October 03, 2017

Bennett Grizzard

Once again, our nation is struggling to explain senseless violence.  The terrifying scenes from the mass-shooting in Las Vegas are both heartbreaking yet appallingly routine dispatches from an epidemic of violence. An epidemic that we allow to persist.

There have been over 1,500 mass shootings in the U.S. since December 2012 when a gunman entered an elementary school in Newtown, Connecticut and killed twenty children, six adults and himself. These events mine the very depth of our collective grief yet somehow no new federal gun-control legislation was enacted as a result.

The political stasis around gun-control is largely due to the political power of manufacturers who market increasingly lethal guns for the purpose of self-protection rather than hunting or recreation. On June 12, 2016, a gunman armed with high-capacity assault rifles killed 49 people at a nightclub in Orlando. The shooting was, until this week, the deadliest mass shooting in modern U.S. history. Between the Orlando nightclub shooting and the attack in Las Vegas on Sunday there were 521 mass-shootings yet zero changes to toughen our federal gun-control laws.       

After the killing this week, our leaders and representatives will likely echo the same “shock, sadness and call for unity.” But what will ultimately come of it? Will we continue allowing open and easy access to automatic weapons in this country, where there is already roughly one gun per person? Will our politicians continue to be swayed by companies that use fear to push military-grade assault weapons into the hands of the public? Were those senselessly killed and injured in Las Vegas on Sunday simply paying the “price of freedom”? The answer must be no.

September 19, 2016

Lionella Pezza, Research Analyst, Responsible Investment

Over the past few months, I have been spending some time researching schools around my neighborhood in Brooklyn, as next year I will need to decide what school I would like my son to attend. As I am sure all moms do, I had prepared plenty of questions, and I was ready to discuss every possible detail with the school staff. Or at least so I thought. There was one issue I had not anticipated would be part of the conversation, and I became extremely uncomfortable the moment I realized it was something that needed to be discussed: lockdown drills.

According to the Congressional Research Service, there are currently more guns than people in the U.S., and the production of firearms in our country is increasing every year. In 2013, after the Sandy Hook Elementary School massacre, 11 million guns were produced in the U.S., twice as many as were produced the previous year. These numbers are simply staggering, and things get even scarier when we consider how easy it is to access firearms in our country. The U.S. has a higher firearm homicide rate than Pakistan, and is doing just barely better than the Democratic Republic of the Congo.

Just to draw a comparison, in 1996 Australia decided to enact nationwide gun law after 35 people were killed in a mass shooting at an historic tourist site in Tasmania. Under the leadership of Prime Minister John Howard, rapid-fire rifles and shotguns were banned, licenses became more difficult to obtain, and a national buyback program was implemented to incentivize gun owners surrender their weapons. The country has not had a mass shooting since enactment of the reform.

I dread the idea of having to explain to my by-then-four-year-old why, should a lockdown drill happen while he is in the bathroom, he needs to stand on a toilet and silently pretend he is not there, as he will be instructed to do by the school staff.

I hope that, in a couple of years, things will be different and there will no longer be the need for me and other parents to have such terrible conversations with our little ones.

But we can do more than just keep hoping. We can and should take collective action to help change this shameful situation. While there are many things that will need to happen on a national level to produce significant change on the issue, there is one very simple thing we can all do on a personal level to make sure that we are not part of the problem, and that is to align our investments with our personal values and consider whether we want to hold companies involved in the production of firearms in our investment and retirement accounts.

The Domini Funds have a longstanding policy to avoid investment in gun manufacturers. Learn more about Domini’s policy on firearms and weapons manufacturers.

May 05, 2014

In November, Domini wrote a letter to Jeff Bezos, Founder and CEO of Amazon.com, raising concerns about the company’s participation in the militarization of the civilian firearms market, after we discovered semi-automatic weapon accessories being sold on Amazon that could help gun owners increase the firepower of their weapons. We highlighted, for example, a trigger kit that allows the shooter to “shoot as quickly as desired” and devices designed to increase accuracy and reduce shooter fatigue. Our letter, which received coverage from Reuters, was signed by 33 institutional investors managing $490 billion, including New York State and the Church of Sweden.

