As a woman working at Domini Social Investments, it can be easy to disregard the pressing issue of gender diversity practices in the workplace. Domini was founded by a woman-Amy Domini-who continues to serve as Chair. Our CEO, CFO, and General Counsel are all women. More than half of the firm’s employees are women. When I attend meetings in the office, most often I am surrounded by more women than men. Although this reality is normal for me, it is especially rare for the financial industry. Recent trends suggest we are in the midst of change, but more assurance is necessary. This is especially true for diversity at the board level.
In 2009, the SEC approved rules for enhanced disclosure about risk, compensation and corporate governance in proxy statements and other corporate reports. Among these new requirements, the SEC required companies to disclose “the consideration of diversity in the process by which candidates for director are considered for nomination.” If a policy does exist, “how this policy is implemented, as well as how the nominating committee (or the board) assesses the effectiveness of its policy” is also required. While this was an important addition to disclosure requirements, the final ruling was a missed opportunity. Companies and shareholders alike are hurt by the fact that the SEC left it up to companies to define “diversity” for themselves. Not surprisingly, many companies define the term broadly, to include educational background, experience, viewpoint, etc.
In 2015, a number of large pension funds petitioned the SEC to require companies to provide investors with information on each nominee’s gender, race and ethnicity, in addition to the skills, experiences and attributes needed to fulfill the corporation’s mission. Early this year, Mary Jo White, Chair of the SEC, said she shared these concerns, and has directed her staff to look into it. This is a hopeful sign. Despite these remarks, last month, a number of lawmakers publicly criticized Chair White, for taking too long to propose new rules for diversity disclosure.
Increased diversity at the board level promotes effective corporate governance. The number of studies that support this conclusion continues to rise with each passing year. Companies with diverse leadership are more likely to avoid group-think and have the potential to better understand customer needs, anticipate new societal trends and emerging issues, and foster cooperation with their workforce and communities.
Since its inception, Domini has advocated for greater gender and racial diversity on corporate boards, and we have a long history of engaging with companies on the issue. However, in order to obtain useful and comparable diversity reporting from all companies, the implementation of explicit guidelines by the SEC is crucial. As boards increasingly become more diverse, we all stand to benefit.
For many years, Domini has incorporated concerns about the environmental risks of companies owning and producing fossil fuels into our investment standards. Over time, we have gradually eliminated an increasing number of these firms from our holdings as our concerns about a variety of environmental and safety issues, including climate change, have increased.
We have never held coal-mining companies, and have historically approved very few major integrated oil companies. In recent years, we have excluded the few integrated oil companies that we had previously approved, and eliminated an increasing number of the smaller oil and gas companies from our list of eligible investments, due to concerns over safety or the environment.
We had historically favored companies focused on the production of natural gas because it burns more cleanly than oil. But as innovation took hold and hydraulic fracturing became widely used, we began to differentiate between the records of these natural gas companies. Due to increasing concerns about methane emissions, safety and community health issues, we gradually reduced the number of natural gas companies approved, until we divested from this segment of the energy industry entirely.
Companies that are owners and producers of oil, natural gas or coal reserves are ineligible for investment by our funds.
We have made each of these decisions in light of the financial, environmental and moral concerns associated with fossil fuels and in recognition that an increasing portion of the responsible investment community has found divestment a productive avenue to further debate on climate change, one of the most important and difficult issues of our time.
Over the past several years, there has been a sharp increase in the number of new auto loans, driven by a surge in lending to borrowers with poor credit. In 2015, the number of new subprime auto loans reached their highest level since before the financial crisis, surpassing subprime mortgage issuance in volume. While providing access to credit to subprime borrowers is essential for a healthy, functioning economy, it is also a risky business which should be conducted with extra care to protect both the borrower and the lender. Because their credit history is weaker, subprime borrowers often pay higher interest rates on loans due to the perception that they are more likely to miss payments during difficult economic times.
