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Tue, 08/25/2009 - 13:00 | by admin
Amy Domini Speech at Dartmouth-Hitchcock Medical (August 25, 2009)
I'm here to discuss socially responsible investing and I hope that by the conclusion of my remarks each of you will be convinced that what I have to say has merit.
We open with a story. Ben Cohen of Ben & Jerry's tells this story but I added on the last chapter. The history of architecture provides us with apt examples. From ancient times through the renaissance the largest structures on the landscape were built in tribute to a deity. The soaring cathedrals of Europe and the Wats of Southeast Asia were built in tribute to the fact that a universal goodness and purpose exists and must be honored.
Next came the age of government. Through much of the past three hundred years the largest buildings were the Houses of Parliament or great palaces. These were built in acknowledgement that the population's social structure was of primary importance and must be honored. While they honored something a bit narrower than universal goodness, they still had the good of the majority as their purpose.
During the past century until quite recently, the largest buildings in our cities were company headquarters. Whether you drive into Cincinnati or Milan, you see a skyline dominated by huge monuments to the company that chose this place to build wealth for its shareholders. The Pan Am Building of New York became a landmark to guide our tourists to Grand Central Station. We built these in tribute to the great engines of commerce, to the power of commerce to give people food, clothing, shelter, and desired goods and services.
But now even this is shifting. Today the Pan Am Building has a new name and a new owner; it is now the Met Life Building. Today our largest monuments belong to the financial services industries.
Today we acknowledge and honor the power of money movers. Neither universal goodness nor even a respect for social fabric or for commerce is symbolically raised above our city roofs. Today money movers have replaced God, government and commerce. Indeed the past 18 months have shown just the briefest insight into the potential of this situation.
This is bad news. The way we invest matters. It's a small planet and there isn't much time. Our pristine spaces are disappearing; our natural heritage of species is being decimated, and vast ghettoes scar every metropolis. Millions live in slavery or prisons. Children of eight are forced into the advance guard of armies. Others are sold into bonded apprenticeship or prostitution. Each day hundreds of thousands of people die of malnutrition, diarrhea, and a dozen other poverty created causes. Finance makes a lousy god.
Today our children and grandchildren look to us with fear of the future. The truth that we refuse to acknowledge is that we have made a commitment to use up the planet and its life giving resources in our generation at the expense of the tens of thousands of generations that might have followed.
A change in the model is urgently needed. We can no longer accept the adage that the business of business is business and that the rising tide will lift all ships. It hasn't and it won't. It cannot without a rewriting of the definition of success. Business is run on a set of rules that value making money for the few owners above all other outcomes. These rules have made business the most powerful force on the planet. Our large companies have revenues that far exceed the incomes of most emerging nations, they even exceed whole continents. Nothing can stand in their way as they strive to achieve their perceived primary mandate, making money for their shareholders.
This is precisely why investments made in a vacuum, without consideration for the social or environmental impact they may have, will result in a continual slide toward rewarding that which is profitable at the cost of that which is life enhancing.
It is obvious that we can no longer defend the position that finance and investors have nothing to do with human well-being. The recent credit crisis makes clear that this can be for the worse. The 9 ½ million Americans newly out of work know that what happens on Wall Street can destroy dreams on Main Street.
I have an answer. I'd like to convince you that it's a good answer. It is called socially responsible investing.
Let's start with vocabulary. Am I speaking of socially responsible investing, ethical investing, Environmental, Sustainable and Governance (ESG) in investing? These various names, and others, refer to the integration of social and ethical criteria into the investment decision making process. But for simplicity, at present, we practitioners of what we call socially responsible investing, or simply responsible investing, provide clients with three services.
First, we don't just buy anything. We apply standards to what we buy. That's true whether we are buying stocks, bonds, venture capital, real estate investment trusts or any other financial product.
Second, we are active owners of the investment we make. Generally our activity is carried out through proxy voting, letter writing, or other advocacy work.
Third, we support community development financial institutions. We support local credit unions like Self Help Credit Union in North Carolina. We make loans to Community Development Loan Funds like New Hampshire Community Loan Fund.
We practitioners of SRI feel that we must offer these three services to our clients. To do less than all three would be something with a different name.
