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Your Money - Socially Responsible, With Egg on Its Face  

When the news broke late last month, it read almost like satire. The Securities and Exchange Commission had charged a mutual fund company that specialized in socially responsible investments with taking stakes in companies involved with alcohol, gambling and military contracting.

But it is a true story, and it’s the first time the S.E.C. has encountered this problem. Pax World, one of the oldest practitioners in the field of socially responsible investing, paid a $500,000 penalty. . . .

In the first half of the decade, Pax World had strict rules about what its mutual funds could not invest in, though they've since become a bit looser. The list of taboos included companies engaged in military activities, ones that derived more than 5 percent of gross sales from Defense Department contracts, and businesses that made money from liquor, tobacco or gambling. "The Funds' policy is to invest in securities of companies producing goods and services that improve the quality of life," its materials stated at the time.

The restrictions are known in the field as negative screens. When the S.E.C. showed up in late 2003 and 2004 to conduct a routine examination, it checked to see if Pax World was complying with the screens that it had outlined in its fund prospectuses. The examiners didn't like what they found, and they referred the matter to the S.E.C.'s enforcement staff.

Here's what the enforcement staff discovered later: 10 securities in 2 mutual funds -- the Pax World Growth Fund and its High Yield Fund -- violated Pax World's various negative screens. The fund managers had bought 6 of those securities even though Pax World had already screened the companies and placed them on the banned list.

The other four ended up in the portfolios without anyone screening them first, violating the fund's own rule that it had to review any securities that its managers wanted to purchase.

In an interview, Pax World's president and chief executive, Joseph F. Keefe, who joined the company after the transgressions occurred, seemed as surprised as anyone that Pax World employees didn't follow the rules. . . .

If you believe that sustainable investing is at least better than throwing up your hands and bringing no principles to your portfolio, an exchange-traded fund called the iShares KLD Select Social Index Fund is worth a look. While it does screen out tobacco firms, the rest of the index is composed of best-of-breed companies in other industries, based on seven criteria, including corporate governance and environmental standards.

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