which has been developing for more than one hundred years. This is true at Pax World and with SRI funds in general.

An example of a company that made it through Pax’s financial review process, but not the ESG process, is Suez Environment. Suez is a utility company based in France that operates largely in the water treatment and waste management sectors (http://www.suez-environnement.com/en/homepage), providing drinking water to seventy-six million people worldwide.

Suez was identified as being in a growing industry and emerging as an industry leader with strong financials in that industry. The company failed the ESG review based on a number of negative factors, including employee tampering with water supply testing, high incidence of worker injury, and antitrust investigation by the European Union.

Portfolio Construction

Portfolio constructionChoosing a select number of companies that meet criteria that emerge from the combination of financial and ESG analysis to be included in the fund. involves choosing a select number of companies that emerge from the combination of financial and ESG analysis and that meet both the financial and sustainability criteria and, as a portfolio, the overall investment guidelines of individual funds (e.g., targeted percentages for bonds and stocks). This entire process is repeated as new insights are developed or economic conditions change.

Every company in the Pax World mutual fund portfolio is reviewed from a financial and ESG perspective on a periodic basis, mostly annually.

Key Takeaways

• Pax World follows an investment approach called sustainable investing—the full integration of environmental, social, and governance (ESG) factors into investment analysis and decision making.
• To Pax World, sustainable investing means what to invest in as opposed to socially responsible investing (SRI), which means what not to invest in.
• The Pax World investment process includes (1) top-down analysis, (2) financial analysis, (3) ESG analysis, and (4) portfolio construction.

Exercises

1. How has Pax World’s investment approach changed and what were the driving forces?
2. Do you feel that Pax World’s sustainable investing approach is a better approach than their interpretation of socially responsible investing (SRI)? Why or why not?
3. Will sustainable investing enable Pax World to differentiate their funds?

12.4 Pax World Looking Forward

The increasing investments in socially responsible investing (SRI) mutual funds reflect enhanced awareness of the potential positive influence of sustainability in businesses financial performance. This is in contrast to when Pax World first started in 1971, when most investors and investment managers believed that companies would incur costs with social- and environmental-minded efforts. Now more and more investors believe that over the long term, sustainable business practices can help to lower costs and risks, can open up market opportunities, and can have a net positive financial impact on business performance and returns on investment.

And for Pax World, its approach to SRI is increasingly well recognized and respected. According to Morningstar, the Pax World Balanced Fund “has terrific socially responsible investing bona fide. It is the flagship offering of fine all-SRI shop. Manager Chris Brown has been at the helm for 13 years, so he’s more seasoned than a healthy majority of SRI skippers (and a healthy majority of allocation managers). And Brown steadfastly applies a rigorous set of environmental, and social, and governance factors while running the portfolio.”“Pax World Balanced Individual Investor,” Morningstar, September 2011, http://quote.morningstar.com/fund/f.aspx?t=PAXWX.

Still, critical to the success of Pax World and its growth—as with any mutual fund company—is financial performance. As Joe Keefe, Pax World Investments CEO and president, commented,

For Pax World, increasing the funds under management is not just for their own profitability, and it’s not growth for its own sake; it’s toward Pax World’s mission, which is changing corporate America. Pax World’s growth and changing corporate America are tied together because the more successful Pax World Funds and Management are from a business perspective, the more leverage they will have to be more successful from a social and environmental perspective. They reinforce each other. They’re integrated, which is what triple bottom line (TBL) and sustainable companies try to achieve—the successful integration of environmental and social factors into their business models.

Investment in SRI mutual funds and public awareness of the importance of environmental, social, and governance (ESG) factors in financial performance accelerated from 1990 to 2010, as there were increasing numbers of examples of companies that suffered significant financial losses by not being attentive environmentally, such as was the case with BP and the Gulf of Mexico oil spill in 2010.

Individuals are at the same time personally experiencing the financial benefits of their environmental practices, such as reducing energy and materials use. Increasing numbers of people are beginning to see environmental stewardship as a financial positive rather than a cost, and this influences their investment decisions over time.

A similar dynamic could be suggested about concern about treatment of workers and good corporate governance. Most individuals had doubts about the financial relevance of the treatment of workers and good governance. Now there is increasing evidence that companies that treat their workers well have higher productivity and lower absenteeism (as stated in a McGill University study published by Harvard Business Review, http://www.portfolio.com/business-news/2010/05/19/harvard-publishes-study-that-shows-treating-workers-well-boosts-bottom-line), and on the governance side, many investors have personally experienced the fallout from the 2008–9 financial crises that resulted from unethical business practices that could have been avoided with stronger governance.