In a recent conversation with Amazon executives we learned that our letter was taken quite seriously. Most of the products we identified have been removed from Amazon.com and added to the company’s list of prohibited items. The third-party sellers have been notified that they may no longer offer these items for sale on Amazon. We will continue to engage Amazon to ensure that they are doing everything they can to avoid becoming a marketplace for assault weapons.

February 18, 2013

Adam Kanzer, Managing Director and General Counsel

Originally appeared in Pensions & Investments

Fiduciaries are the only class of investor legally obligated to care for other human beings. In recent decades, however, the fiduciary duty of loyalty has been turned on its head and converted into a duty to ignore other human beings. Financial returns are now considered more important than the interests of beneficiaries. This misstatement of the law in the quest for alpha is at the heart of the so-called “mainstream” rejection of social investing, and the opposition to divestment from gun makers in the wake of the horrific shooting in Newtown, Conn.

The opposition to divestment, including a Pensions & Investments editorial on Jan. 21, “Misdirected furor,” is based on several well-worn misconceptions about social investing and fiduciary duty. The foundational myth is the notion that “social” issues are unrelated to financial return and must therefore be ignored by fiduciaries. This myth was put to rest ages ago by the performance of the MSCI KLD 400 Social index, and numerous academic studies, including excellent reports on fiduciary duty from Freshfields Bruckhaus Deringer LLP, a London-based international law firm, and FairPensions, a London-based group that campaigns for responsible investing in the pension industry.

The individual performance of a gun investment is largely beside the point, however. There are many lucrative investment opportunities — a fiduciary must exercise prudence in selecting the most appropriate ones. There are only three small-cap publicly traded gun manufacturers in the United States, and a handful of gun-related private equity investments. Can a diversified portfolio be managed for the long term without these investments, which “externalize” unacceptable harm to participants and beneficiaries? This question is neither asked nor answered byP&I's editors.

First and foremost, fiduciaries must be dedicated to their beneficiaries' financial goals. This requires a deep understanding of risk and opportunity, including those relating to “social issues” that affect consumer demand and the broader economy, or impose legal risks and operational costs (e.g., cleanup costs). The debate has moved on from the artificial, bifurcated view of reality that views the investment portfolio in isolation from the real world. A modern fiduciary must understand how the corporation affects the health of the systems upon which it depends for its long-term survival.

P&I urges pension funds to ignore calls for divestment and to “step up and communicate the value of investments to their portfolios. ... They must stay focused on securing the highest risk-adjusted returns possible for their funds.”

This is roughly half right. As Justice Benjamin N. Cardozo famously wrote, the courts have kept “the level of conduct for fiduciaries ... at a level higher than that trodden by the crowd.” Fiduciaries should not respond to every demand — they need to set a higher standard and stay focused on long-term goals. But where P&I and other critics of divestment would ask fiduciaries to ignore these demands in favor of an exclusive pursuit of profit maximization, Mr. Cardozo had something else in mind: “A trustee is held to something stricter than the morals of the marketplace.”

In the marketplace, everything has a price. The market has no use for irreplaceable things of infinite value. As a result, finance lacks clear imperatives to maximize life and the priceless things that sustain it, such as clean air and water. Finance knows no imperative to safeguard children.

Fiduciaries, however, can check the more damaging aspects of finance through the process of prudent decision-making in conformance with a duty of loyalty — another priceless thing. “Price” is not a fiduciary's sole concern. If fiduciary duty meant “maximize returns,” we'd have no need for fiduciary duty at all. We would merely need to set the incentives right and guard against embezzlement.

Newtown presents a very concrete example of what a violation of the duty of loyalty looks like. If you use my money to make a weapon that kills my child, don't tell me that in 20 years I'll retire with more money as a result. If you claim that decision was made in my best interest, you have no right to call yourself a fiduciary.

On the question of divestment as a tactic, the P&I editors have the question exactly backwards — we should be asking about the impact of the investments, not about the tactic of divestment. Investors are not seeking to enter this debate on guns. They are already knee-deep in it, have been on the wrong side and are now looking for an exit.

