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Intended Consequences
By Penny S. Bonda 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 green@work 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?
DOMINI: 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?
DOMINI: 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?
DOMINI: 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 larger percentage 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.
DOMINI: 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?
DOMINI: 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?
DOMINI: 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?
DOMINI: 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 percent
of pre-tax profits to charities, which puts it roughly among the
best 11 percent of the companies KLD looks at. We presume that a
company that’s in the best 10 percent or the worst 10 percent
has either a commitment or a blindness. Do I think 1.5 percent is
the right level? No. I think it should be five percent at least.
But 1.5 percent 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 percent 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?
DOMINI: 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?
DOMINI: 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?
DOMINI: 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?
DOMINI: 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?
DOMINI: 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.
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