Intended Consequences

Intended Consequences

Since the early 1980's, Amy Domini has worked hard to help launch the growing field of socially responsible investing. Along the way, she has proved that investing is an act with real-world consequences -- and that a socially responsible investor can intentionally change the world for the better. By Penny S. Bonda, FASID, and Katie Sosnowchik

Working as a portfolio manager in the early 1980s, Amy Domini knew the number one rule of the game: do whatever it takes to maximize financial returns. But then a funny thing happened: some of her clients actually began questioning that status quo. How, they wondered, could they reconcile their investment objectives without violating the personal principles they held? An avid birdwatcher, for example, questioned holding stock in a paper company which used defoliant that endangered the birds she loved. Another client refused to hold stock in a tobacco company.

What happened next not only changed Domini’s world and the way she viewed it, but started in motion a chain of events that, during the course of the next decade, helped launch the growing field of socially responsible investing. Along the way, Domini has proved that investing is an act with real-world consequences—and that a socially responsible investor can intentionally change the world for the better.

Challenging conventional wisdom is never easy, but that’s exactly what Amy Domini needed to do when embarking on the path toward socially responsible investing, or SRI. The idea of ethical or faith-based investing was not new when she began her journey, yet at the time there were only a few groups involved and they were not working collectively.

The first step, Domini decided, was to take on traditional Wall Street analysts who said that SRI wouldn’t work—they claimed that by limiting the number of corporations where investors could put their money, it necessarily limited the returns they could expect to get back. So in 1989 Domini and her partners Peter Kinder and Steve Lydenberg began work on the Domini 400 Social IndexSM, an index of 400 primarily large-capitalization U.S. corporations that they selected based on numerous social and environmental criteria. Their goal was to provide a benchmark, similar to Standard & Poor’s 500, that would determine whether or not there were costs or benefits involved in SRI. A year later the index was launched. In 1991, the Domini Social Equity FundSM was established, which provided investors with a fund that actually tracked the index. At the same time, the trio launched Kinder, Lydenberg, Domini & Co. (KLD), a social and environmental research firm focusing on publicly-traded companies.

In the decade that followed, the Domini 400 Social Index has managed to debunk the theories proffered by those earlier Wall Street analysts. On average it has enjoyed a slightly higher rate of return than the S & P 500.

But what about investor acceptance? It is evident, now, that SRI was a concept whose time had come. Thousands of investors have subsequently embraced the notion of putting their money where their principles are. Back in 1990, the Domini Social Equity Fund managed assets of approximately $3 million; that number has since skyrocketed and is today closer to $1.1 billion. Along with companion offerings—The Domini Money Market AccountSM, the Domini Institutional Social Equity FundSM and the Domini Social Bond FundSM—total assets managed by Domini Social Investments LLC today stands at approximately $1.6 billion.

Domini admits that she never believed 10 years ago that her efforts would lead her to where she is today. Her strategy through the years has been straightforward. “I think the primary drivers for growth have been that when people know more about it and what it’s trying to accomplish, then people believe in it and know they can make money this way,” she says.

With five books to her credit, Domini has charted the transformation of SRI since her journey began. In 1984 she wrote Ethical Investing, one of the first books to discuss SRI in depth. Additional titles she authored or co-authored include Challenges of Wealth, The Social Investment Almanac, Investing for Good and, her most recent, Socially Responsible Investing: Making a Difference and Making Money. In it, Domini charts a clear course for investors who want to contribute not only to their bottom lines, but also to a just and fair society.

“I believe that by integrating deeply held personal or ethical concerns into the investment decision-making process, investors can bring about a world that values and supports human dignity and environmental sustainability,” she writes. “Through socially responsible investing, the investor re-engineers the equation of success. We want to make money because we want a better life, more security, a legacy for our children or our planet, or even simply because we like to feel that we played and won. But socially responsible investors ask that first we do no harm.”

Domini recently talked with [email protected] about the tremendous growth of SRI, exploring what has contributed to its rise and where short- and long-term market conditions may lead it in the future.

