The money behind the Newtown massacre

December 18, 2012, 12:32 AM UTC

FORTUNE — Do you know who owns more than a 6% stake in the maker of .223 Bushmaster rifles, like the one used last Friday to murder 20 first graders and seven adults in Newtown, Connecticut? California public schoolteachers.

The company in question is Freedom Group, a privately-held firearms conglomerate formed by private equity and hedge fund group Cerberus Capital Management. Cerberus created the platform in April 2006 via the acquisition of Bushmaster, after which it added another 10 makers of firearms, ammunition and accessories (including Remington, Marlin Arms and Barnes Bullets).

The California State Teachers’ Retirement System (CalSTRS) committed to invest a whopping $500 million into a $7.5 billion Cerberus fund that has helped bankroll Freedom Group. That means that it effectively could own a 6.67% stake in the gun maker, which filed to go public in late 2009 before pulling the offering in early 2011. In fact, the figure could be even higher since CalSTRS also committed $100 million to a $1.4 billion predecessor fund, which likely made the original investment.

[Update: CalSTRS said Tuesday afternoon that it owns 2.4% of Freedom Group, and I have requested an explanation of how they arrive at that figure.]

What I honestly don’t understand, however, is why. Check out the following part of the pension system’s statement on investment responsibility:

Non-economic factors will supplement profit factors in making investment decisions. Non-economic factors are defined as those considerations not directly related to the maximization of income and the preservation of principal. The consideration of non-economic factors is for the purpose of ensuring that the Retirement System, either through its action or inaction, does not promote, condone or facilitate social injury.

Does Freedom Group not facilitate social injury? I’m not suggesting that social injury is its mission, but it certainly is a foreseeable consequence.

Moreover, CalSTRS has identified 21 risk factors “that should be included within the financial analysis of any investment decision.” Here is the one titled Human Health:

The risk to an investment’s long-term profitability from business exposure to an industry or company that makes a product which is highly detrimental to human health so that it draws significant product liability lawsuits, government regulation, United Nations sanctions and focus, and avoidance by other institutional investors.

Pretty sure the manufacture of semi-automatic rifles would apply here as well.

To be sure, there is a difference between buying a listed company’s stock and investing in a private equity fund that promises to build out a diversified portfolio. Direct versus indirect. But it also is true that certain institutional investors either, (a) Only invest in private equity funds that pledge not to make certain types of investments (e.g., firearms, tobacco, etc.), or (b) Insist that its money be carved out of any such offending investment, so that the institution does not become an indirect shareholder.

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Unfortunately, CalSTRS has not taken either tack.

“Clearly you can make a case that this company’s products fall within the 21 risk factors, particularly the one regarding human health,” says CalSTRS spokesman Ricardo Duran. “But there are a lot of products that can be used responsibly or irresponsibly, and in this case it was used irresponsibly… Now that a tragic event like this has occurred, I’m sure that it is something that we will be discussing going forward.”

When I followed up by asking if CalSTRS had such a discussion after a Bushmaster rifle was used in the Aurora movie theater shooting, Duran said he did not know. Also worth noting that Cerberus itself is not returning requests for comment.

There has been a lot of talk in the past several days about how to prevent the next massacre, with suggestions ranging from strengthened gun control legislation to improved mental health infrastructure. And, for the record, I support both.

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But I also think that it’s time for our large nonprofit institutions to put some of their money where their mission is. Profit should be the primary goal of their investment offices, but not at the expense of their broader purposes. If a schoolteachers union or university endowment or nonprofit foundation truly cares about stopping the next mass killing, then they should not provide capital that produces the instruments of such destruction.

For many gun enthusiasts, semi-automatic rifles like the .223 Bushmaster is about sport and individual liberty. For Freedom Group, they are about profit. If the company were unable to find private investors unless it changed internal policy — perhaps by only supplying such weaponry to police departments and military — then Freedom most likely would do so. Capital is, of course, the root of capitalism.

Cerberus did not return repeated requests for comment. Also not commenting was private equity firm Bruckmann, Rosser, Sherrill & Co., which sold Remington to Cerberus and still owns firearms peripherals company Magpul Industries.

UPDATE: Cerberus announced at 1am on Tuesday that it plans to “immediately engage in a formal process to sell… Freedom Group.”

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