Amy Domini on the Good, the Bad, and the Ugly in ESG and Sustainable Investing Today Barron’sAmy Domini on the Good, the Bad, and the Ugly in ESG and Sustainable Investing Today Barron’sAmy Domini on the Good, the Bad, and the Ugly in ESG and Sustainable Investing Today Barron’s
Impact Investing Forum 2023
London. May 04-05, 2023.
Amy Domini, founder and CEO of Domini Impact Investments, said that portfolios with sustainable management represent $8 trillion in global assets. This figure is expected to quadruple by 2020.
Amy Domini believed in the importance of considering environmental, governance, and social issues in investment decisions for decades before Wall Street did.
When she was a stockbroker in late 1970s, her interest in sustainable investing began. Domini says that she used to call clients with stock tips and would be shocked when they got mad at her and said, “I won’t buy a company that makes weapons, or does business with South Africa.” Domini started to ask about such preferences in client questionnaires.
She co-authored Ethical Investing in 1984. She co-founded KLD Research & Analytics in 1990 with Peter Kinder, Steven Lydenberg, and created the Domini 400 Social Index. Soon after, a passive U.S. equity funds was launched that was tied to the index. The firm and its flagship index were eventually sold by the couple. MSCI now owns the firm. They converted the fund into an active strategy, the $1.1billion Domini Impact Equity fund (ticker DSEPX).
Today, global assets worth $8 trillion are managed sustainably. This figure is expected to quadruple by 2020. Traditional fund managers are now incorporating ESG considerations into their investment process.
This approach to investing has become increasingly popular and some of the most prominent names in finance have adopted it. Domini, 71, isn’t complaining. Domini, a partner in Domini Impact Investments that manages $3 billion across five funds, says that “addressing the most pressing environmental or social issues will require a lot of energy. And we’ve got this beautiful financial system that is capable of providing that.”
In the book Thoughts on People, Planet, & Profit, she recently published a collection her essays on responsible investment. Domini and Barron’s talked about sustainable investing’s evolution and their vision for the future. Below is an edited transcript of our conversation.
Barron’s: I remember when I first interviewed you twenty-plus years ago that the conventional wisdom was that socially responsible investment meant lower returns. ESG is now a popular topic among mainstream fund managers. What has changed?
Amy Domini: It’s a common saying that before I became an overnight success, it took 30 years of hard work. I believe that a lot has been accomplished over the past 30 years. KLD was founded with the mission to remove all barriers to responsible investing. Although the industry has a long way yet to go, we have seen significant progress.
What were the most significant barriers and where are things now?
The first was obtaining nonfinancial information. Although it’s difficult and requires more standardization, there are many places that can do core ESG research. The second was the assumption that any investment that limits your investment universe would reduce your return. Investors are more aware that avoiding financial trouble is a good way of making money. You can also learn a lot about management by looking at non-financial information.
Recently, the third barrier fell apart–that investors shouldn’t be involved in social issues because that’s the role government, philanthropy or religion. The public is beginning to realize that certain corporate behavior cannot be controlled or influenced by government. You need to speak from within. The financial system can be a powerful tool for improving the world. It transmits information almost instantly, is capable of amazing innovation, and has enormous resources.
Let’s return to standardization and reporting. What changes would be most beneficial?
This is where Europe is ahead of America. The 2005 Freshfields Bruckhaus Deringer Report was published by the United Nations Environment Programme. It established a legal framework to integrate ESG. Europe was quick to respond to the report and began to insist that these elements should be integrated into their pension funds. This led to many U.S. companies realizing that they needed to increase their ESG capabilities to attract European business.
The Securities and Exchange Commission must take action now that Wall Street is demanding standardization of ESG information. Investors need to ensure that management is focusing on the positive impact they have on people, and the planet. We also need to see the Department of Labor clarify its position on the role of the fiduciary.
Trump-era rules that limited ESG funds in retirement plans are what you’re referring too. These rules will be reversed by the DOL. Why do you think this is important to you?
This angers me so much that I keep a DOL Letter on my desktop. [That laid the foundation for these limitations]. It’s here. It was dated Friday, October 17, 2008. I went through it and wrote down what they added and deleted.
