Excerpted from the Domini Funds 2022 Annual Report
On August 16, President Biden signed the Inflation Reduction Act into law. The surprise deal, which came after a year debate, represents a level of climate action that has eluded U.S. policy makers for decades and sends a signal to the global community that the U.S. is on board. The law is complex and our work is just beginning — but it is bold action and an unmistakable step in the right direction.
Capitol Hill, of course, isn’t the only place where climate action takes place. It can’t be. Years of Congressional gridlock has meant that communities, companies, and their investors have become key drivers of climate action. The new legislation has created a new sense of momentum and optimism for everyone working on the climate crisis. As we embark on this crucial opportunity to restructure our economy, we cannot afford to replicate the problems of the past. We need an ambitious, substantive climate response that puts equity at its very center. There’s no time for delay — and we know companies around the world are building solutions that our investments can help bring to scale.
At Domini, climate change has long been central to our investment approach and to our vision of ourselves as impact investors. We can help create a better future through our choices, and so can each individual.
What We Look At
Our core goals are universal human dignity and ecological sustainability. They’ve shaped how we analyze, invest in, and seek to influence companies since day one. There are certain lines of business that we believe are fundamentally misaligned with our goals. Our response? We don’t invest in them, plain and simple.
Steering clear of fossil fuels
We do not invest in companies in the GICS Energy Sector1 and those involved in oil and natural gas exploration and production. Further, we avoid companies that provide significant services to energy, such as energy transporters, as well as coal mining and utility companies with significant power generation coming from coal. We don’t invest in utilities that have either announced plans for new coal-fired power plants or started new construction after the Paris Agreement was adopted in 2015.
The finer points
Excluding fossil fuels is an essential first step in building portfolios geared for a more sustainable economy. But most research questions aren’t so cut-and-dry. Whether a company is contributing towards a greener future often depends on their business model, their climate transition plans, and their efforts to center the needs of their communities, customers, and other stakeholders.
Effectively analyzing those points means getting down to the details — so we’ve evolved our Impact Investment Standards accordingly. We go beyond the assessment of greenhouse gas emissions reductions. We look for evidence that companies are aiming to lower their climate impact by shifting their capital expenditure to energy efficiency, renewable energy, recycling and circular economy initiatives, business transformation, physical risk mitigation, and a just transition. These plans should incorporate thorough assessments of risks and opportunities across their markets and industries, and recognize the intersection between environmental issues and social justice in the low-carbon transition.
Here’s a closer look at some of the finer points:
Corporate climate goals must be rigorous. We look to see whether companies’ goals reflect the best available climate science, rather than what’s easily achievable. The Science Based Targets Initiative (SBTi) is helping make the process more standardized, establishing necessary pathways for each sector to meet the Paris Agreement’s 2050 global temperature targets and working with companies to set and validate aligned climate goals.
Moving away from inadequate solutions
Carbon offsets generally aim to balance out emissions by funding a carbon-negative project (e.g., reforestation) somewhere else. At Domini, we understand that offsets will play a role in the climate transition — especially for industries that are fundamentally harder to decarbonize. At the same time, we’re aware that some companies may use carbon offsets to delay or avoid real emissions reductions. Many offset projects lack clear methodologies and monitoring systems — and often infringe on local communities’ rights or fail to reach their promised emissions targets. Companies need to steer clear of climate projects that do more for their image than for our planet and communities.
Rethinking business, regenerating nature
It’s crucial that companies go beyond minimizing harms, and instead develop business models that benefit the environment. Our research team sees this in terms of value creator companies, a lens which originated as part of our Forest Project. We go beyond asking companies to be neutral with respect to forests, and instead focus on identifying those that have aligned their business strategies with solutions for shared value creation that we can help to accelerate.
The circular economy is also central to addressing climate change because it will help companies reduce emissions and minimize their impact on ecosystems. We look for companies that are beginning to re-conceptualize their products so that all components can be reused, repaired, or reincorporated into nature. You can read our deep dive on circular approaches to learn more.
