The Way You Invest Matters: Setting the Stage for the Next 30 Years
(Article graphics from the Domini Funds 2021 Impact Report)
The first phase of the responsible investment movement has matured. We find our approach of arguing that scrutiny of the way companies respect their relationships with people and the planet adds value to the investment decision-making process. Our stakeholders include the natural ecology, work forces, suppliers, customers, investors, taxpayers, and communities, both locally and in the global sense. We have demonstrated value and so regulators, large investors, investment banks and partner-nonprofits mobilized to begin the process of standardizing data and providing it to investment decision makers.
Roughly every fifty years a new awareness of a better way for investors to make money emerges. In 1934 Benjamin Graham published Security Analysis which forever shaped the way professionals approached the investment decision making process. He argued that being disciplined, investing in the company—not simply the stock—and staying invested for the long haul allowed one to achieve superior results. His stock-by-stock approach prevailed for roughly fifty years before the next tidal wave of insight appeared: The Modern Portfolio Theory, which argued that a thoughtful diversification would reduce risk and enhance return revolutionized portfolio management. Although Harry Markowitz introduced the concept in 1952, it did not sweep institutional investing until David F. Swensen famously built the highly successful Yale endowment by utilizing the theory in the late 1980s. Today we witness a global rush to investing with values, frequently referred to as Environmental, Social and Governance, or ESG investing, although impact or sustainability investing is favored by many.
Modern Portfolio Theory did not remove security analysis—it is used alongside it. ESG will not cause the demise of security analysis and will not cause the demise of diversifying portfolios. Instead, it sets out to strengthens investors’ capacity to make sound investment decisions that help outcomes for their clients. Many on Wall Street did not expect this outcome, but as the idea spread, these people have become converts. In fact, we are now headed to universal acceptance that there is a value add.
Thirty years ago, socially responsible investing, as it was called, was generally ignored by professional investors as a tool for making investment decisions. When it was discussed, concerns were raised. Was it possible to perform with such constraints? Was it legal? Who decides what is good and how do they weigh its pros and cons? Today we have set aside most of these concerns. There is plenty of academic literature and lived experience to give comfort to those who are hesitant.
I anticipate that the next several years will see an increase in standardized reporting on topics of interest to responsible investors. Many of these data points will result from demands by regulators. We have already seen the Securities and Exchange Commission mandate disclosures relating to executive compensation and board makeup. Some data points will continue to be collected voluntarily.
Carbon Disclosure Project is an example of what can be accomplished without specific regulation when investors voice an interest in a disclosure.
The question of who decides what is good is quickly emerging as a hot topic. Recent news that S&P Global does not consider controversial behavior that happened more than ten years ago drew some criticism. But I thought ten years was more than adequate and as I generally consider four years as adequate for the aging off of a concern. A difference of opinion is a good thing. All investors have identical information of earnings per share and the price of a security, yet some are buyers and some are sellers. It is, as they say, what makes a market.
Nonetheless, for the sake of a strong outcome, advocates of the integration of social and ecological considerations into the investment process could benefit from a greater convergence over “what matters,” even if we do not agree on how to interpret it.
In 1989 Peter Kinder, Steven Lydenberg and I created the metrics to identify a company’s impacts on several stakeholders in an even-handed way. With this tool, we could create a splatter of data points. We did not assign values to each data point, arguing that the investor should stand back from the canvas, stare, and see the points form a picture. Certainly, we had to decide which companies to put into the Domini 400 Social Index*, but there was no simple numerical entry point.
Currently, the largest research vendors have a tendency to use data points to come up with a single score for a company. It is an approach that is, in my opinion, unlikely to continue to be much sought after. As a portfolio manager, I am somewhat interested in buy and sell recommendations, but I certainly don’t take someone else’s opinion blindly. I want to know why and I want to know in detail about the tidbits of information that have helped me in the past, such as qualifications of top management or cash flow trends. The same is true for stakeholder analysis. I want to judge for myself whether the company has taken steps to address their ecological damage, or to attract and retain a diverse and empowered workforce. I have my own prejudices as to what matters with what companies.
One of these prejudices is that the treatment of the taxpayer deserves greater scrutiny. If your employment base must rely on public assistance to make ends meet, your company is not, in fact, a functioning capitalist company. It is living on handouts and needs to be priced as such. I raise this only as an example of potential areas to explore for greater understanding of whether a corporation is in fact a good place to invest money.
