Recently, after posting a column about BP and socially responsible mutual funds (See Social Funds and BP: How embarrassing!) I heard from Adam Kanzer, who is managing director and general counsel at Domini Social Investments. While Domini has never owned shares of BP, Adam and I began a conversation about the role of socially-responsible mutual funds. Adam, who has been in the fund business for 12 years, is a smart and committed executive, but we don't always agree, so we decided to engage in a dialog about social funds.

Marc Gunther: Adam, let's start with BP. Why did Domini exclude the company? Do you hold any other oil or coal companies?

Adam Kanzer: Domini has consistently excluded BP from our portfolios because of our concerns about their safety record. Our initial review followed the Texas City explosion in 2005, but our decision was quickly reinforced by the Prudhoe Bay spill the following year. We met with BP to discuss these and related issues with them. And each time we revisited BP, we found more violations.

We're looking to identify the key sustainability challenges each company faces. For the oil and gas industries, worker safety and environmental compliance are among a handful of core issues we consider. I should also note that we have consistently excluded Transocean and Halliburton, both of whom played a role in the Deepwater Horizon project. In addition we have also consistently excluded Massey Energy, the other current poster-child for disaster, as well as Toyota for substantial safety, employee relations and human rights concerns. We discuss these decisions on our website. And yes, we do hold other oil and gas companies, although we set a high bar for entry. We do not invest in companies whose core business is coal mining.

MG: Any thoughts on why BP was so widely held by other socially-responsible funds?

AK: As CEO of BP, Lord Browne made very important statements about the reality of climate change at a time when others in his industry were denying its existence. That was important. In addition, BP has been committed to transparency on its social and environmental performance. I can't speak for other firms, but I can see how those factors may have led some to hold BP. We felt that the safety and environmental issues outweighed these positives.

If a fund's benchmark is heavily weighted towards oil, then an SRI manager will need to consider that. This tyranny of the benchmark certainly led many to hold BP and other oil companies that in a perfect world they would have preferred to avoid.

Which brings me to the important question that I have not heard -- why did all of the so-called "mainstream" investors buy BP? Why did investors allow this company to become one of the largest in the world by market capitalization? At least social investors weighed these issues and came to a decision. The rest of the market acted as if there was no problem.

MG: That's an excellent point, and it makes me wonder why people pay mutual fund managers such high fees. They missed the housing and Wall Street bubbles, and didn't see or care about the safety issues at BP. Clearly most funds aren't very good at managing risk.

Turning to another topic, many SRI funds have their roots in the anti-war movement of the 1960s and 1970s as well as in faith-based investing. So funds like Domini exclude companies that make weapons, alcohol, tobacco and nuclear power. My question is, why? Let's start with weapons. Don't we need companies that make weapons in the post 9/11 era?

AK: First, it is important to understand that we divide those industries into two general categories -- companies that provide addictive products and services, and companies whose products contribute to geopolitical instability. We place military weapons manufacturers and nuclear power in the latter category. We do not consider investments in addiction and global instability to be productive uses of capital.

National defense is too important to be placed in the hands of the same system that brought us the financial crisis. When Eisenhower issued his warnings about the growth of the military-industrial complex, he wasn't questioning our need for a strong national defense. Yes, we need weapons, but do we need publicly traded companies manufacturing weapons? Are the capital markets an appropriate mechanism for providing these goods, or have the markets distorted our national priorities? That's a critical debate our nation needs to have.