Empowering the Socially Responsible Investor

From Investing in Responsibility, Published by Global Panel Foundation, 1999

"I am an advocate," says Amy Domini by way of introduction. "For fifteen years, I've been actively advocating the integration of social or ethical criteria into the investment decision-making process."

This is a meager description of somebody who has become a recognized force in socially responsible investing. A past board member of the National Association of Community Capital - an organization that finances grassroots, economic development initiatives primarily in America, but also throughout the world - Ms. Domini now serves on boards and committees that specifically concentrate on achieving social responsibility. The Interfaith Center on Corporate Responsibility, based in New York City, for example, represents an interfaith initiative to use the rights and powers of shareholders in US corporations to enter and direct dialogue with other corporations as a means to carry their mission into the financial market.

But Ms. Domini is undoubtedly best known for her activities in those companies that bear her name.

"At Domini Social Investments, I'm a principal and the president of the mutual fund, Domini Social Equity fund. At Kinder, Lydenberg, Domini (KLD) - a sister organization which I founded together with Steve Lydenberg and Peter Kinder - I am, however, the majority shareholder. KLD created and maintains the Domini 400 Social Index, the benchmark for socially responsible investment portfolios. The organizations differentiate themselves in terms of mission. Our mission at Kinder, Lydenberg, Domini is to remove the barriers to socially responsible investing and at Domini Social Investments we empower socially responsible investors by providing the tools to help them achieve their goals."

From Ms. Domini's perspective, the field of socially responsible investing encompasses three basic areas:

1. Managing portfolios with screens (not financial screens, but rather social screens) .
2. Direct dialogue with or education of shareholders and corporate leaders. It is done primarily through the shareholder resolution initiatives.
3. Support of community development investments.

Screening

"The first area we view as strategic. Socially responsible investors who demand corporate accountability information in order to make informed screenings of portfolios possible have created an infrastructure that never existed before. There is ongoing baseline, system-wide information on the corporate impact on society over multiple issue areas that roughly translate into constituency areas. But on the issues of product safety, employment practices, and diversity, it profiles the communities in which they operate and the impact beyond their national borders and the natural environment."

Clarity, innovative programs, and inventiveness

Ms. Domini believes that this is not necessarily as new a concept as some people may think. "In the United States, we have a deep history of running investments in a manner that is consistent with morals. For example, we have avoided alcohol, tobacco, and gambling for faith reasons (depending on your faith). During the early seventies there was an initial environmental movement in America and concerned environmentalists added nuclear power to it.

"But as the seventies and eighties evolved and the divestment of American corporations doing business in South Africa evolved, so did our thinking. Socially responsible investing grew away from avoiding certain things toward seeking to define the role of the corporation in society and trying to establish what we call 'Bellwethers'.

"Bellwethers" are indicators of something beyond themselves. For example, an issue such as clarity or transparency would be considered a qualitative standard, which is systematically ascertainable.

"Whether or not a company has a routine report on environment or on equal employment is ascertainable information. It is something that is quite concrete or quantifiable, you can see it and compare it to similar reports and see how effective it is. Significantly, it is a rare company that is committed to ongoing publication on any issue area and has a management team, a board of directors, and an infrastructure in place to evaluate that ongoing issue.

"We also look at these 'Bellwethers' for innovative products. One of our key interests is in companies that have taken on as a profit center something that previously was considered a societal cost. We will give extra marks to innovative products that address issues that society has been unable to answer. For example: a bank may have a particularly strong community lending to severely disenfranchised populations. If it sees ways of turning these into a profit center while also alleviating poverty in their geographic zone, then we would consider that a good example.

"I think it is important to understand that we use these positive screens to discover standards that are systematically ascertainable (number one), quantifiable (number two), and significant (number three). If a company provides 1.5% of pre-tax earnings to charities for each of the last three years - and we are talking about approximately 11% of companies in our universe - it is information that is ascertainable even without the companies' help. In most cases it is quantifiable - do they or do they not - and it indicates a company that has a commitment to charitable giving. From that you can pretty much assume a commitment to the communities in which they operate - whether they define those geographically or by any kind of constituency group."