One quick note, please notice that I never speak of socially responsible companies. I discuss services to the socially responsible investor. It is investors that will make the most impactful difference in shaping the future of this planet and its inhabitants.
Motivations vary. I began my professional career as a stockbroker. Occasionally clients would say to me, "Ugh, I'd never buy a paper company. I'm an avid birder and the herbicides they use are killing songbirds." Or "Ugh, what are you talking about, coal? Have you ever seen a coal mine?" Out of self defense, I started asking clients up front, "is there anything you'd rather I didn't talk to you about? Is there a line you draw on what you'll make money investing in?" Guess what? There always was. "Dad died of lung cancer," "Brother died drunk on the highway." "Best friend died in Nam." "There's slavery in South Africa." "Our foundation focuses on environmental issues, no polluters please."
That's often the start, a deeply held personal conviction that something is wrong.
But this field has grown to be more than a means of aligning personal ethics with the way you make money. It has become solution oriented. Alignment is joined by a second goal: that of being part of something bigger than ourselves, part of a dynamic force for the process that creates positive social change. Like me, most social investors find the field out of a desire to bring their investments more closely in line with their values, and, like me, most stay because of a belief that the way that we invest can actually make both money and a difference in the world
So now let's spend a few minutes drilling down on each of the three pillars of SRI: setting standards; becoming an activist, and supporting community development financial Institutions.
We set standards because doing so is a long-term strategic plan to introduce disclosure and transparency on a broad range of issues.
How can we accomplish a better tomorrow? How can we change the world? We can demand data. That is what worked for the South African campaign. Back in 1971, the Presiding Bishop of the Episcopal Church went to the annual meeting at General Motors and asked them to divest from South Africa. Where 27 million people had no vote. The resolution failed. However, a board member, Reverend Leon Sullivan, was interested in the issue and created a code of conduct for doing business in that nation. That code, later called the Sullivan Principles, demanded a report each year. It was a consistent report, comparable from one company to another. Through the years that report proved to the satisfaction of civic society that American corporations were not ending slavery through their presence in South Africa.
As a result, civic society began to act more aggressively, instituting selective purchase programs in cities and towns. They instituted boycotts and did everything they could to isolate that nation and to ostracize its leadership in the hopes of bringing about change, and it worked. In 1994 blacks in South Africa were given the vote. If you want to make things better demand data. That is why we apply social and ethical standards to our investments. That's why I don't need to love every company in my portfolio. I set a standard at the best half. Should it be the best third, should it be the best tenth? That is irrelevant.
In setting this standard, we should not ask how high or how low, but how wide. How many impacts of the corporation can we scrutinize? Our very special lens, the lens of human dignity and environmental sustainability guides us. Only SRI practitioners have fought for greater and broader data about corporations and their impacts.
Why? Again we learn from the past. In 1933 legislation was passed demanding companies disclose certain information systematically and in a certain format. Over the 77 years since then, those disclosures have increasing dictated what corporate management strives to achieve. The income statement, the balance sheet, the standards for defining profit became law. The law copied informal procedures that some of the best shops had been using. We will provide the procedures for a more comprehensive look at company costs and benefits.
Domini Social Investments avoids alcohol, tobacco, gambling, weapons, and nuclear power. Why? It's about the past, yes, but it is also about the right use of capitalism. Capitalism is very good at getting stuff to a lot of people cheaply. I'm not that happy with the concept that capitalism is the tool by which weapons are distributed. I don't think it is right that weapons be distributed through a methodology that gets them as cheaply and broadly distributed as possible. If America wants weapons, that should be exclusively a government program. I also don't think that capitalism is the right way to deal with prisons, national security forces, with hospitals, or with public school management. The consumer is not empowered. We don't state that we don't buy those industries. Why? Socially responsible investing is not about creating a laundry list of what we won't do. It's not meant to be eco-fundamentalism in action.
Now look at our qualitative screens. We look for the positive notes in the corporations that we evaluate, including their relationships which we view as partnerships with the consumer, the vendor, the employee, the communities in which they operate, both in the local sense and in the global sense, and their impact on the natural environment.
We rely on information that is ascertainable, quantifiable, and significant. It may not be perfect information upon which to make a decision, but it is available information. Further, it is information from which you may safely draw conclusions.