Here is an example: “The named fiduciary shall perform this responsibility solely for the benefit of the participants and beneficiaries” What did they do? They changed it to “the economic value” of the plan. The Obama administration reverted to the previous letter and the Trump administration reverted to the 2008 changes. We must get rid of the concept of economic value. This is about making life easier for plan participants. I don’t care how much I have in my pocket, if it’s unsafe to walk on the sidewalk or if my grandson is suffering from leukemia due to the polluted water system.
Let’s discuss the Domini Impact Equity Fund. From 2006 to late 2018, Wellington Management subadvised the fund. Carole Laible and I took over. What was the motivation for this decision?
I can’t fault Wellington. They still manage our international bond and bond funds and they have been fantastic. They had a [value-oriented] team managing the U.S. Equity fund. We believe responsible investing should be more future-oriented, with a greater emphasis on growth than on value. Domini Impact has averaged 29% per year over the past three years, which is better than 94% for large-blend funds.
How is the fund invested
Two sleeves are available to the fund. The core sleeve consists of 80% to 95% assets and is driven entirely from the social and environment profile of companies. While we do not exclude energy, we try to get as close as possible to the S&P 500. ESG analysts identify companies that should not be included twice a year.
Thematic is the other option. We are trying to introduce stocks that are particularly interesting to responsible investors. The universe was small when we started the fund. Companies like Ben & Jerry’s (now part of Unilever) were not present.
There are many great opportunities today because so many companies that have a social purpose have gone public. Zoom Video Communications (ZM), which was in that category prior to the pandemic, was included because of the social benefits it offers to make it easier for people working remotely. DexCom (DXCM), which is a continuous glucose-monitoring system that doesn’t require finger pricks, would also be included in this category. It improves the lives for people with diabetes, which the World Health Organization has deemed one of the most deadly diseases. Ameresco (AMRC) is another thematic company that specializes in renewable energies. It installs solar panels on municipal buildings and sells excess energy back to power grid. It is very cost-effective for the state and local governments and it benefits downstream users.
Amy Domini believes that more investors will understand that avoiding trouble can be a good way of making money.
Tony Luong Photograph
The first iteration in sustainable investing was focused on excluding companies or entire industries that caused harm. ESG funds invest in the most sustainable companies in these troubled industries today. Which perspective are you taking?
Certain industries are excluded from our portfolio, and we will continue to do so. We won’t buy companies whose primary business involves tobacco, alcohol, gambling and weapons. We are now unwilling to buy any oil company due to the deaths of employees and the environmental liability litigation.
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Beyond that, we place companies in five categories. These range from companies that clearly provide a social benefit to companies who aren’t perfect, but are still good enough from an ESG perspective. That’s where engagement comes in. About 20% of our ESG analysts spend their time engaging with companies.
We’ve already talked about how larger companies make it a point to try to recruit people from your company. What can you do to make your firm stand out?
Steven Lydenberg was the author of a book called Shopping for a Better World. He created a method for evaluating companies that was specific for the products they made. That is the core difference of Domini. Large ESG research firms can apply a general standard to companies, while we are very industry-specific. Your supply chain poses a greater risk if you are a food company than a software company. Each industry has its own key performance indicators.
We also define some industries differently. We have a classification for infant formulation: It’s a negative if a company makes more than 10% of its sales from formula. This is because it’s heavily promoted to people who don’t have clean water. Both Nestle [NESN.Switzerland] as well as Danone [BN.France] fall under this category, which is why they are excluded.
Are sustainable investing becoming less popular as more companies integrate ESG into their investment process?
It’s not a problem, I’m passionate about it. My goal has been to see 15% investment actually consider it. You need to start with 40% to get there. Otherwise, you’ll have a lot of lightweights. It starts out light, then investors see the potential to make money by investing in this way, and they begin to take it up. I don’t require people to invest 120% and then become sophisticated the moment they start. I only need them to start.
Although you are widely considered a pioneer of sustainable investing, relative newcomers like Larry Fink, BlackRock CEO, have become more prominent voices. This has to bother you.
When people ask me how they can tell if an ESG-focused firm is genuine, I tell them that the lowest-hanging fruit are whether they are a member or not of the Forum for Sustainable and Responsible Investment. If they vote their proxy in a way that’s consistent their stated ESG goals. BlackRock is more inclined to vote with management. [BlackRock declined comment.]
This is my beef with Larry Fink. But Larry made sustainable investing legal. I don’t mind when other people are in the spotlight. We need all the resources available to ensure that the planet survives and makes life worth living. It’s a win if I can get someone who manages trillions to get on board.