An example Ms. Domini mentions is that of Johnson & Johnson. It donates one million dollars each year to an 800 hotline for battered women. That is a different constituency than some companies would define as constituency.

In order to be ongoing in that level these benchmarks all try to capture the 10% best or worst.

"In our universe, none of these benchmarks guarantee a company as on or off the index. All of them are quantitative ways of allowing the research process to go forward by allowing the researcher to compare apples with apples across an industry group so that at a certain point human intervention can take place. Someone could look at the picture, stand back and say: 'Yes, this is one of the better half of companies.' Therefore, this company is worth considering the next time we have a spot in the Domini Social Index."

Women, minorities, and individuals with disabilities in the Boardroom

"There is a very big difference between America and Europe on diversity issues. When we originally launched these 'Bellwethers," diversity was considered part of employee relations. But diversity can go beyond employee relations. It can go to where you purchase your goods and services. Also, you can have a very solid employee relations profile and no diversity. So, we eventually decided to make it a separate issue.

"In the United States, you're looking at a workforce that is roughly 70% non-white. So if you have an environment that is racially hostile, you are obviously losing an opportunity to draw on seventy percent of the talent pool. We have a negative that is a corollary to the positive. The negative is zero when minorities or individuals with disabilities are on the board - roughly ten percent of the companies that we have in our world can claim a zero rating. I think here is a good example of how the 'Bellwethers' work: if there is nobody there, you pretty much have to have a hostile environment. If, in the United States, you have never appointed a woman or member of a minority to your board, then that in itself is a statement.

"Microsoft lost their only woman on their Board of Directors. They did not propose a new woman to take that slot - and that's pretty extraordinary. Bill Gates always had a reputation for not being too sensitive on this issue. That lack of diversity on their board would indicate that although great strides have been made there on that front over the recent past - let's say the last four years - there still is a lack of commitment, at the top, to diversity.

"The other extreme - a company where you can see a positive commitment with four seats or a third of the total board - is also significant and rare. Less than ten percent of our listed companies would fit into this category. But generally speaking, this percentage is creeping up to around eight percent. One, two, or three percent is business as usual and typical for companies. So when we see a concern or strength on the number of board members we view as significant, either there was a truly hostile environment or there was a truly strong initiative to bring different voices into the boardroom.

"So strategically, the single most important thing that socially responsible investors do, is to create this kind of corporate impact research. The research process we collect independently. Then we give corporations our audit and give them an opportunity to deepen our understanding of their profile or offer new information so in and of itself, it's an educational tool for the corporate management team."

In May 2000, the Domini Social Index celebrated its tenth anniversary. Throughout this period, a network of good connections and relationships for dialog has been carefully developed. And the index provides solid information on which socially responsible investors can base their investment decisions.

Activism

But there is a second arena that can also be significant for socially responsible investors or direct dialogue through shareholder initiatives and this may take the form of boycotts, letter-writing campaigns or other types of direct action. All this is much more tactical and is a way of dealing with emerging issues. The social-screening criteria, as it stands at the moment, does not address of sweatshop issues, US impact abroad, or the impact abroad of US-based companies. That is primarily because there are no adequate system wide, ascertainable, quantifiable and significant datapoints to collect in that area.

Ms. Domini recognizes how important these issues are for socially responsible investing.

"Human rights watch groups or groups that are concerned about sweatshop issues abroad are very keen to have corporations enter into dialogue with them to help define some terms so that eventually we can sort the weak from the strong. A mutual fund can be a strong social change vehicle: a) our investors create the demand for the research and b) we are in stock, so we are able to file resolutions with companies.

"We filed for three years on the sweatshop issue with Disney. Disney has over 2000 vendors from which they purchase things from abroad. It is not reasonable to expect that there are going to be system-wide spot-checks, periodically, at 2000 vendors in multiple nations. But maybe that is more Disney's problem than our problem. Maybe the board needs to understand the human cost of this business model and come up with a different solution.