For example, if a company manufactures something that supports the goal of environmental sustainability, such as cogeneration equipment, that leads us to be prejudiced in their favor. We then look at just what matters in that industry. Is it industrial accidents? Is it a commitment to use recycled metals? We may know at that point if it is one to own, but often we don't. So we drill down to broader partner indicators: employee plans, diversity profiles, impact on vendors and a broad range of other data points.
What we create is a good corollary to the Sullivan Principles. It is information upon which civic society can take action. The model works globally. They don't have Superfund sites in France, so they can't count the number of Superfund sites in France. But they can find indicators that will help assess the positives and the negatives of environmental behavior in that economy.
Setting standards is strategic. Activism is more tactical. It is best used to raise issues and to bring corporations and non-profits together to address a unique or emerging issue. Because you own stock you have the right to ask questions that do not involve ordinary business decisions of the board and other shareholders. This is a powerful right. Domini Social Equity Fund has used this right to raise questions over 200 times. Here are some highlights from our mutual fund for 2008 work.
We helped to launch the Global Network Initiative, a multi-stakeholder group that opposes government censorship and threats to privacy. The group includes a range of human rights and academic organizations as well as corporations: Microsoft, Yahoo and Google.
Of the twenty shareholder resolutions we filed for the 2008 proxy season, six related to sustainable forestry and climate change. Best Buy agreed to work with us to develop a sustainable paper purchasing policy and the packaging manufacturer MeadWestvaco agreed to study the feasibility of phasing out the use of wood fiber not certified by the Forest Stewardship Council and to increase its use of recycled fiber.
Domini Social Equity Fund has participated in a multi-year collaborative effort, over sweatshops. McDonald's and the Walt Disney companies field-tested a new approach to eliminating the worst cases, using contractor factories in southern China in 2008 as a part of this.
In 2007, the International Labor Rights Forum brought to our attention the annual forced mobilization of children in Uzbekistan to harvest cotton. In 2008, we helped lead a group of investors that sent letters to more than 100 corporations around the world, prompting them to start tracing the source of their cotton purchases. It isn't always filing a resolution.
In September 2008, Domini's general counsel briefed the Congressional Human Rights Caucus on what investors can do to address genocide and other crimes against humanity.
Your ownership gives you a chance and a responsibility to act.
Caught up in the excitement of shareholder activism and big corporations, it often is easy to forget the individual who, along with five dependents, is living in one of our decaying inner cities or rural back roads under conditions a civilized society should not tolerate for any of its own. For one reason or another, whole populations exist outside of the economic mainstream. But lending a helping hand to those in need can be as simple as being deliberate about where you do your banking. By using a community development bank or credit union, you get the basic banking services you need while also stretching the capacity of that local community-based institution to meet the sometimes overwhelming challenges of its service area.
The movie classic, It's a Wonderful Life, starring Jimmy Stewart is shown every holiday season. In it we see the world as it exists with and without the caring community banker. Without the lending institution, the future is grim; the town deteriorates into a mean and dangerous place; Main Street is largely boarded up, and lives are shattered. Our hero chooses life and returns home to find that the community is gathered to support him as best they are able so that they can benefit from his kindness and generosity as a lender. Such stories, dusted off at the holiday season, are a lost part of our shared popular culture. Most of us, and most banks, have forgotten what banks were created to be.
Community development banks and bank programs are, in a way, simply a return to the origins of banking. Early bank charters were granted to encourage saving and thrift by the population. Today's community development bank programs are innovative and aggressive in meeting the needs of community organizations.
Community Development Credit Unions often trace their roots to either a church or an affinity group (such as the Portuguese American Club) in a low-income area. Many are small and unknown outside of their neighborhoods, but these truly grassroots organizations are the first option most poor people have for financial services. Remember these institutions are not-for-profit, they are member owned. They serve members needs at lowest cost. The debit card they offer is often the first step to a credit history.
One, Latino Community Credit Union of Durham, NC., was founded to solve a problem. In 1996, a local Latino community club held a meeting to address violence in their community. At the time, most local Latinos did not have bank accounts and kept large sums of money in their homes. As a result, many were mugged and robbed. Most of the audience wanted more help from the police, but one local suggested a credit union. "If we had a safe place to keep our money, none of this would happen." Most everyone in the room felt the local Latino community was too poor to build a credit union but the idea took hold and today they no longer hide money under mattresses, the crime rate has dropped, and members are building a credit history.
