A rethink on shunning sin

For as long as investors have been bringing moral concerns to bear on the stock market, two industries have loomed large as societal scourges to be avoided: alcohol and gambling.

But as the universe of socially responsible investing (SRI) expands and matures, debate is brewing as to whether traditional rationales for these age-old taboos still pass muster. As a result, the future of these bedrock criteria, embraced for decades by conservative and liberal investors alike, is increasingly uncertain.

"Alcohol and gambling have remained – until this year – standard SRI exclusionary screens across the industry," writes Peter Kinder, president of KLD Research & Analytics, in an e-mail.

But changes are afoot, he observes, as screens seem to be evolving away from categorical bans on these industries to what Mr. Kinder terms a "more normal appraisal" in which vice peddlers are held to largely the same standards as other businesses.

Later this week, Pax World Funds is expected to announce whether shareholders have repealed a 35-year ban on alcohol and gambling-related investments. The initiative stems from management's request for "flexibility to make decisions based on a company's entire social responsibility profile" with a goal of making "the social screens more relevant and meaningful in a changing world."

Observers say the Pax initiative, which could overhaul the oldest social screen used in mutual-fund investing, has kicked off some lively discussion within SRI circles about how to engage so-called "sin stocks." What remains open to debate, however, is whether investors' moral standards have shifted – perhaps amid pressure to earn bigger returns – or if strategies to influence corporate behavior are simply keeping up with the times.

Pax's initiative may not be unique for long. Although Calvert Social Investments has no immediate plans to review its sin screens, "the exact [screening] language that we've been living by for a number of years isn't necessarily carved in stone for eternity," says Bennett Freeman, the company's vice president for social research and policy.

Just as Calvert broadened its screen for weapons manufacturers last month to make it more flexible, Mr. Bennett says, "legacy commitments" on alcohol and gambling could potentially be revamped as part of a probable review of all social screens in the next two or three years. Meanwhile, other issues such as climate change and human rights enjoy priority.

"Alcohol and gambling are just not what we're looking at and working on every day here," Bennett says. "The significance of those issues has diminished as the whole universe of issues that we examine has expanded."

To be sure, alcohol and gambling still incur serious social costs. About 3 percent of Americans display signs of a gambling addiction, according to the National Council on Problem Gambling. Nearly 5 percent struggle with alcohol abuse, according to the National Institute on Alcohol Abuse and Alcoholism.

Even so, more SRI funds are likely to follow Pax's lead by reconsidering whether a hands-off approach to alcohol and gambling stocks still makes sense, according to David Vogel, a business ethicist at the University of California at Berkeley, and author of "The Market for Virtue." In his view, these screens reflect a value system that no longer resonates with most ethical investors.

Bans on "gambling and alcohol come out of more of those early religious roots," Vogel says. In the 1920s, Methodists began shunning firms whose stock in trade was to market one vice or another. In 1971, two Methodist ministers institutionalized those concerns (among others) when they founded Pax, the first publicly available SRI mutual fund.

"I can't imagine that there are many social investors now who believe that a company engaged in those two things is inherently irresponsible," Vogel says. If Pax drops its ban, "I think it might lead other funds to rethink their negative screens."

But others read a different message. Moves to make screens more flexible allow for more thoughtful analysis and better assessment of a company's overall social impact than a simple formula or industry ban could deliver, according to Timothy Smith, president of the Social Investment Forum, a network of socially responsible investment companies.

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