Editor’s Note: During the Vietnam War, two Methodist ministers started an investment fund that purposely excluded weapons manufacturers.
It was around that time, in the second half of the 20th century, that more women started occupying more senior level positions in the American workforce. Several decades later, Sallie Krawcheck climbed the ladder of high finance, becoming one of the rare women to make such high strides in a male-dominated industry.
Today, it’s not just the Lean In movement that’s encouraging more women to assert their voices in the workplace and take leadership roles in business. Businesswomen, like those in Krawcheck’s Ellevate Network, and anyone else can financially invest in other women and in women-led companies in the latest incarnation of socially responsible investing.
What those two Methodist ministers began is now Pax World, a New Hampshire firm that manages socially responsible funds, including the Pax Ellevate Global Women’s Index Fund, a partnership with Krawcheck’s network that invests in the world’s 400 most female-focused firms.
Pax World has other funds, too, that are targeted to a range of environmental, social and governance issues. As Keefe explains in the text of his extended conversation with Paul, edited and condensed below, he thinks firms that care about these issues will be more successful over the long term. The women’s fund, especially, as Krawcheck explained on this page, supports the kind of gender diversity business needs to thrive.
Social impact investing, like betting on companies that are gender diverse or environmentally sustainable, is not just a feel-goody thing, Keefe stresses; it’s about driving better performance over the long run.
— Simone Pathe, Making Sen$e Editor
Who invested in your company when it first started?
In the early days, it was religious investors — people opposed to the war, and probably within a year after they launched the fund, they thought, well, if we can screen out weapons, we can look at other things we disagree with. So they screened out tobacco. That was sort of the early days of socially responsive investing. It’s really transitioned since that time to what people call “sustainable investing” or “impact investing.” As opposed to screening out bad companies, or bad industries, it’s more about looking to invest in good companies, good industries, companies that are making a difference, having a positive impact. That’s really what we do now.
How big is social impact, or socially responsible investing, now?
It’s going mainstream, and perhaps the biggest reason it’s going mainstream is because of certain demographics. And I mean women, younger people – so-called millennials – who increasingly want their money to be making a difference. They want a fair return, but they also want to have a positive impact. They want their money aligned with their values. And that, I think, is driving the demand.
So, is this a reaction to the preoccupation in the business world with maximizing shareholder return?
Well, there’s nothing wrong with the concept of maximizing return over time. However, if your time horizon becomes so short that you’re maximizing return at the expense of other things, such as the environment, your employees, or your supply chain, then there’s something wrong with the system. And what sustainable investing is really about is taking a longer-term view. Companies, over time, should not only produce profits, but they should produce jobs that are good for their employees; they should produce positive environmental outcomes; they should be contributing to a better society. That’s what capitalism is supposed to be about — the markets are supposed to be working for the good of all.
MORE FROM MAKING SEN$E
In order to do that, you have to take the longer-term focus; you have to look at the great sustainability challenges of our age, be it climate change, or water, or pollution control — or gender equality. These are all critical issues.
So social impact investing is a reaction against short-term thinking?
Well, I don’t think there’s any doubt that short-term thinking and hyperactive traders – that a certain approach to markets contributed to the financial crisis and the long recession that we’ve been climbing out of ever since. There are a lot of investors out there who want to do business differently. They’re still spooked a little bit by the market. You know, once you’ve seen your 401K turn into a 201K, you never forget that. At the same time, though, I think investors are cautiously optimistic about the possibility of their money giving a fair return to them, but also making a positive difference in the world.
MORE FROM MAKING SEN$E
How do you determine what’s socially responsible?
What we try to do is take a “best of class” approach. So in any given industry, in any given sector, in any given region, we try to invest in the companies that have better environmental practices, better social and governance profiles, and that are better financially. We take everything that traditional financial managers look at, and then we layer on top of that a second level of research that looks into those companies: how they treat their employees, whether they have diversity on their boards, whether they disclose their greenhouse grass emissions — issues that we think are relevant to how those companies are going to perform over the long term.
But really sleazy companies could be doing very well, no?
If you take 200 companies that have better environmental and social governance profiles, and you run them over time against 200 companies that have lesser profiles, there’s no guarantee that one is going to do better than the other. But I’ll place my bet on the 200 that are doing a better job managing their carbon emissions, that are doing a better job promoting women into the corporate board suite, that are doing a better job managing the supply chain for human rights abuses and so forth.
Because those things, over time, affect share price and a company’s reputation. Those things, over time, are material. What I’m saying is that all the things that classic investors looked at — price earnings ratio, cash flow, and so forth, are still relevant, and we look at those too, but you’d better start looking at environmental sustainability as well. You’d better start looking at women’s equality because those things are going to play out in the company’s financial performance.