Thinking Big, Working Collaboratively
As impact investors, our main focus is identifying companies that are helping create a more sustainable future. But our scope isn’t limited just to corporate climate action. We know that companies’ climate work intersects with local environmental justice challenges, federal climate policy, and much more. We strive to make an impact at these intersections.
A shifting narrative
It’s critical that governments, companies, and individuals do a better job of protecting the most vulnerable communities and seeking their input to shape the climate transition. But climate action hasn’t always worked that way. Ten — even five — years ago, many initiatives seriously under-valued environmental justice, or ignored it entirely. Community organizers, activists, and Indigenous leaders have been instrumental in changing that. Today, climate justice is increasingly a guiding principle in climate initiatives, policy design, and sustainable investing. The Inflation Reduction Act includes a major focus on revitalizing communities that are marginalized, underserved, and overburdened by pollution.
Justice through collaboration
Historically marginalized communities and communities of color have long bore the brunt of climate change and other environmental fallout. Now, as the global economy pivots towards sustainability, we have an opportunity to prevent this kind of harmful inequity. Domini knows that a company’s climate transition plan is not effective unless it upholds and strengthens climate justice, which means understanding the needs of their workers, neighbors, and local leaders and taking their priorities into account. Equitable climate action helps reduce global carbon emissions while also ensuring job security and safely reducing the local air and water pollution that has historically burdened underserved communities.
Policy as a foundation
Good climate policy puts companies and investors in a better position to drive progress. The Inflation Reduction Act, for example, will invest $369 billion in renewable energy and other climate tech.2 It extends key subsidies for businesses and offers consumer tax credits. Well-designed policies, in the U.S. and around the world, serve as a foundation upon which climate-forward companies can grow and investors can invest in a greener world. That’s why we believe it is so important to understand the policy landscape and, when possible, engage on key issues.
Better information for better decisions
Investors and other stakeholders need to know how companies are addressing climate change. As global disclosure frameworks on sustainability continue to expand, they are honing in on key climate information. Recently, the U.S. Securities and Exchange Commission proposed new requirements that would enhance how companies disclose information on climate-related risks. We submitted a comment to the SEC, writing in support of the proposal and discussing how we use relevant climate information in our investment analysis, engagement work, and proxy voting.
Climate engagements and partnerships
Collective action is one of our best mechanisms for encouraging progress at the company level. We’re part of Climate Action 100+, which has brought together over 700 investors to engage companies that represent 80% of global industrial emissions.3 We also frequently work with other partners including Ceres, ShareAction, and the Finance for Biodiversity Pledge to engage on topics like climate benchmarks, decarbonization plans, deforestation, and much more. Collaborating with partners helps us reach more of our portfolio companies and increase our leverage in engagements by bringing together more investors.
Doing Our Part
Decades of research and activism on climate change have given us a clear sense of the path forward. And in recent months, we’ve gained a newfound momentum. Now, it’s time to put it all together. No single individual, community, company, or government has all the tools to combat climate change. But we all have something.
At Domini, we know what part of the solution we have to offer. We work hard to exercise our levers for change — our exclusions that ensure we avoid harmful industries; our research that helps us identify forward-thinking companies with thorough climate transition plans; our engagement work that strives to improve corporate climate action. And we’re incredibly fortunate that our shareholders allow us to do this on their behalf — whether they’ve been with us for 20 years or 20 days. Impact investors are working hard to do their part: investing thoughtfully, with the goal of making our world a better place to live.
“The global climate crisis is urgent and enormous. The future itself is at risk. But meeting the challenge isn’t impossible. We can help give ourselves the breathing room we need to cope with global warming and transition to a more sustainable way of life. It’s not too late.”
1 The Global Industry Classification Standard (“GICS”) was developed by and is the exclusive property and a service mark of MSCI Inc. (“MSCI”) and Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. (“S&P”) and is licensed for use by Domini Impact Investments.
2 https://www.whitehouse.gov/briefing-room/speeches-remarks/2022/08/16/remarks-by-president-biden-at-signing-of-h-r-5376- the -inflation-reduction-act-of-2022/