In recent years, Americans have been borrowing record amounts to purchase vehicles, which are among the most commonly held type of nonfinancial asset in the United States. Cars have become a necessity for many families who rely on them as their primary means of transportation and to access greater economic opportunities, including employment. For many, owning a car is seen as such a necessity that they will pay their monthly auto-loan payment before paying their mortgage.
According to Experian Automotive, the average loan for a new car in the fourth quarter of 2015 was $31,008 for prime borrowers and $28,231 for subprime borrowers, with the amounts to both types of borrowers increasing from the previous year. Typically, subprime borrowers tend to stretch the loan for a longer period to reduce monthly payments, increasing the total amount paid over the life of the loan. According to Experian, fourth-quarter 2015 auto loans with a term of 73 to 84 months accounted for 29% of new vehicle loans, with 71% of new car loans exceeding five years. Besides increasing the overall cost of the car, longer loans carry a higher risk of negative equity (when the loan balance exceeds the value of the vehicle) as cars typically lose 15-35% of their value in the first year and 50% or more over three years.
A sizable added cost for subprime borrowers is the dealer markup. When a borrower obtains a loan at a car dealership instead of a bank, the dealer can charge an additional fee for their services. Usually, loans to subprime borrowers have higher markups, which can produce a higher default rate. Federal officials have expressed concern over this practice, as the system incentivizes dealers to charge higher rates. There have also been cases of discriminatory lending practices. Ally Financial agreed to pay $98 million to settle Department of Justice and Consumer Financial Protection Bureau lawsuits that alleged it marked up interest rates on auto loans to minority borrowers.
Providing access to credit to subprime borrowers, especially the under-banked and unbanked, who encounter the most difficulties in obtaining any kind of access to credit is important for individuals, as well as our economy as a whole. At the same time, if companies do not lend in a responsible way, their lending may constitute harmful predatory lending. At Domini, we seek to invest in companies and securities that provide non-predatory access to capital for those historically underserved.
We apply social, environmental and governance standards to all of our investments, believing they help identify opportunities to provide competitive returns to our fund shareholders while also helping to create a more just and sustainable global economic system.
We are very pleased to announce that the Domini International Social Equity Fund Investor (DOMIX), Institutional (DOMOX) and Class A (DOMAX)* share classes received an Overall Morningstar rating of five-stars as of March 31, 2016, based on risk-adjusted return.
The Fund's Investor and Institutional Shares received five stars for the last 3 and 5 years and the Fund's Class A Shares received four stars for the last 3 years and five stars for the last 5 years rated against 289 and 251 U.S. domiciled Foreign Large Value funds, respectively.
*The Fund’s Class A shares are intended for investors who invest through a financial advisor. They carry a front-end sales charge (load) of up to 4.75% that is paid to the advisor buying the Fund on behalf of the investor. If you do not invest through a financial advisor, please refer to the Investor shares. The Fund’s Class A shares (load waived) received an Overall Morningstar Rating of five stars as of 3/31/16.
For each fund with at least a three-year history, Morningstar calculates a Morningstar RatingTM based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a funds' monthly performance (including the effects of sales charges, loads, and redemption fees), placing more emphasis on downward variations and rewarding consistent performance. The top 10% of funds in each category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars, and the bottom 10% receive 1 star. The Overall Morningstar Rating for a fund is derived from a weighted average of the performance figures associated with its three-, five-, and ten-year (if applicable) Morningstar Rating metrics. Fees have been waived or expenses advanced during the period on which the Fund's ranking is based, which may have had a material effect on the total return or yield for that period, and therefore the rating for the period.
Past performance is no guarantee of future results. Investment return, principal value, and yield will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Investing internationally involves special risks, including currency fluctuations, political and economic instability, increased volatility and differing securities regulations and accounting standards. The Fund may focus its investments in certain regions or industries, thereby increasing its potential vulnerability to market volatility. You may lose money.