Pax World’s shareholders, like most mutual fund investors, are not interested in short-term performance. This is compatible with Pax World’s approach and use of ESG factors that can tend to play out over the long term to affect company financial performance and to help minimize risk. That does mean that in every year Pax’s funds do better than or as well as a non-ESG funds. But as Joe Keefe says, “We believe over time we can outperform other funds because environmental, and social, and governance factors have what they call materiality. In the financial world, all that really means is relevance. They are relevant to how companies perform. So we think focusing on them is really important.”

Pax World has traditionally been primarily a retail mutual fund, with a majority of its funds under management for individual and household investors. However, Pax’s institutional presence is increasingly important. Many of the so-called individual or household investors are coming to Pax through institutional investment platforms, such as through an option for pension funds, through personal financial planners and investment adviser recommendations, and through platforms provided for investors through larger financial players, such as Schwab, Fidelity, Merrill Lynch, and UBS. Increasing Pax World’s institutional presence is not a question of retail or institutional because the two are integrated.

An increasing number of large institutional investors and the major consultants that work with them are incorporating SRI into their portfolio as evidenced by the significant increase in SRI recently. Individuals tend to either invest directly or, now more often than not, they invest through a broker, financial adviser, or a financial planner. And individual brokers and financial planners tend to be individuals who have to do a lot of research on their own, and they don’t necessarily have all the most recent findings on SRI performance. Thus on the individual and household investment side, Pax World growth is being driven a lot by the investment advisers as the intermediary to the end customer. Pax World’s task then becomes to convince a financial planner to include Pax World in what they recommend to their client.

On the “pure” institutional side, Pax World continues to have religious institutional investors and pension funds. Looking forward Pax World plans to attract more and more investment from institutional investors because the institutional investment world is ahead of the individual investment world in embracing sustainable investing in many respects. There are reasons for this, including having the track record of performance being similar to traditional funds. As Keefe commented, “Eventually, individual investors will catch up, but institutional investors in general are ahead of the curve right now in embracing our investment approach. Institutional investors study market trends. They have a lot of research and data at their disposal, and they’re seeing a lot of the research, a lot of the data, that underscores the materiality of ESG, or the financial relevance of environmental, social, and governance factors.”

Even with all the positives for Pax World and the more general acceptance of SRI-like funds, many believe that it will still require the next generation of investors to have Pax World and SRI get closer to 50 percent of mutual fund holdings. Personal investments are “sticky”—they don’t change that easily. And the SRI approach to investing, incorporating the ESG into the analysis, is very different from the traditional approach.

But the data show high growth recently, suggesting the hockey stick model of growthDescribes a pattern in which an industry or a company’s revenue or sales start off at a low level and grows slowly over time, sketching in the blade of the hockey stick. Then, if all goes well, at some point, growth starts to increase more rapidly, creating the upward curve that is the stick’s neck. And then, if the industry or company is really onto something, revenue takes off and growth becomes almost vertical; that’s the handle of the stick. might be at work. There are two things going on. The first is that the generation of baby boomers is inheriting wealth from its parents. And that generation is more likely to want to have some alignment between its values and its investments because they are the ones who grew up during the Vietnam era. Second, you go to the generation behind the baby boomers, and according to Keefe, “they are even more inclined toward concern about the environment and SRI-type-investment, because the notion to them that your investments can be somehow out of whack with the rest of your values and the rest of your lifestyle does not make sense. They want to have that alignment. When we were growing up, certainly our parents’ generation, but to some extent ours, would say something like, well, great, but your investments should just be making money. Then, if you want to change the world, give it to charity. Get involved in your community, protest. Now investing and values needing to be integrated into their investment decisions by boomers and others, and this is the hockey stick—SRI is ramping up fast.”

As the SRI industry grows and its prospects look more promising, the traditional mutual fund companies are moving aggressively into SRI. This is happening through traditional families of funds starting new funds on their own or acquiring existing SRI funds. With this trend, Pax World could get purchased or lose market share within the SRI industry to the larger mutual fund company participants.

It is increasingly important for Pax to differentiate what they do. This was accomplished with the adoption of the sustainable investing approach in 2006. And Pax World has added new funds that are innovative, including the Global Women’s Equality Fund, which is the only mutual fund in America that focuses on investing in companies that treat women better, that invest in women, and that recruit and promote them. Pax World added the Global Women’s Equality Fund because of their belief that there are connections between having more women in management and more women on your board and financial performance.

On the issue of women’s equity and other issues, Pax World also differentiates themselves from traditional mutual fund companies by its many investor initiatives. With regards to women’s equity, this includes collaboration with the United Nations Principles for Responsible Investment (UNPRI) and the Calvert funds to encourage greater gender equality on boards of directors and in senior management and to promote improved disclosure. (As of 2011, only 13 percent of Fortune 500 board chairs are held by women.) Pax World launched a campaign to promote greater gender diversity on corporate boards by encouraging investors to vote no on proxies for board membership that did not contain a sufficient number of women. During the 2011 proxy season, Pax World withheld votes from, or voted against, 264 director slates for insufficient gender diversity, sending notification letters to those companies explaining why and offering guidelines to improve diversity.

