Evaluating Non-Corporate Issuers
Each of Domini’s mutual funds is managed through a two-step process designed to capitalize on the strengths of Domini Impact Investments and of our investment submanager, Wellington Management Company. Domini sets social and environmental guidelines and objectives for each asset class, and develops an approved universe of companies, and Wellington utilizes proprietary fundamental research to select investments from among those which Domini has notified the submanager are eligible for investment.
Fixed-income investments are particularly well suited to the creation of public goods, and can address a wide range of economic disparities in our society while filling certain capital gaps—that is, funding needs that have often received insufficient attention from investors. By applying our standards, we seek to address a number of these disparities to build sustainable and fair societies, while simultaneously seeking to achieve competitive returns.
The following provides an overview of the social and environmental objectives of the Domini Social Bond Fund, particularly those addressing affordable housing, climate change, and unmet medical and educational needs.
Fixed Income Investment Themes
Before making any fixed-income investment, we believe all responsible investors should ask two key threshold questions: To whom am I loaning my money and for what purpose? Answering these questions helps investors understand the direct impacts that fixed-income as an asset class can be particularly well-suited to achieve.
Our standards, described in our Impact Investment Standards, are directed toward two long-term goals: universal human dignity and the preservation and enrichment of the environment.
Domini evaluates potential corporate debt instruments against social and environmental standards based on:
- the businesses in which the issuer engages; and
- the quality of its relations with key stakeholders, including communities, customers, ecosystems, employees, investors, and suppliers.
For non-corporate issuers, the standards applied to the Domini Impact Bond Fund’s portfolio focus on three key themes:
- Increasing access to capital for those historically underserved by the mainstream financial community
- Creating public goods for those most in need
- Filling capital gaps left by current financial practice
These three themes flow from our belief that healthy economies must be built on a strong foundation of fairness and opportunity for all.
We look to diversify our holdings in the Fund across a broad range of social issues, including affordable housing, education, community revitalization, rural economic development, the environment, and health care.
Below, we provide examples of several types of fixed income investments and the standards we utilize to select the Fund’s holdings
Standard Setting by Asset Class
In keeping with our commitment to increasing access to capital to those historically underserved, the Domini Impact Bond Fund has, since its inception, maintained a substantial, long-term commitment to affordable housing primarily through the purchase of securities backed by pools of residential mortgages.
Ginnie Mae, a government owned corporation, as well as, Fannie Mae, and Freddie Mac, which are government-sponsored entities, play a prominent role in ensuring access to affordable housing. Among the range of debt instruments they offer are those targeted to increasing liquidity in the housing markets for low-income borrowers, in the development of multi-family housing and for a variety of community revitalization projects. In addition, these institutions have programs to help financially struggling homeowners stay in their homes or otherwise avoid foreclosure. These efforts play an important role in stabilizing neighborhoods, supporting affordable home prices, and promoting a healthy overall housing market.
We generally consider municipal bonds – debt issued by states, cities, counties or other quasi-public organizations – to be closely aligned with our investment themes of creating public goods, particularly in jurisdictions with below-average resources. They help finance:
- Essential infrastructure and services such as buildings, roads, and power supplies
- Economic Development
- Healthcare facilities and services
- Educational facilities and services
- Other services needed to close the gap between these localities and the rest of society
Municipal bonds can also help to ensure broad access to environmentally beneficial technologies to all members of society. We therefore look to invest in municipal bonds that generate environmentally positive impacts for underserved communities. Municipal issuers have a key role to play in terms of:
- Low-carbon technologies
- Pollution control
- Climate adaptation, such as disaster prevention and recovery
We will seek to avoid purchasing the relatively few government-issued bonds that are explicitly issued to finance the development of projects, such as nuclear power plants or casinos, which are fundamentally misaligned with our investment objectives.
National governments around the world issue bonds (debt) to finance a wide variety of public goods including education, infrastructure, national defense, the judiciary and social welfare. Although sovereign debt is issued to finance such public goods, debt raised by governments with a history of corruption can be misallocated and misused at the expense of the well-being of the nation and their own citizens.
We therefore use indicators of political freedom and corruption to eliminate from consideration certain countries’ bonds. We use these threshold indicators to help us to identify a country’s ability and willingness to utilize the proceeds of these offerings for appropriate purposes.