Although the Fund's Investor shares are no-load, certain fees and expenses apply to a continued investment and are described in the prospectus. The composition of the Fund's portfolio is subject to change.
©2016 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information.
This past December marked a historic moment in the fight against climate change, as the world came together in Paris to address what is perhaps the most significant challenge our global community has ever faced. Representatives from 195 nations reached a landmark agreement that provides a framework for universal long-term action on climate change. Although the agreement is not legally binding, it achieves a historic degree of global unity around the need to avoid catastrophic climate change.
The Paris Agreement sends a strong, unified message to businesses and investors around the world that the time for relying on fossil fuels for economic growth is over. We hope that this will spark a new wave of investments and public policies that help to accelerate the shift to renewables around the world and across the value chain—from system manufacturers and electricity generators, to financiers and consumers.
In our just-released Semi-Annual Report, we take a closer look at some of the ways the Domini Funds are helping to promote a clean-energy future. This includes investments in manufacturers of wind- and solar-power systems, utilities generating electricity from renewable sources, banks financing renewable projects, corporations purchasing renewable energy to cover electricity consumption, green bonds, and more. We also discuss how we our using our voice as investors to talk to companies about their commitments to address climate change.
Domini Funds shareholders are playing a role in the world’s crucial transition to renewable energy. Click here to learn more about key issues we seek to address in our approach.
Fixed-income investments provide an important opportunity to create public goods, address a wide range of economic disparities in our society, and to fill certain capital gaps – funding needs that have often received insufficient attention from investors. We seek to address some of these disparities through the investments of the Domini Social Bond Fund, while simultaneously seeking to achieve competitive returns for our Fund’s investors.
The following provides an overview of the social and environmental objectives of the Fund, particularly those addressing access to healthcare, climate change and affordable housing.
Standard Setting by Asset Class
Stock ownership offers the opportunity to set standards for corporate behavior and to influence management through the exercise of shareholder rights. Fixed income investments offer a different set of opportunities for long-term, lasting impact.
If you think of a bond as a loan, the key questions for responsible lenders should be: To whom am I loaning my money and for what purpose? Despite some of the complex details of the fixed income markets, we believe these are the threshold questions that responsible investors should ask.
Domini’s Global Investment Standards are directed towards two long-term goals: universal human dignity and the preservation and enrichment of the environment. The standards applied to the Domini Social 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, small business development, 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.
Governments around the world issue bonds (or “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, including Transparency International’s global corruption index, 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 proper purposes.
In addition, we will not invest in debt issued by certain “tax haven” jurisdictions -- countries characterized by low or no taxes, financial secrecy laws, and light regulation. Tax havens can help to facilitate criminal activity, including allowing dictators to shelter embezzled funds, and wide scale tax avoidance by corporations and wealthy individuals. Tax havens foster global economic inequality, which is destabilizing to the financial markets and to society.
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 they carry a special obligation to eliminate this global threat.
We generally consider municipal bonds – debt issued by states, cities or counties or other quasi-public organizations-- to be closely aligned with our investment objectives, particularly when they are issued by jurisdictions with below-average resources. They can help to finance the creation of substantial public goods, such as 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.
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 climate adaptation, disaster prevention and recovery. We are seeking to purchase these types of bonds as well.
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.
The Domini Social Bond Fund has maintained a long-term commitment to affordable housing, which the Fund supports primarily through the purchase of securities backed by pools of mortgages.
Fannie Mae and Freddie Mac, two U.S. government-sponsored entities, play a particularly prominent role in increasing access to affordable housing and sustaining the housing recovery in this country. Among the range of debt instruments they offer, those targeted to low income neighborhoods, low-income borrowers, multi-family housing or specific community revitalization projects have a particularly direct social impact. Also, these institutions have specific programs to help homeowners stay in their homes or otherwise avoid foreclosure. These efforts have helped to stabilize neighborhoods, home prices, and the housing market.