Pax World is an increasingly active shareholder representing investors with proxy votingParticipation in the company’s annual general meeting via mail, phone, or Internet. It is the primary means by which shareholders are able to direct company management to act in a socially responsible manner.. During the 2011 proxy season, Pax World also signed on to eighteen environmental initiatives, many of which focused on the oil and gas industry. For example, Pax World joined other investors in writing to oil and gas companies engaged in offshore oil drilling, requesting information regarding the companies’ policies and programs to manage operational risks and steps taken to improve them.

Pax World has participated in multiple initiatives led by Ceres (a national coalition of investors, environmental organizations, and other public interest groups working with companies to address sustainability challenges), encouraging Congress and state legislators to take action on environmental standards. These included decreasing emissions of air pollutants and greenhouse gasses, passing comprehensive clean energy legislation, and urging the EPA to raise fuel economy standards for motor vehicle fleets.

Pax World also joined with other investors in the Investor Network on Climate Risk urging California voters to oppose Proposition 23, a statewide ballot initiative that would have stopped implementation of the state’s landmark clean energy bill. The proposition was rejected in the fall 2010 election. In addition, Pax World signed on to an initiative led by the organization As You Sow, urging companies to take responsibility for recycling postconsumer product packaging. The companies receiving the letter included General Mills (whose share holdings represented 1.8 percent of the Pax World holdings in the Growth Fund), Procter & Gamble (1.4 percent of the Growth Fund and 0.9 percent of the Balanced Fund), and Unilever (1.6 percent of the Global Women’s Equality Fund and 1.9 percent of the International Fund). Pax World also cofiled a shareholder resolution led by Domini Social Investments with Southwestern Energy (1.4 percent of the Growth Fund) requesting that the company publish a report on the risk of hydraulic fracturing as a means of obtaining natural gas. The company agreed to improve its disclosures and work with stakeholders to develop a model disclosure format for other natural gas firms; the resolution was successfully withdrawn.

Pax World’s focus looking forward is not as much on their SRI industry competitors, like Parnassus, but on growing the overall SRI market and changing corporate America. Their main competitors looking forward are Fidelity Investments, Vanguard, T. Rowe Price, and others of the large traditional mutual fund families whose investors are increasingly likely to move at least some of their assets to an ESG-like investment approach. In many respects, Pax World’s main challenge is to try to win those people over who are not familiar or were previously not comfortable with sustainable investing and to try to convince people that their values do not have to be compromised when it comes to their financial investments. And this will require strong financial and ESG performance at Pax World, particularly with evidence that companies with better ESG performance have better financial performance.

As Keefe commented, “There are studies suggesting that, over time, funds and investors that use the ESG approach do better than the market. And I believe, over time that will clearly be the case.…I think once you start measuring up 10-year track records versus 10-year track records, I think you’re going to see that this investment approach holds up very well.…there’s all kinds of research now suggesting that environmental, social, governance factors are relevant.…over time, we’re going to be able to convince more and more people of that.”

And for Pax World, if they grow, they can have greater societal impact—with the company’s business success and societal impact being intimately tied together. For Pax World, there are opportunities to change corporate behavior on greenhouse gas emissions and climate change, on gender issues, and on all kinds of social and environmental issues that will help markets produce better outcomes. But to do that, Pax needs to grow its asset base.

Europe certainly is ahead of the United States right now in embracing sustainable investing. In fact, most of the governments in Europe, for their own government pension funds, have a mandate for it. But Pax World would have to get licensed in Europe and it’s a complicated and costly process. The company would have to launch new entities and they are not like Fidelity and some of the larger mutual fund companies that are large enough to establish themselves outside the United States.

According to Keefe, “The main opportunities for us right now are, one, opening up conversations that were hard to open up before in the US, with investment advisers, the intermediary platforms, and institutional investors. Those conversations are starting to happen now. In fact, we have a hard time keeping up with it all.”

To open up these opportunities, Pax has newsletters and their own marketing and sales teams to e-mail and visit the financial planners and financial advisers. The company also does webinars and podcasts. There are also opportunities with particular demographic groups, such as female investors. With research showing that women are more likely to want to align their investments with their values than men (http://www.northerntrust.com/wealth/11-summer/women-in-wealth.html). Research shows that women are controlling a larger share of investment dollars. On the institutional side, there are opportunities with private foundations and their endowments and pension funds. The strategy is to launch the products that the investment community wants, to attract investors, and to communicate with those investors, which often is through their advisers and intermediaries.

The biggest challenge for Pax World continues to be overcoming the conventional wisdom in the financial industry that if you base investments on moral values, you’re going to have to significantly sacrifice financial performance in order to do the right thing.