"One of my fears is that as we go global, we continue to see the merger model where the US pay scales are kept in place and the government moves to a place where direct dialog with corporate leadership is much more difficult. Shareholder activism is tactical in nature. It's for dealing with the emerging issues. It took fifteen years of shareholder dialog before South Africa led to divestment of American corporations doing business there. That life cycle might have shortened to ten years today, but it hasn't shortened to two years."

Community Economic Development

"The third area on our Social Index Fund, the Domini Social Equity Fund, cannot really invest in communities since it is an equity fund and that is a dead process. But we have another product at Domini Social Investments that is the Domini Money Market Account at South Shore Bank. Shore Bank is the nation's oldest and largest community development bank. We do all the bookkeeping for them with lists of who the end depositor is and we do their sub-accounting so they have a single large deposit from us. It is now about $22 million and it has been a very steady grower for them. So they have been able to move away from the 2.5% interest rate that they would pay if our shareholders came in the door to a floating rate that is now at 4.8% that is directly competitive with money market mutual funds. More importantly, it is an insured deposit into building healthy communities.

"They Money Market Fund started four years ago, but it has quadrupled in assets since we were able to go to the market rate in interest about six months ago. Financial service providers are in a particularly logical position to be part of the answer to investing in sustainability."

Caring investors

Six trillion dollars are now invested in mutual funds in the United States. The investors are primarily small investors. And they are in many ways two or three steps removed from the corporation they are investing in. They don't get the annual reports. They don't have an opportunity to vote their own proxies and they probably don't even know the names of the companies in which they have invested.

"We are an investment mutual fund company, so when we walk in the door we represent caring investors. All of our investors are in there for one reason: We ensure a dialogue with management clearly concentrates on what it is to be responsible corporate citizens. It is the main reason our shareholders have come to us.

"Our scale also allows us to be very innovative for our shareholders so that we can provide them with something that they couldn't do themselves. It is not reasonable to expect that a shareholder is going to be an activist in 400 companies. But we can be an activist in all these companies on their behalf. It is not reasonable that they take a large portion of their savings and put them in below market instruments. But we can turn them into market rate instruments. It is not very logical that they are going to be able to construct a dialogue of infrastructure of corporate accountability information from which activists, corporations, government, and all different constituencies can draw. But we are going to implement that infrastructure for them. We couldn't do it without them. We couldn't do any of those things without them. Our mutual fund's mission is to empower the socially responsible investor."

A stronger sense of a social safety net in Europe than in the United States

Amy Domini recognizes that a global market implies a far greater challenge for her investment fund. And she is actively involved in plotting local differences within the global picture. "Initially, conversations I've had with people in Europe with regards to socially responsible investing stimulated my interest to focus on the global landscape. I've been attempting to learn more about Latin America, Asia, Africa, and Australia as part of my quest in going global. It is important to understand the goals of socially responsible investors. If I may speak for my investors, it is to be part of the creation of a just and sustainable economic system.

"When people look to America and say that we have such a big industry there, we're less than one half of 1% of the mutual fund industry. We are not such a big industry there. But we have a pretty big voice because we represent the activist portion of that industry. Plus we are growing. I think it is fair to say that we are one of the very fastest growing sectors of the financial service industry. Domini Social Investments is the ninth fastest growing mutual fund in America. So that puts us very clearly on the radar screen."

Europe has a leadership capacity that is void in America

"I am convinced that Europe can make an important contribution to a global financial industry that is dedicated to serving the needs of socially responsible investors. In Europe there is a willingness at the highest levels of government and corporate leadership to talk about issues of ethics, sustainability, the right to do, and the goal of civilization. These are ideas to which a politician in America may occasionally give lip service. But you rarely hear a corporate leader even mention them.

"In Europe there is a presumption of caring for the less fortunate people. Even in the poor countries in the south of Europe, you have a much stronger sense of a social safety net than you have in the United States. People in the United States have become very comfortable walking past beggars as they go to work in the morning. I don't see that yet in Europe.