To what do you attribute the spectacular growth of SRI?

Socially responsible investing has an ancient history. It came out of faith-based investing. For example, if you were a Quaker, you did not invest in armaments or, at least, you didn’t keep the profits if you invested in armaments. If you were a Baptist, you didn’t invest in alcohol. Those ancient roots set a framework. So when the debate over the role of U.S. corporations doing business in South Africa began to build some momentum, the response was: Don’t buy companies that are doing business in South Africa.

At that time in history, up through 1986, which was the year divestment crescendoed, the vocabulary changed from ethical investing, which was the name of my first book, to socially responsible investing, which reflected a shift in understanding that more than personal ethics were at stake—this had to do with having a voice, as well as determining the appropriate role for the corporation in society. That shift made me feel that this was absolutely the single most important message the world needed to hear: the way we invest and the things we finance have created—and will continue to create—the world we live in.

For example, we made an investment as a society in highways and in subsidizing our oil costs, and we are now paying the price in global warming and quality of life and not having more appropriate fuel and more appropriate transportation vehicles for more of our population. Those things are a direct result of what we invested in. You can point to what we voted for and how we acted as consumers, but the core was really where we invested. It became a passion for me. It was extremely important that everybody understood that the way we invest matters.

Why did we grow as quickly as we did? I, and the people who were active in the field at the time, were very deliberate about removing the barriers to socially responsible investing. A primary barrier was the presumption that you would lose money—yet it didn’t seem logical that avoiding trouble would cost money. But who I am to judge the wisdom of Wall Street? So in 1989, Peter Kinder, Steve Lydenburg and myself felt that the time had come to create a research company that would track the costs or benefits.

Another barrier that existed was that socially responsible investing was poorly understood. Some people thought it was all things to all people, but the true definition is: achieving universal human dignity and environmental sustainability of people and the planet in a profitable way. It isn’t about your lifestyle—just because you drive a car doesn’t mean you’re being two-faced to invest in an ethical fund. It’s about whether or not you believe that the way you invest can sustain universally human dignity and environmental sustainability.

What events in the past decade have underscored the value of SRI?

In the last 10 years an awful lot has come about that has built a framework within which people began to understand that corporations influenced not only their own employees, but also the way global trade is conducted. That framework became very clear over the debate on sweatshops, where the harmed party doesn’t work for a corporation, he or she works for an uncle in a very small village with limited choices and resources. Yet that uncle wouldn’t be in business were it not, for example, the contract with McDonald’s to supply Happy Meal toys or Disney to supply pajamas.

That set the background, but the key in the last 10 years has really occurred in the last year—especially the last few months—with a crisis in confidence of enormous proportion. First were the revelations of child sexual abuse by priests and those cover ups. Next was the humiliation of the presidential election. Then the Enron situation began to unfold. In the middle of all that, you have the tragedy of the World Trade Center, which, I think, was the symbol of U.S. domination of world trade. Finally, we learned about all these other corporations and their legal, political and accounting troubles, and that Wall Street, with its supposed checks and balances system, was actually in cahoots with the malfeasance. It has combined to shake our confidence in a huge way.

I think that this has prompted people to understand (a) how important corporations are in the world and (b) how little controls there are over corporations and how important it is for the owners, which are what shareholders are, to exert some responsibility and control over the way corporations conduct their business.

Will faith in the markets be restored?

There are, in my opinion, two primary things that could bring about restored faith in the market. One would be strong, swift action by government to require greater transparency on issues that affect stakeholders like diversity reporting, environmental reporting, how they supply goods and services, etc. The other thing is time. I think the five- or 10-year picture on the markets will be driven, in part, by time passing without any new shocks and revelations.

Another factor, though, is the fact that roughly 250 million people in Europe are beginning to save for retirement—they are where U.S. citizens were in 1975 when the IRA was invented. They are just beginning to learn that there’s something besides life insurance. These people have income levels that are much more level than ours, so a largerage of that population will be investors as compared to the U.S. I think they will first fuel European markets and then global markets in much the same way that U.S. investors fueled our markets over the last 25 years.

