Basics of Responsible Investing
Responsible investing incorporates social and environmental criteria into the investment decision-making process. It uses finance to create a more fair and sustainable world. By making sustainability part of your investment decisions, you can encourage corporations to act more responsibly and also channel capital to community economic development.
The investments we make today shape the world we will live in tomorrow. If our investments are made without consideration for social or environmental impact, the result will be a continual slide toward rewarding that which is profitable at the cost of that which is life-enhancing.
By creating an incentive for greater transparency by corporations and rewarding forward-looking management, responsible investing helps ensure continued growth in the financial sector is accompanied by greater stability. It also helps turn the financial industry from a threat to our future into a potent force for the creation of a world that offers peace, justice and a livable planet.
Principal Strategies of Responsible Investing
The three basic aspects of responsible investing, as practiced by our firm, are:
- Applying social, environmental and governance standards to investment portfolios
- Engaging in direct forms of advocacy on social, environmental, and governance issues
- Investing in community development initiatives
As a responsible investor, you may use some or all of these practices in addition to financial factors. While each has a different purpose and impact, each strengthens the impact of the others.
Making a Reasonable Return While Making a Difference
Remember, just like traditional investors, responsible investors can earn money or lose money on their investments. No investment strategy can guarantee a positive return.
Applying social and environmental standards, however, does not have to mean sacrificing performance. In fact, it may help identify companies with high quality management, positive corporate cultures, and socially and environmentally beneficial products built to last. Investment gains and losses can be impacted by many factors such as market cycles, specific events, and investment strategy. All factors, along with personal investment goals and time horizon, should be considered when selecting an investment.
Responsible investing has contributed to building a more sustainable world and the alleviation of suffering. Responsible investors recognize the difference between making money honestly and profiting at the expense of our children, neighbors and natural environment. Responsible investors have convinced numerous companies to improve their policies and practices. We have helped construct a framework to evaluate companies and encourage them to help solve the most pressing societal problems.
Motivation for the Responsible Investor
Investing is a purchasing decision. Caring about it is like caring about what you eat or how you choose to lead your life. For example, if you are a high school teacher, you may not wish to invest in alcohol manufacturers that advertise to youth. If you support environmental causes, you will want to pay attention to the environmental impact of the companies in your portfolio. This desire for consistency with your personal values is a common reason why people start down the path to responsible investing.
Companies to Avoid
Many responsible investors avoid companies substantially involved in:
- Military weapons, including nuclear weapons, land mines and cluster bombs
- Tobacco, gambling, and alcohol
- Nuclear power
Our investment portfolios seek to exclude all of the above. We also seek to avoid companies with patterns of environmental harm, substantial worker safety violations or human rights abuses, or major consumer product controversies.
Of course, not every responsible investor cares about, or agrees with, every avoidance standard. You might feel a strong military is a good and necessary thing. Or you may view alcohol consumption as a relatively benign personal choice. Responsible investors recognize their investment choices are not lifestyle choices. For instance, you do not have to be a teetotaler to be concerned about the pervasive role of alcohol products produced by large publicly traded companies in the lives of teenagers.
Responsible investors believe products that are addictive or potentially harmful should be treated with exceptional care and should not be aggressively marketed or sold indiscriminately by large public corporations whose only goal is profit. Similarly, you do not need to be a pacifist to want to seek the dismantlement of nuclear weapons arsenals or the elimination of land mines. By avoiding certain industries, you are calling attention to important societal problems that still need to be solved.
Companies We Emphasize
At Domini, we seek investments that promote universal human dignity and environmental sustainability. We also recognize that no company is perfect, and are therefore willing to invest in companies that may have significant controversies from time to time. We favor companies that have strong relations with their stakeholders, including companies that invest in their employees, set high standards for their suppliers, serve the greatest needs of their local communities, manage their environmental affairs responsibly, and monitor the human rights implications of their activities.