"In the United States, we define the standard of living as having four television sets. We don't define it as the ability for two women to sit in comfort and safety in an open space and have a beer together in the evening. In Europe, there is a much greater awareness of lifestyle. The gentler pace of life has been the definition of the standard of living.

"What you don't have in Europe is the mechanics of the financial service industry that we have in the United States. You don't have small investors. This is partly due to the very sufficient retirement system that historically has been in place. It also partly grows out of a certain disdain for chasing the dollar, or country currency in this case. We have no sense of this mindset in America. We are very eager to chase the dollar. But the European financial service industry is going to be rapidly moving toward a more US system, in part because there are concerns about retirement and in part because people are buying into the myth that with four television sets you have a better life than your neighbor.

"I hope that Europeans will do those things without giving up on the other aspects," continues Ms. Domini thoughtfully. "I believe that Europe has a soul that can enrich the social investment industry in America and a leadership capacity, coming from the top, that is void in America. In America we have some good mechanisms in place. Ideally, I hope that cross-fertilization will take place. I'm hoping that in Europe - and this will play out even more strongly as you go to the rest of the world - the so-called socially responsible investment industry will not become an environmentally insensitive industry.

"You can have a healthy and prosperous planetary environment and still have a lack of justice. So I am hoping to bring the 'voice of justice' into mutual funds as they grow up in non-US settings."

Making the world better with human dignity

"In Japan I know of five environmentally screened mutual funds where there is no justice component built into the process. They are quite popular and they build assets much more quickly than the American funds I have known. I need to understand why. But I want to be part of the global discussion on what the responsible asset manager can do to build a just and sustainable economic system. Economics is an important component in this global discussion. Finance was originally created as a means of stimulating economics, not as a means of enriching individuals.

"I believe that corporate leadership would like to make longer term decisions that are also more in keeping with a personal code of ethics. Individuals are making the decisions, but they are receiving input from only one constituency - their shareholders. My belief is that if we can build the constituency to 10% socially responsible shareholders, we will be an important enough voice to alter the equation. We will be able to say: 'Yes, make profit at any price' with one caveat: 'Make the world better for the next generation.' And better not only in terms of clean water and clean air, but also in terms of human dignity. These are the goals of socially responsible investing and that's why I am so passionately dedicated to this field."

The Internet: a testing ground for assumptions

For Amy Domini, the best invention of the last 100 years is the Internet. "We're becoming multiple voices and smaller voices looking for tighter, smaller communities. We have a multiplicity of voices that are emerging and it is emerging in an anthropological way. When I was a teenager there were only two kinds of teenagers, preppies and townies. Today we have a multitude of teenage groups that are differentiated by music, lifestyle, crime, clothes, and attitudes. We are searching for shared connectedness.

"The Internet is a system with an enormous wealth of data. But it does more: it provides us with an immediate feedback loop. If I were to stand up in front of an audience and say: 'We have a population problem. I have identified five-year-olds as the major danger group, and have therefore reached a decision that we should eliminate all five-year -olds.' I might get negative feedback from the audience. But probably they are going to be so astonished that I won't get any feedback at all. Certainly if they feel intimidated by the people with machine guns in the room.

"Now if I go on the Internet and say a thing like that, I'm going to hear from everybody. It is a great feedback loop. It is an absolutely wonderful place to test your assumptions. I see it as a model of what society is becoming - a rapidly evolving segmentation of different groups that are nevertheless able to co-exist because of some shared connectivity.

"With the Internet, you have a network which has tremendous human rights potential and tremendous environmental opportunities. For instance, when the war was going on in Kosovo, messages were e-mailed describing real time bombings and the information was simultaneously distributed worldwide. This source of information could only have been dreamed of during the Gulf war.

"Valid information is a key element. You cannot be a concerned investor unless you have information. From data comes knowledge and from knowledge comes action. So the end goal of data collection is to create knowledge. And the end goal of the knowledge collection is to create action. The source of data collection through the Internet can help to empower the socially responsible investor."