Is there hope for the market? In the very short term, inflation is low, interest rates are low, corporate earnings are going up. Were it not for the fact that we stand on the verge of war, we can’t trust government, we can’t trust priests, we can’t trust Wall Street, we can’t trust law firms, we can’t trust judges—we’d be all set for a great rally right now. But with all that, I think we’re just in a churning mode: up a little, down a little, up a little for a while. Now if there were a major shift in the nature of Congress and it moved more heavily Democratic, then I think that would do a lot to restore the markets.

The primary enemy to markets and to commerce is changing the rules. There’s nothing Wall Street likes less than a change agent. For example, as soon as George W. Bush became the front-runner Republican candidate, the market turned sideways. As soon as he was declared the winner, the market went down. Many people are angry with me for saying this, but I think it goes to his being a change agent. I don’t think people on Wall Street wanted change. They were very happy with business as usual.

Yet you advocate change. For example, you have applauded the New York Stock Exchange’s proposed changes to its listing standards, and even say that it hasn’t gone far enough.

I think it’s important to understand the big picture. I tell the story of growing up in an era where television was relatively new and most all TV shows were cowboy shows and most all cowboy shows ended the same: there would be a stagecoach or a wagon—with a family or a wounded soldier or a beautiful woman—being pulled by a team of horses that had panicked and was charging wildly across the landscape. Then, across the desert would rise . . . Cowboy Bob! And Cowboy Bob would reach over, grab the lead horse by the harness, steady it and save the day. Today, the big engine is finance and it’s on a runaway path. It’s stampeding across the horizon, carrying the helpless family of humankind along with it. And what might Cowboy Bob be? Can Cowboy Bob be government? Finance has trampled many governments—Argentina being the latest example of that—so no, I don’t think it’s government. Is it an enlightened consumer? Well, the last I checked more people smoked yesterday than the day before. So I don’t think it’s an enlightened consumer. They’re a good start, but they’re not the big answer.

Is it enlightened leadership of corporations? I think that’s possible, but the CEOs at companies that have not been exposed for corruption argue that they have a gun to their head from Wall Street—it doesn’t care about the long-term. Wall Street cares what’s going to happen next quarter and the quarter after that.

So how much control does the CEO or top management really have? I think an enlightened management can do quite a bit, but they don’t want to be replaced. So what you really have to look at is who’s holding the gun to their head, and that is the investor. The investor is the only hope for grabbing this financial stampede and bringing it to a goal of universal human dignity and environmental sustainability.

You have filed more than 60 shareholder proposals since 1994. Do you have success with these resolutions?

Yes. The successes come in three ways. One is that you’ve contacted the corporation and the dialogue is so successful you never have to file a resolution. The second is that you file a resolution, but you don’t go all the way to the annual meeting with it because the filing brings the board’s attention to the issue. The third is that you have that dialogue for two or three years and it finally goes to vote.

What criteria are used to screen the investments chosen for your funds?

After South Africa, we focused on the impact of “stakeholders.” There’s a whole controversy about who’s a stakeholder, but we tried to figure out how the corporation touches people and have identified communities, the environment, employees, suppliers, customers and investors.

There are about 100 underlying questions to the screens. The way we differ from the newer index funds is that we collect the data and then we stand back, read the picture and make a decision on the human level. Other social indexes have taken what some would argue is a more rigorous—and I would argue is a more mechanical—approach of adding it up and coming to an answer. But I’m reluctant to assign a higher priority to say diversity versus super fund sites or something.

How do you weight those criteria?