Semiautomatic weapons are now widely available, not solely as a function of consumer demand, but also due to the ready availability of investor capital and investor demand for expanding markets. Is there any limit to these demands? The New York Times reports that industry strategies to increase market share now include an aggressive push to get guns into the hands of children. The editor of Junior Shooters magazine noted that if the industry is to survive, gun enthusiasts must embrace all youth shooting activities, including “semiautomatic firearms with magazines holding 30 to 100 rounds.”

This is your return on investment: Children toting semiautomatic weapons. Whether communicated through private or public equity ownership, the message, no doubt, has been the same — make more, and get these weapons into as many hands as possible.

Whether they like it or not, pension funds are, in fact, agents of social change. Freedom Group has used pension fund capital to change the retail gun landscape, with clear social consequences.

When we allocate billions of capital, we are also sketching out the parameters of future societal possibilities. The long-term growth of these companies depends upon Washington's inability to enact meaningful gun control. Trustees should consider whether that outcome is in their participants' best interests.

Divestment can be effective. The mere suggestion of divestment prompted Cerberus Capital Management LP to announce it would sell Freedom Group. For public equities, divestment sends a signal to management about what is and what is not acceptable. If it is done on a wide enough scale, it can certainly have an impact on a company's finances. But on the most basic level, it is an expression of the duty of loyalty.

P&I's editors noted that these divestment activities “reveal shortcomings as fiduciaries in portfolio oversight.” Here, I wholly agree. These funds should never have been invested in gun makers in the first place. But that is a very poor argument for taking no action now.

January 09, 2013

By Adam Kanzer, Managing Director and General Counsel

Originally appeared on Reuters

Mutual funds, according to a recent Vanguard statement responding to the mass-shooting in Newtown, Connecticut, are not “optimal agents to address social change.” I agree. But while a mutual fund may not be the best way to promote sound social policy, when trillions of dollars in mutual fund assets are managed without any social or environmental considerations, they can be a very effective way of promoting broad social harm.

Unlike other national tragedies fueled in part by investment decisions – the BP disaster immediately comes to mind – the Newtown massacre has prompted an important and overdue debate about the role of investment in our society. Your IRA is at the heart of that debate.

We’ve read about how the retirement funds of teachers and other public servants were used by Cerberus, a private equity fund, to create Freedom Group, the largest gun maker in the country. Freedom Group makes the assault weapon that was used to kill children and teachers. Unless you are a participant in a public pension fund, or a very wealthy individual, however, you are probably not invested in any of the private equity firms that own gun makers. But you are most likely invested in a mutual fund, and your fund may own gun stocks.

Vanguard’s statement was issued in response to the revelation that it is one of the largest owners of Smith & Wesson and Sturm, Ruger, the largest publicly traded gun manufacturers.  Vanguard holds these stocks in passively managed index funds. This, of course, is no real revelation – it is the status quo, the result of a philosophy that treats investments as abstractions, divorced from real world impacts. But it should serve as a wake-up call for the millions of Americans invested in so-called ‘low cost’ index funds. What are the true costs of these investments? [1]

Vanguard’s statement contains two of the most common excuses offered for failing to address the social implications of investment decisions. Let’s take each in turn.

The first statement involves benchmarks. Vanguard is the inventor and largest manager of index funds – ‘passive’ funds designed to replicate benchmark indices. Smith & Wesson, Sturm, Ruger and ammunition maker Olin are members of the Russell 2000 and Russell 3000 indices. In essence, Vanguard claims that its hands are tied – to track an index, it must invest in all the stocks in that index. But is this true? Is it possible for an index manager to track a 3000 stock index with 2997 stocks?

Does a passive investment strategy relieve an asset manager of all moral responsibility? Do managers have an obligation to choose appropriate benchmarks that do not contain inherently destructive companies?