To learn more about responsible mutual funds in the United States, check out The Forum for Sustainable and Responsible Investment (US SIF) and SocialFunds.com. Responsible investing is now a global phenomenon, with resources for investors in Europe, Asia, the United Kingdom and Canada.
For research into individual companies, visit their websites to view corporate social responsibility (CSR) reports. How to Read a Corporate Social Responsibility Report: A User’s Guide is also available.
Learn more about how Domini applies social and environmental standards to our mutual funds.
What is Shareholder Activism?
As a shareholder, you can have significant influence over the management of the companies you invest in. Because we recognize that even responsible companies face numerous social, environmental and governance issues day to day, we use our leverage constructively through letter-writing, direct dialogue, proxy voting, and the filing of shareholder resolutions (also known as “shareholder proposals”).
Investors in publicly traded companies have an opportunity to vote on a variety of important matters at each company’s annual meeting. In the United States, you have the right to place your own issues on the ballot for fellow shareholders to vote on. These “shareholder resolutions” have been a critically important tool for holding corporations accountable on a wide range of issues, beginning with the civil rights movement in the 1960s and the fight against apartheid in South Africa.
Shareholder activism makes corporate managers aware that you want real change and thoughtful long-term management, as well as profits. Corporations do not generally hear about social and environmental issues from their shareholders, providing an excuse to ignore these issues. Responsible investors have helped to change that.
Shareholders file resolutions for the long-term well-being of all stakeholders. By convincing a global company to reduce its impact on the environment, everyone—including investors—stand a better chance of growing old on a planet with breathable air, drinkable water and healthy food. The corporation may also benefit by saving money on energy, reducing the risks of environmental fines, consumer boycotts and community opposition, and by better positioning itself for a low-carbon future.
Shareholder resolutions help keep these issues on the agenda, even when companies do not want to talk. In fact, many companies have been prompted to come to the table to discuss solutions to problems after receiving a shareholder proposal. Corporate managers often prefer to resolve these issues through dialogue rather than at their annual meeting.
How Your Mutual Fund Votes
When you invest in a mutual fund that holds stocks, your fund votes on your behalf at corporate annual meetings. These votes concern a variety of issues, including election of the board of directors, executive compensation, mergers and acquisitions and issues raised by other shareholders through shareholder proposals. Mutual funds are required to publicly disclose these proxy votes so that you can hold your fund manager accountable for this important responsibility (Domini was one of the organizations that asked the SEC to adopt this rule).
Websites like www.fundvotes.com and www.proxydemocracy.org can help you understand the voting patterns of your mutual fund manager. These websites demonstrate that responsible investing funds are more likely to vote against management, and more likely to support shareholder resolutions on social, environmental and governance issues than mainstream funds.
By placing deposits with community development financial institutions (CDFIs) including community development banks and credit unions, you can channel your money directly to projects that serve neighborhoods and regions of great need through the creation of, among other things, low-income housing, loans to small entrepreneurs, financial literacy, and the provision of affordable financial services for those who lack access to the mainstream banking system. Certain responsible mutual funds, such as the Domini Social Bond Fund, also provide this opportunity, by devoting a portion of their portfolios to these investments.
As of 2012, according to The Forum for Sustainable and Responsible Investment, responsible investors had placed some $61 billion in various community investing institutions.
CDFIs lend to at-risk populations, playing a crucial role in revitalizing communities, and providing access to financial services to many who would not otherwise be served.
They help finance low-income housing, transitional housing for the previously homeless reentering the workforce, safe housing for battered women seeking to rebuild their lives, loans for used cars so that single parents can get to work and back to care for their children, start-up enterprises that put the unemployed back to work and serve local communities, check-cashing and remittance services at non-extortionary rates and programs that encourage savings and establish solid credit ratings.
For more information about community development visit the The Forum for Sustainable and Responsible Investment (US SIF) and SocialFunds.com. For more information on community development banks see the Community Development Bankers Association and the National Community Investment Fund.
For more information on community development credit unions see the National Federation of Community Development Credit Unions. For more information on community development loan funds see Opportunity Finance Network.