Green Bonds are designed to finance projects and activities that address climate change or serve other environmentally beneficial purposes. These environmentally themed bonds are rapidly growing as a new asset class, with issuers including supranational banks, governments, and corporate entities. The market for green bonds more than tripled in 2014, rising from only $3-5 billion per year between 2007 and 2012 to $39 billion in 2014.
Today, we are cautiously optimistic about the development of this new asset class. The stakes are high, however, as this market develops. We are concerned, for example, that an overly aggressive use of the word “green” could conceal environmentally harmful impacts, threatening the credibility of this important avenue for financing critical unmet environmental needs. We 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.
Our Approach to Green Bonds
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 carbon capture sequestration or 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.
Significant capital will be needed to finance the transition to a low carbon economy and adapt to the physical impacts of climate change. For example, while current investments in clean energy alone are approximately $250 billion per year, the International Energy Agency has estimated that limiting the increase in global temperature to two degrees Celsius above preindustrial levels requires average additional investments in clean energy of at least $1 trillion per year between now and 2050.
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. We have therefore purchased several bonds designed to finance green buildings. In particular, we are looking for the U.S. Green Building Council’s LEED (Leadership in Energy and Environmental Design) certification, a comprehensive green building certification program that recognizes best-in-class building strategies and practices.
You perhaps have noticed Valeant Pharmaceuticals in headlines recently. First, the company made news for hiking the prices of life-saving drugs, in some cases quadrupling the prices. Then, the company’s relationship with an affiliated mail-order pharmacy came under scrutiny, prompting comparisons to Enron. Most recently, Valeant’s interim CEO testified before Congress about its pricing practices. (The notorious Martin Shkreli, former CEO of Turing Pharmaceuticals, refused to answer questions during this hearing. Turing is privately held and not eligible for investment by the Domini Funds.)
At Domini Social Investments, our investment standards led us to designate Valeant ineligible for investment a year ago. Before reports of price hikes and shady subsidiaries hit the headlines, we were concerned about the company’s culture and business model – acquiring companies and slashing spending on research & development and on taxes. Valeant spends about 3% of its revenue on R&D, compared to 15% for typical pharmaceutical companies. And by taking advantage of the company’s Canadian mailing address, Valeant (and any companies it acquires) pay only 5% in corporate income tax, instead of the much higher US rate. This ethos of cost-cutting and profit above all else also led the company to delay FDA-required studies on drugs the company was marketing.
For now, the company’s culture is costing its investors dearly. Thankfully, we are not among them. And while we cannot predict what its stock price will do in the future, the Domini Funds will continue to avoid Valeant as long as its values – social as well as economic – are not in line with our own.
Domini has a longstanding policy to avoid investment in the manufacturers of weapons, including military weapons and civilian firearms. This policy extends to firms that derive a significant percentage of revenues from the sale of firearms. We believe this industry is inherently damaging to society, due to the intersection between a particularly dangerous product and the extraordinary pressures to maximize profits and increase market share—pressures which are exponentially heightened for publicly traded companies.
There are very few publicly traded gun and ammunition manufacturers. Most gun manufacturers are private—they are owned by private equity firms, which pump money into expanding their markets. The ultimate challenge facing the industry today is to expand a market where an estimated 70-80 million Americans already collectively own 300 million firearms.
In response, the industry has undertaken a strategy focused on designing and marketing military-style semiautomatic weapons for the civilian market. A detailed study released by the Violence Policy Center, a gun control group, found that “the flood of militarized weapons exemplifies the firearms industry’s strategy of marketing enhanced lethality, or killing power, to stimulate sales.”
Distressingly, but perhaps not surprisingly, much of this marketing has been targeted at children and teens. The New York Times reported, “Threatened by long-term declining participation in shooting sports, the firearms industry has poured millions of dollars into a broad campaign to ensure its future by getting guns into the hands or more, and younger, children.” The editor of Junior Shooters magazine noted that if the industry is to survive, gun enthusiasts must embrace all youth shooting activities, including ones, “using semiautomatic firearms with magazines holding 30-100 rounds.”