In addition to how we, who manage impact portfolios, look at companies, a shift has occurred in how investors look at us. The issuer of investment products labeled as responsible or green is being asked to demonstrate consistency. If a mutual fund is green, the fund management is expected to vote green on proxies. This may seem simple and obvious to insiders in the field, but it was in reality not the case and has led to claims of greenwashing, confusing the public. Nonetheless, it is effectively moving mountains. Large asset managers are integrating value across proxy voting, headquarter building, diversity programs and a host of other areas. Consistency will grow.
Intentionality is also under scrutiny. When Morningstar began to rate mutual funds for ESG, shock waves were set off as dozens of funds with a special purpose and no intentionality to be ESG were given good scores. Was a fund that bought only solar panel manufacturers really a “better” ESG investment than a diversified portfolio that intentionally engaged with its portfolio companies and had a prospectus stating that it used environmental standards to make investment decisions?
What do the next thirty years hold? I believe there will be universal acceptance of ESG as a valid and useful tool for investment advisors; a move towards greater disclosure of granular data; a move away from top line scores; and an avalanche of new research on the approach. This is not, however, as important as what the byproduct of our growth will bring. With data comes knowledge and with knowledge comes corrective action. That will be our legacy.
We have always believed that investors matter in assuring that there is a tomorrow, and that tomorrow includes a livable planet and lives worth living. And our field is built on the idea that we are more alike than different from each other, that our combined impact will be an important source of engaging finance in creating a better world. We are on the cusp of seeing our goals met. Our simple concept, the way you invest matters, will have positive real world results.
Article by Amy Domini, Founder and Chair of Domini Impact Investments (“Domini”). She has been a leader and innovator in the development of impact investing for over 30 years. Widely regarded as one of the world’s eminent authorities in the field, she was named to Time magazine’s list of the world’s 100 most influential people in 2005.
Ms. Domini began her career as a stockbroker and became especially interested in working with clients that were concerned with ecological sustainability and universal human dignity. She co-founded KLD Research & Analytics and, in 1990, was instrumental in the launch of the Domini 400 Social Index. She later co-created the Domini Impact Equity Fund. Ms. Domini serves as a voting member of Domini’s Impact Review Committee and Standards Committee. She also serves as co-Portfolio Manager for the Domini Impact Equity Fund, Domini International Opportunities Fund, and Domini Sustainable Solutions Fund.
Ms. Domini was acknowledged with the Clinton Global Initiative citation for innovation and finance. She has also received an honorary Doctor of Business Administration degree from Northeastern College of Law, an honorary Doctor of Laws degree from Flagler College, and an honorary Doctor of Humane Letters from Yale University’s Berkeley Divinity School. Ms. Domini was named to Directorship magazine’s Directorship 100, the magazine’s listing of the most influential people on corporate governance and in the boardroom, and Barron’s selected her as one of the 30 most influential people in the mutual business. In 2009, she was named to Time magazine’s list of 25 “Responsibility Pioneers” who are changing the world.
Active in her community, Ms. Domini is a board member for the Center for Responsible Lending. She is also a past board member of the Church Pension Fund of the Episcopal Church in America; the National Association of Community Development Loan Funds, an organization whose members work to create funds for grassroots economic development loans; and the Interfaith Center on Corporate Responsibility, the major sponsor of shareholder actions. A frequent guest commentator, Ms. Domini has appeared on CNBC’s Talking Stocks and various other radio and television shows.
Ms. Domini holds a B.A. in international and comparative studies from Boston University and holds the Chartered Financial Analyst designation.
Ms. Domini is the author of Thoughts on People Planet, & Profit (2021), Socially Responsible Investing: Making a Difference and Making Money (Dearborn Trade, 2001) and The Challenges of Wealth (Dow Jones Irwin, 1988), and a coauthor of Investing for Good (Harper Collins, 1993), The Social Investment Almanac (Henry Holt, 1992), and Ethical Investing (Addison-Wesley, 1984).
* Now known as the MSCI KLD 400 Social Index, owned by MSCI, Inc. MSCI and Domini Impact Investments LLC are not affiliated.
This commentary reflects the views of the author and are subject to change as market and other conditions warrant. No forecasts are guaranteed. This commentary is provided for informational purposes only and is not an endorsement of any security, mutual fund, sector, or index.