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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, because we’re a mutual fund company…I would say the number one component critical to our success is the financial performance of our funds. We have a fiduciary obligation to our shareholders to try to get them market or above-market returns and to manage their risk. So that’s fundamental to what we do.…If we grow, we do two things. First of all, we are successful as a business. And we are a business, so we’re trying to make money and make a profit. But we also are a mission-driven business, and as we grow assets, not only will we become more profitable and successful from a business perspective, but we will have more impact. And that’s what, ultimately, this has to be about. We want to change corporate behavior. We want markets to produce better outcomes, not just financially, but from a social and environmental perspective. And the larger we get, the more leverage we have, the more we can change investor behavior, and the more we can change corporate behavior.
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.
SRI market analysis.
Table 12.4 All Balanced Funds
|Morningstar Category||1 Year||3 Year||5 Year||10 Year||Equity (%)||Bond (%)||Cash (%)|
|Number of funds||506||458||403||257||531||531||531|
Table 12.5 All SRI Balanced Funds
|Morningstar Category||1 Year||3 Year||5 Year||10 Year||Equity (%)||Bond (%)||Cash (%)|
|Number of funds||30||23||23||14||30||30||30|
The previous charts show the financial performance of all balanced mutual funds versus only SRI-balanced mutual funds (including Pax World) for the period ending September 30, 2011. Compare the one-year, three-year, five-year, and ten-year financial performance of the two different categories. Does this evidence support or refute assertions that SRI funds outperform the overall market? What might be some reasons for the difference in performance? How does this example compare with other examples of SRI performance in the chapter? What conclusions can you draw on the comparison? What are the implications for the future growth potential of SRI funds and Pax World funds specifically?