Many of our shareholders may be pacifists, or opposed to hunting. Their investment in our funds may be seen as a reflection of these personal commitments. Other Domini Funds shareholders may be hunters or sharpshooters. Their avoidance of gun-makers through their investment in our funds may be seen as a recognition that the stock market is not a safe mechanism to finance the makers of such inherently dangerous products. Either way, our shareholders understand the importance of taking full responsibility for the implications of their investment decisions.
- De-Militarizing Amazon.com
- Let's stop investing our retirement funds in lethal weapons
- Divesting is an exercise in real fiduciary care
At Domini, we believe it’s possible to make money and make a difference at the same time.
We are pleased to report that the Domini Social Equity Fund and the Domini International Social Equity Fund both outperformed their benchmarks for 2014. The Domini Social Equity Fund – Investor shares (DSEFX) returned 13.97%, beating out the S&P 500 Index, which returned 13.69%. Meanwhile, the Domini International Social Equity Fund – Investor shares (DOMIX) outperformed its benchmark by more than 1%, returning -3.27% versus -4.48% for the MSCI EAFE Index.
Each of the Domini Funds pursues an innovative strategy that combines our expertise with the strength of a financial submanager. Domini is responsible for the development and application of each Fund’s social and environmental standards. In addition, we engage with companies in our equity fund portfolios to encourage improvements in their social and environmental performance. Wellington Management Company is responsible for the Domini Social Equity Fund and Domini International Social Equity Fund’s financial standards and portfolio construction.
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Several years ago, at a Goldman Sachs annual meeting, time was set aside for shareholders to ask questions of the CEO. A man approached the microphone and announced that he was a guest, not a shareholder, and wondered if he could ask a question. “No,” he was politely informed, “only shareholders can ask questions.”
It was a telling moment that spoke a significant truth about the corporate system – only shareholders count. For many, a responsible company is defined as a company that takes care of its shareholders. A nod will be given to other “stakeholders,” such as employees and community members affected by corporate activity, but only to the extent that these good relationships help create wealth for shareholders. Shareholders? That’s us. Most of us don’t know much about picking stocks, so we trust a financial advisor or a mutual fund manager to do this for us. Nearly 100 million Americans invest in mutual funds.
When you invest in a mutual fund, your money becomes part of a common pool of assets that the fund manager uses to invest in stocks or bonds or other financial instruments. It’s their job to look out for your best interests. A mutual fund is a profit-seeking vehicle, but it can also become a vehicle for the common good. Your small investment can be leveraged to help produce significant change.
Shareholders have not done a particularly good job monitoring the behavior of the companies they own. In fact, they are often a significant part of the problem. Corporations are some of the largest economic entities in the world, and they are managed with the steady drumbeat of "make me money" in the background. It should come as no surprise when companies cut corners on safety, oppose environmental regulations and outsource production where wages and worker protections are weakest. They do this to satisfy their shareholders. A year before the explosion in the Gulf of Mexico, Tony Hayward, BP’s former CEO, quipped that he pays his shareholders an annual dividend “to keep his job.”
Moral and financial concerns are not independent but interdependent. Corporate success depends on a delicate web of relationships with employees, customers, communities, governments, suppliers, investors, and ecosystems. Companies that treat these stakeholders with dignity and respect can prosper in the long run by avoiding problems and winning the loyalty of their employees and consumers. They can also create tremendous value for society. When oil companies like BP pay insufficient attention to worker health and safety, however, shareholders also suffer. And CEOs, like Mr. Hayward, lose their jobs.
So what does it mean to be a shareholder? A shareholder is a person of influence. Together, we have an opportunity to seek profits and wield that influence for the common good.
Read why Domini chose not to invest in BP, years before the Gulf of Mexico disaster. .