We collect the same data on every company and we use that to inform our decision, but not to make our decision. The data might be, for example, that a company has given 1.5 of pre-tax profits to charities, which puts it roughly among the best 11 of the companies KLD looks at. We presume that a company that’s in the best 10 or the worst 10 has either a commitment or a blindness. Do I think 1.5 is the right level? No. I think it should be five at least. But 1.5 is, in fact, what puts you at that level and so we take that as a positive. We say that companies that are among the best 10 in terms of charitable giving probably means that they have a commitment to charitable giving and are deliberate about it. We can infer something from that statement. By itself, though, it doesn’t mean you’re in the index or off the index—it’s only one of roughly 100 data points.

One of your screens is community involvement. What does that involve?

There are three “legs” to social investing: find the better company, be a better owner and be a better neighbor, which includes support for community development financial institutions. There are people who have been left behind by the miracle of capitalism—so as long as capitalism is going to be the way of the world, I’m very interested in being supportive of alternative models to that and sourcing locally. Community development financial institutions are things like credit unions for low-income people or banks that are focused on a constituency, such as Native Americans on certain reservations, or something of that nature. There are also lending pools that are pretty well structured, pretty large, which can be invested in.

Of what accomplishments are you most proud?

Well, I really do feel that the Domini 400 Social Index changed the landscape with regard to social investing. The index helped people know that they could make money this way. So that is one of my proudest achievements. I’m also proud of Socially Responsible Investing, which I printed last year. I think it is very accessible and easy and lays SRI out in a very simple language for the most naïve investor. It welcomes them to the industry.

Currently, the largest challenge to this industry are people who don’t think socially responsible investing makes any difference. They would rather make money the old-fashioned way and then give it away. But I ask: “Are you going to give away enough to compensate for the hardships you wrought on the world?” That’s something I’ve been working quite hard on—getting people to understand how SRI makes a difference. I think that if I can get people to understand how it makes a difference, that will open up the gate to more investors.

Do you think that corporate social responsibility is on the rise?

It certainly is. If you had told me 15 years ago that I would have land on my desk unsolicited corporate responsibility reports from British Petroleum, Talisman Energy or McDonald’s, I wouldn’t have conceived of it. Now it’s on all the Web pages of all the corporations in a popular vocabulary. David Rockefeller gives a speech on finance and he talks about corporate social responsibility. I never would have believed that it would have moved so far as all of this.

You don’t think that it’s all just a public relations tactic?

I think there’s probably a big component of PR in it. But I also think these things take on a life of their own, and they do tend to grow and develop. People want to do more than they did last year, so the department in charge of the environmental reporting is going to want more responsibility, a bigger budget and have a bright new idea next year. I think that’s a good dynamic.

Do you have a personal passion?

There is one thing. People come into SRI for personal reasons and stay for global reasons. There’s an aspect to social investing that’s a personal transformation aspect—I compare it mentally to my own shopping at Whole Foods. When Whole Foods opened in Cambridge, I went just as a curiosity seeker, and left really impressed with their fish.

Getting fish in Cambridge was always a separate shopping trip for me. So the fish brought me back to Whole Foods a second time. While I was there, I started being bombarded with messages such as “conventional versus organic” and “free-range versus not free-range.” By the third trip, I wasn’t even looking at conventional vegetables or fruits anymore. By maybe my seventh trip, I would get upset if I couldn’t get the organic alternative.

There is an argument that consumption changes the person. For example, say you buy a new table lamp, which then leads you to buy a new pillow, which then leads you to feel that your sofa is really tawdry or prompts you to paint the wall. This whole process started with buying a lamp. Another example: when a young woman gets her hair cut, she may be transitioning from grad student to young professional. Her next purchase might be a briefcase and a subscription to Business Week and all the other things that follow.

I think that social investing has a tremendous capacity to build better citizens. I believe that at the end of the day what builds this world with universal human dignity and environmental sustainability is thinking, active citizens. Once you start feeling that you are not one of the helpless masses, but one of the few who’s doing what you can do, you’ll read the newspaper differently and maybe you’ll vote, maybe you’ll be a little more deliberate in your purchases. You become constantly aware of the fact that you’re part of the answer.

This article first appeared in the Sept/Oct issue of [email protected] magazine.