We do not invest in U.S. Treasuries or Russian government debt, as these instruments partially finance the maintenance of these countries’ nuclear weapons arsenals. The United States and Russia possess over 90% of the world’s nuclear warheads. We believe these countries carry a special obligation to eliminate this global threat.
Green Bonds are designed to finance projects and activities that address climate change or serve other environmentally beneficial purposes. They are issued by corporations, states and cities, non-profit organizations and international development banks. These environmentally themed bonds are a rapidly growing phenomenon, having grown to annual issuances of scores of billions of dollars from only $3-$5 billion per year between 2007 and 2012.
We are cautiously optimistic about the development of this new theme-based form of fixed-income investment. We are concerned, however, that an overly aggressive use of the word “green” could be applied to projects that in fact have environmentally harmful or neutral impacts, thereby threatening the credibility of this important avenue for financing critical unmet environmental needs. We have therefore established our own guidelines to identify appropriate green bonds for the Fund, considering the social and environmental record of the issuer as well as the specific purpose of the bond.
The following are some of the key questions Domini asks when evaluating green bonds:
- Who benefits from the proceeds of the bond? We favor investments that generate positive impacts for people and communities in need, with a special focus on vulnerable groups, including low-income populations, minorities, and immigrants.
- Can the proceeds from the bond contribute to innovations that address serious sustainability challenges? We favor investments such as those mitigating the impacts of fossil fuels in energy-intensive industries, promoting energy efficiency, or otherwise addressing environmental and social justice issues.
- What is the quality of the issuer’s relations with communities, customers, employees, suppliers and the environment? Does the issuer maintain credible due diligence processes to address environmental and social risks?
We will seek to avoid the following:
- Bonds that finance projects with substantial sustainability concerns such as first-generation biofuels, waste-to-energy plants using toxic substances, or projects that prolong fossil fuel dependence such as refurbishment of coal power plants.
- Bonds issued to finance nuclear power, activities related to the mining of coal or uranium, or the production of weapons, tobacco, alcohol or gambling.
Finally, we believe that the real estate industry is in a unique position to reduce greenhouse gas emissions through energy efficiency improvements that are low cost and that create value within the underlying asset.
Key Performance Indicators
For all of our funds, we use key performance indicators to help us evaluate the most important sustainability issues presented by each investment.
Key performance indicators (KPIs) are those aspects of an organization’s relations with its stakeholders (communities, employees, investors, vendors, and the environment) or in the nature of its core activities that we believe provide the best sense of whether its contribution to society is likely to be aligned with our Global Investment Standards. In general, we avoid investments offered by entities that, for example, have a record of abuse of employees or the environment—and conversely approve those whose record is favorable, or at least neutral, in these areas.
We have developed KPIs specific to each asset class because each presents a different set of sustainability challenges and opportunities. Domini’s KPIs focus on the most pressing sustainability challenges the issuers in each asset class face. Our definition of material sustainability factors also reflects our belief that issuers that treat their stakeholders—communities, customers, ecosystems, employees, investors, and suppliers— well, will be rewarded over the long-term. Our indicators also provide us with insight into the quality of leadership, which is a key component of future success.
We focus on a relatively small number of KPIs—typically five to ten—for each industry or asset class because we believe that if entities 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.
Below we provide our municipal bond KPIs as an example.
Municipal bonds are debt instruments issued by a state, municipality or county. This asset class includes a wide variety of fixed income securities including municipal taxable and tax-exempt bonds, state and local general obligations, pension obligations, and bonds funding nonprofit healthcare systems, education, housing, and water and sewer services.
Municipal bonds are fundamentally aligned with Domini’s investment goals since they fund a wide variety of public goods including infrastructure, safety, education, health, the judiciary and social welfare, which are essential to meet basic needs of society, and are often not provided by the private sector. We consider these bonds high impact when issued by jurisdictions with below-average resources and underserved communities. We also look to purchase municipal bonds that finance low-carbon and climate-resilient infrastructure.
We seek to avoid the relatively few government-issued bonds that finance the development of projects such as nuclear power plants or casinos, which are fundamentally misaligned with our investment objectives. We evaluate municipal issuers’ stakeholder relations such as community opposition against public projects, corruption and budget deficit issues on a case-by-case basis.
Municipal Bond (General Obligation) KPIs
Increased access to capital for disadvantaged