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Evaluating Corporations

Each of Domini’s mutual funds is managed through a two-step process designed to capitalize on the strengths of Domini Impact Investments and Wellington Management. Domini establishes and applies the social, environmental and governance standards for the funds, and Wellington then uses proprietary analytical tools to manage the portfolio.

Our Research Process

Each industry carries its own costs and benefits to society. We have developed a matrix to help us determine each industry’s degree of alignment with our sustainability objectives.  You can see the spectrum of industry alignment in the diagram below.

We evaluate companies in two dimensions – its business model and the strength of each company’s stakeholder relations – how the company treats its employees and its customers, or how it addresses its environmental impact. 

A company that is fundamentally aligned with our standards will have a lower stakeholder relations threshold to cross than one that is partially misaligned.  For example, a solar cell manufacturer would be considered fundamentally aligned with our standards (last column in the diagram above) due to the ecological benefits provided by its core business model. Without severe stakeholder relations challenges, it would probably be considered eligible for investment in our portfolios. For a company in a more problematic industry, we set the bar higher. For example, partially misaligned industries include those that contribute to global warming to a major degree, such as automobile and truck manufacturers, and electric utilities. 

Some industries, like tobacco manufacturers and nuclear power operators, present such severe risks to society that we consider them to be fundamentally misaligned businesses, which are excluded from the Domini portfolios (first column in the diagram above). We do not believe the risks they present to society can be managed.

A bank may provide important benefits to society, but may have a poor track record of lending to the poor. Our ESG Review committee will want to know whether this is a pattern of behavior or a single instance.  How severe is the impact? How does the bank’s performance on lending compare to its peers? Does this problem warrant exclusion from our Funds, or should we keep an eye on the issue and contact the company? 

Key Performance Indicators

At Domini, we use Key Performance Indicators (“KPIs”) — a set of factors we have defined for each industry—to guide our analysts toward the most important issues. Our indicators focus on the most pressing sustainability issues each company faces, within the context of its business model and its industry.  For example, safety is a key indicator for us in the automotive industry. A poor safety record may override other positive aspects of a company's social and environmental performance.  We will examine other issues as they arise, but our KPIs will generally take precedence in our decision-making.

We tailor our KPIs not only to the industry but to subindustries, making meaningful company-to-company comparisons possible. Domini has identified four to seven subindustries for each of the 24 major industry categories we use.  We focus on a relatively small number of KPIs—typically five to ten—for each industry because we believe that if companies cannot align their conduct in their most challenging areas with our Global Investment Standards, we are unlikely to be comfortable with the alignment of their overall conduct.

To demonstrate, below are two subindustry KPIs:

 

   Business Alignment Indicators

Stakeholder Relations Indicators

Airlines

  • Average age of fleet
  • % of workforce unionized
  • % of revenues from air freight
  • % of business that is long-haul/international (positive) vs. short-haul/regional (negative)
  • Relationships with labor
  • Major safety incidents, initiatives to improve airplane safety, etc.

Retail Banking

  • % of revenue from retail banking
  • % of sales/absolute amount of activity in community based lending, microfinance, etc.    
  • % of revenues or major predatory lending subsidiaries
  • Consumer Finance (Japan) - if > 10% or market leadership, Fundamental Misalignment (case-by-case)
  • Programs that address housing, lending, financial literacy, and other issues relating to access e.g. foreclosure prevention loan modification 
  • Controversies related to excessive risk in the financial markets and the inappropriate marketing of excessively risky products to investors who don't understand them
  • Strong diversity programs, or gender or racial discrimination in the workplace
  • Marketing and advertising
  • Lending practice related controversies e.g. foreclosure and loan recovery, force placed insurance practices, excessive interest rates and fees, predatory lending

We  are not looking for “perfect” companies. We are seeking to identify companies that are responsibly addressing the key sustainability challenges and rewards presented by their business model.

Ultimately, our ESG Review Committee is responsible for determining which companies are eligible for our funds. Our framework helps us to identify the risks and opportunities for each industry as well as how they are being managed.  It helps us to keep in mind the unique benefits and risks of the industry and to evaluate its performance in that proper context. 

Once we have determined which companies are eligible and which are ineligible, we provide these lists to Wellington Management, submanager for our funds, who utilizes their financial expertise to manage the funds. Wellington is not permitted to invest in any company that has not been approved by Domini.

Companies are reviewed on a regular basis in order to allow us to evaluate long-term patterns of behavior, new business lines and emerging issues. Current holdings are reviewed on a continuous basis.