Semi-Annual Report 2016
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Letter from the President

Dear Fellow Shareholders,

One year ago, in this report, I wrote about the largest climate change march in history, in anticipation of the climate talks in Paris in December 2015. We are now “post-Paris” and the signals are clear.

At that time, I questioned whether we were seeing the beginning of the end for fossil fuels as the primary source of power. The economic climate for oil and coal certainly hasn’t improved since then. The price of oil has fallen to levels not seen since 2003, forcing companies to leave expensive reserves in the ground. In February, for the first time in twenty-two years, ExxonMobil failed to fully replace its production, meaning that its reserve-replacement ratio - a key metric used by oil and gas analysts - fell to 67 percent. Anything less than 100% means that the company pumped more oil than it acquired or discovered. The low level tells us that even within the industry, it is understood that the business is changing dramatically. The story for coal is even more dramatic. The Dow Jones U.S. Coal Index is down almost 90 percent over the last ten years.  

In the meantime, we are seeing dramatic reductions in the price of wind and solar as many jurisdictions reach “grid parity.” If wind and solar cost the same as coal, or even less, what will you choose?

We do know that if the fossil fuel industry should recover and fully exploit their reserves, life on earth is in very serious trouble. The future we wish to build with our investments is inconsistent with their success. The vast majority of the carbon that is embedded in global reserves must stay locked underground if we have any hope of preventing catastrophe.

In the past, we approved extremely few oil and gas companies for our mutual funds. This year, we further refined our policy to exclude all companies that own and produce fossil fuel reserves. You can read more about it on our website. We did this for two basic reasons. First, we seek to align our investment decisions with the future our investors wish to build. That future cannot tolerate the success of the fossil fuel industry. Second, we recognize that divestment has tremendous value in fostering wide-scale debate and influencing public policy despite entrenched interests or long-standing opposition. People argue about how important divestment was to the history of South Africa, but that is exactly the point – that argument helped keep the issue alive. This is the point of divestment campaigns – to shine a spotlight on an issue.  It is a crude tool, but it has proven its worth during other campaigns.

In each of our Annual and Semi-Annual reports, we feature an essay on a different theme. This report focuses on wind and solar energy for the generation of electricity. It is exciting to see these solutions-oriented companies in our portfolios, but it is also important to understand that these portraits only tell a portion of the story. Of course, we apply climate change-related standards to many industries beyond wind and solar. It is a pervasive theme for us. Still, simply avoiding fossil fuel investments would be less than what we could do.  We therefore, on your behalf, engage with companies in different industries, as consumers of energy and natural resources, asking questions about their efforts to reduce their carbon footprints, and end deforestation.  The fight for our planet is not simply a matter that energy companies must take on, it is the job of each of us to do what can be done.

As investors, we are not simply passive actors. Each investment decision is a decision to allocate capital. We should be mindful of the wider implications. This is particularly true for climate change, which places all life at risk. We are now living on a planet whose atmosphere has changed; one that no human being has ever experienced before.

The issue has a broad constituency that is deeply concerned. As a member of the institutional investing community, we often hear “climate risk” discussed in terms of what it might cost investors.  If only the risk were a mere matter of monetary import. Climate change is the challenge of humankind, and we are grateful to you, our shareholders, for allowing us to use what tools we, as investors, have to join the effort.

As always, I thank you for your investment and for your confidence in Domini Social Investments.

Very truly yours,

Amy Domini