If an index strategy requires automatic investment in destructive companies – landmine manufacturers, human rights violators, gun-makers – then safeguards need to be put in place to allow passive investment while also protecting innocent third parties. Ultimately, this responsibility should rest with the firms that manage the benchmarks themselves. Generally, companies are selected for major market indices without any consideration of their social or environmental impacts. But what if Russell decided to assess the true value these companies contribute to society? What if Russell identified a set of corporate practices that pose unacceptable risks, and then chose to remove those companies from their indices? Every index manager in the world would divest overnight.

If there’s anything we’ve learned from the financial crisis, it is that even the most arcane financial decisions can have real-world impacts. Such is the case when you allocate billions of dollars to companies that make military-style assault weapons. We can no longer pretend that these decisions are morally neutral – they are not.

Standard-setting is not foreign to index management. Both the index managers and the stock exchanges set all sorts of financial and governance standards. The OMX Nordic Exchange actually has a standard to “investigate”, and presumably to ultimately delist, companies that have committed “serious or systematic violation of human rights or other ethical international norms” including those that manufacture chemical weapons or land mines. They placed these standards under the heading “marketplaces with integrity.” After OMX’s acquisition by NASDAQ, it is unclear where those standards now stand.  Some exchanges, including the Johannesburg Stock Exchange, require listed companies to produce sustainability reports.  Dow Jones, MSCI and FTSE all maintain indices that include social and environmental standards.

Should investors be able to choose between both responsible and irresponsible indices? That depends on whether you believe there are real-world consequences for allocating capital to firms that are hurting people.

Vanguard’s second claim, drawn from its longstanding statement on social issues, is that “as a fiduciary” it is required to manage its funds in the best interest of shareholders and is obligated to “maximize returns” in order to help shareholders meet their financial goals. Whenever you hear the phrase "maximize returns," add three simple words: “at any cost.” Pure profit seeking should never be conflated with fiduciary duty. Fiduciaries are held to a higher standard.

The 19th century ‘prudent man standard,’ for example, directs trustees to “observe how men of prudence, discretion and intelligence manage their own affairs.” When fiduciaries manage money for parents, they need to think like parents. It is self-evident that a prudent person would not use her own money to harm her children. It is both callous and misguided to suggest that fiduciaries are compelled to do so.

The long-term rationale for investing in gun manufacturers is the belief that society will not act to rein in the costs these companies impose on others. The largest asset managers in the world are backing a future that fails to address broad social harm. They have placed many billions of dollars of other people’s money on the laissez faire side of the scale, and they have done this despite a clear legal obligation to put their investors’ best interests first. We should therefore not be surprised to see our children inherit a passive democracy that is unable or unwilling to protect them.

I believe divestment of stocks in gun manufacturers is appropriate, but there is more that can be done. Beyond divestment, institutional investors – including mutual fund managers – should be using their clout to place this issue on the agenda of every board in the country. Directors should be asking whether their company’s products, services and political activities are contributing to this epidemic of violence, or standing in the way of reform. Many companies, including those that manage theme parks, operate stores in large shopping centers, or are closely associated with children, could benefit from strict gun control. These companies should stand up and say so. Video game companies that partner with gun makers to help market assault weapons should be asked to review these practices. Every retailer that sells semiautomatic weapons should be asked to take them off the shelves. In addition, as we wait for stricter gun control laws, there is no reason why companies that sell guns cannot impose strict rules of their own.  I believe that when trillions of dollars of capital unite against gun violence, companies and policymakers will listen.

Money managers, unlike individual investors, have a legal obligation to think about the welfare of others. Institutional investors are not prevented by fiduciary duty from taking these actions; rather, fiduciary duty compels them to do so.

Let’s apply a little common sense. We don’t need to finance violence in our communities in order to provide for our retirements. Now is the time for individuals to speak up and demand an approach to investment that is appropriate for children.


[1] Passively managed index funds invest in portfolios designed to match the composition of a public benchmark, such as the S&P 500. They are generally offered at significantly lower cost to investors than actively managed funds, and may offer certain tax advantages. Over time, mutual fund operating expenses can negatively impact returns. All mutual funds are subject to expenses and risks, including loss of principal. You should always read the fund's current prospectus before investing.