Bond Fund Standards
The standards applied to the Domini Social Bond Fund’s portfolio of fixed-income investments 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
- Using financial innovation in the service of the economically disadvantaged
These three themes flow from our belief that healthy economies must be built on a strong foundation of fairness and opportunity for all.
Increasing Access to Capital
The need for access to capital arises when individuals, neighborhoods, or regions are poorly served by traditional financial institutions. Neglect can occur because traditional lenders or investors view potential clients as too risky, fail to understand their needs, have no history of serving them, or allow discrimination or cultural dissimilarities to interfere with deal making. Such situations can lead to capital “gaps.” We seek to play a role in filling these gaps through our fixed-income investments.
Access to capital increases, among other things, opportunities to purchase housing for those with low and moderate incomes, to start small businesses for those who have not traditionally had access to the financial markets, to have credit at affordable rates for those who are otherwise considered high-risk borrowers, and to obtain knowledge of the basics of finance for those who have not participated in the mainstream financial systems.
Creating Public Goods
The need for additional public goods arises when communities or regions have historically been deprived of the resources to develop the basic infrastructure that assures, among other things, healthcare, education, sanitation, transportation, and personal security. A downward cycle of unmet needs and deteriorating infrastructure can be reversed through lending and investments that support the creation of these public goods. These goods help assure an equal footing to members of a community to participate in homeownership, job training, small business development, and economic revitalization projects. We look to identify opportunities where our fixed-income investments can help break these negative cycles.
Using Financial Innovation in the Service of the Economically Disadvantaged
The need for financial innovation in the service of the economically disadvantaged arises because, although the mainstream financial community often uses its resources and talents to innovate and create new financial products for rich and sophisticated investors, it rarely makes a corresponding effort to find new ways to serve the poor responsibly and well. Yet, as the recent success of the microfinance world has shown, there is a huge untapped world of economically disadvantaged clients who have yet to be well served by our financial institutions, whether through prejudices, lack of imagination, or simple inertia.
We therefore seek out investments that serve these community development and social purposes. While most fixed-income investments, particularly those offered by public institutions, can be said to serve a social purpose, some have a greater community development impact than others. For example, Fannie Mae and Freddie Mac play a particularly prominent role in increasing access to affordable housing in this country. Among the range of debt instruments they offer, those targeted to low-income neighborhoods, low-income borrowers, or specific community revitalization projects have a particularly direct social impact.
Similarly, certain municipal bonds are issued by cities or states with below-average levels of resources. These bonds help create public goods, such as affordable housing, transportation infrastructure, educational facilities, brownfield redevelopment, technical assistance for small enterprises, and other services needed to close the gap between these localities and the rest of society.
Community development financial institutions (CDFIs) play a critical role in service to those who have been historically neglected by the mainstream financial community. Up to 10% of our bond fund’s assets may be invested with CDFIs, which operate in market niches underserved by traditional financial institutions. Our investments here are made primarily through certificates of deposit.
CDFIs include community banks, low-income credit unions, and community loan funds, working in neighborhoods or regions that are among the poorest in this country. They serve clients who may never before have had a checking or savings account, may never have had the opportunity to purchase a home or start a business, or may lack the basic knowledge and skills to effectively manage their personal finances. For more than 30 years, these CDFIs have pioneered ways to serve these communities.
Most fixed-income securities issued by governments and quasi-governmental bodies, by definition, tend to serve social purposes. We will, however, exclude those relatively few government-issued bonds explicitly issued to finance the development of projects such as nuclear power plants or casinos that are excluded by our standards for our stock funds. In addition, for corporate debt obligations, we apply the same set of standards that we apply to our stock funds.
Additionally, we exclude U.S. Treasuries — the general obligation securities issued by the U.S. government — from our investments. While we recognize that these securities support many public goods essential for our society, we have adopted this policy to reflect our serious concerns about the risks posed by our country’s nuclear weapons arsenal and continuing large military expenditures. The U.S. government (along with Russia) maintains one of the largest nuclear-weapons arsenals in the world. These nuclear arsenals are among the greatest and most immediate threats to the world today. U.S. Treasuries go to fund repayment of our national debt, incurred in part by our ongoing military expenditures, including those devoted to maintaining our nuclear weapons arsenal.