But the data are equivocal. Evidence is based on cross-sectional studies — not longitudinal, so you can’t tell if it’s causation or correlation.
There’s no definitive proof that any investment strategy is going to work over time. There’s now definitive proof that Warren Buffet’s will work in the future, as it has in the past. You have to marshal the best evidence you have, and the research suggests where women are better represented on boards, where women are better represented in management, where women are not only at the table, but in leadership positions, the companies simply perform better.
But it may be that it’s just better companies that are hiring more women.
That’s correct. But you should have a virtuous circle either way. Over time, those companies should do well because they’re more innovative; they’re more forward thinking; they’re taking advantage of what half the world’s population has to offer for crying out loud! The fact that, in this day and age, women only hold 11 percent of corporate board seats globally, it’s a travesty. And investors can do something about that, and we should.
MORE FROM MAKING SENSE
This really called for a fund – it called for a strategy, and we believe it really called for an index. And so we built an index, and we launched a fund that invests in that index. And now, as a result of that, you can make an apples to apples comparison between the market as a whole and the 400-something highest rated companies in the world when it comes to advancing women. We think, over time, that these companies are going to perform at least as well, if not better, than the global markets because of gender diversity.
So how did you create it?
So what we first did was take the MSCI World Index, which sort of like the S&P 500 for global developed markets, and we subjected that to some basic environmental, social and governance screening, and that reduced it to about 900 companies. Then we took those 900 companies and we graded them all based upon the number of women on the board, the number of women in senior management and factors like that. And then we took the top 400 of those, and those constituted the index. And those 400, it’s actually 406 companies that the fund invests in.
And the fund then does an additional screening to rank order them?
The fund invests in the same 406 companies that are in the index. But it’s slightly different weightings, because the index is a market capitalization-weighted index, meaning it starts from the largest company and it goes down to the smallest. In the fund, we decided to put even additional emphasis on gender leadership, so we weight the companies based upon women on their board and in management, so that a company that has maybe five women on its board versus a company that only has three would get some additional weighting for that.
The top 10 companies include Microsoft, Nestle, Xerox, Proctor & Gamble, Lockheed Martin — big, blue chip global companies.
Why do big companies do so well?
Well not all of them do, and not all the big companies are in this index. These companies are in the index and the fund because they’ve demonstrated leadership when it comes to advancing women. There are other large cap companies that aren’t in the fund. Again, this fund is about leadership. In this fund, 31 percent of the board seats are held by women. Ninety-seven percent of the companies in this fund have two or more women on their board, and almost 70 percent have three or more women on their board.
MORE FROM MAKING SENSE
How about the new generation of companies — the Googles, the Facebooks…
They’re in there.
So who’s number one?
In the fund right now, I think it’s Lockheed Martin that’s number one. I think Microsoft’s number three.
And why would Lockheed Martin, an arms manufacturer, be the most gender-diverse big company in the world?
Well, some aerospace companies are ahead of the curve on this issue. It depends on the industry, but Lockheed Martin happens to be an aerospace company that has a significant percentage of women on its boards and in management, and it’s just doing good things when it comes to gender diversity and advancing women.
We try to be responsive to different concerns that investors have. So we have two funds that are fossil fuel free because we know for a lot of our investors, their number one issue is climate change. Some of our investors, their number one issue is war and peace, so we offer funds without weapons in them.
So, no Lockheed Martin in that one…
Right, because we’re not looking at climate change; we’re not looking at weapons; we’re looking at gender diversity. This is a fund for people who want to place a bet and invest in that concept.
So the original test, though, that started this company, which is “Do you make weapons or not?” has not been applied in this particular fund?
That’s correct. There are a lot of issues in this community right now. We don’t see a one-size-fits all approach. You have to offer funds and strategies that are responsive to various priorities, various concerns, various values out there. And we think one driving concern right now around the globe is gender equality. And we want this fund focused on that issue, and that issue only.
Which fund are you most disappointed in?
Well, right now we have several funds that are beating their benchmarks, and a few funds that aren’t, and that’s the way it always is. And it’s different ones at different times. But over time, what I think people who follow PAX World specifically, but sustainable investing more generally, will tell you is that there’s no penalty to be paid in investing in this way. And in fact, over time, I think the evidence on the other side suggests that integrating environmental and social and governance factors into portfolio construction can help you lower risk and perform better over the long term. And that’s basically the investment thesis that animates all of our funds here.
But if you’re truly successful, and all the companies of the world adopt the strategies that you were trying to promote, you’re putting yourself out of business, right?
That would be a good problem to have.