Community development loan funds are nonprofits that borrow from many sources and lend to many borrowers. They offer help on budgeting, building, or whatever technical assistance may be needed to the borrower to assure success of the project. Most serve a clearly stated constituency. Boston Community Capital is in the business of building healthy communities in the Greater Boston area. Shared Interest makes small business loans in South Africa, and Lakota Fund makes small business loans to residents of the Pine Ridge Reservation in North Dakota.
I'll dive into one example, the Panamanian bank MiBanco. In order to meet the capital requirements set by Panama, the founders appealed not only to friends and family but also to the entire population of that nation. As a result, MiBanco stock trades on the Panamanian exchange and is its most widely held company. When I did an eco-tour of Panama, in 1997, my driver proudly told me he was an investor. It was his only stock. The bank makes micro loans and gives training to borrowers. Each time a borrower pays interest, a portion of that payment goes to buying stock for the borrower. This means that in addition to the benefits of lending at the grassroots level, the poorest of the poor in Panama are learning about stocks and are building wealth.
This is the value proposition I offer: standards set the stage for knowledge and action. Activism brings nongovernmental organizations and corporations into meaningful solution-oriented conversations and community development work to bring disenfranchised pops into the main stream. If you believe the way you invest matters, join me.
Now to ask the irresistible question. Is there a cost to socially responsible investing?
When I began my work, the standards applied to socially screened portfolios were poorly understood. Criticism focused on whose standards were at work here and were they the right ones. Further, the actual research process was quite cumbersome and decentralized. Data was hard to come by and hard to interpret. We felt that explaining the standards applied to the research was the first barrier to work on.
The second barrier was the absolute truth, well-established in academic work, that anything that limits your investment universe must limit your investment return. Although we could argue that it didn't seem logical that avoiding trouble would limit your return or that live track records at individual firms had actually been quite satisfactory. These arguments didn't hold any sway with Wall Street. The answer was to have an index of our own. It would set the standards and track the cost or benefit of using these standards.
The Domini 400 Social Index was born. Now re-branded as the FTSE KLD 400, it has taught us that the application of broad social criteria to the investment decision-making process does not hinder the investor from achieving superior results. In fact it seems that the application of social criteria may have led to superior investment results.
As of July 31, 2009 the social index had outperformed the more conventional Standard & Poor's 500 index on a one month, year to date, one year, three year, ten year and since inception basis. It tied for the five year period. The performance argument has been put to bed.
What has SRI accomplished?
It is changing the rules. On learning of the field, the United Nations Environment Programme hired Freshfields, a firm offering global legal services to review the implications of SRI to fiduciary obligations. Freshfields concluded that integrating Environmental, Social and Governance considerations into an investment analysis, and I quote "is clearly permissible and is arguably required in all jurisdictions."
It was the shot heard round the world.
The House of Lords of the UK Parliament passed the Pensions Bill in 2008. It states that, again, I quote: "There is no reason in law why trustees cannot consider social and moral criteria in addition to their usual criteria of financial returns, security and diversification." The law goes on to state that these considerations are not simply an option; they are an obligation on the fund trustees.
China has mandated Corporate Social Responsibility reporting by any company in which the government has any ownership. Malaysia has made disclosure of environmental and social issues a prerequisite for listing on their exchange. Across Europe and in Brazil standards have been set.
Shareholder actions have also brought dozens of conversations to reality. The quality of environmental reporting is light-years ahead of what it was yesterday, thanks largely to an initiative of ours, the Global Reporting Initiative. Shareholder actions have brought meaningful changes to the lives of hundreds of thousands of people. Today, we have legislation enabling and giving grants to community development financial institutions here in the United States.
We have corporate social responsibility pages showing up on web sites and annual reports of corporations, over 4,000 annually globally. Business responsibility is on everyone's lips. Panels and conferences are discussing this topic at the Chamber of Commerce, the Asian Development Bank, and the Conference Board -- settings I could never have imagined when I wrote Ethical Investing 26 years ago. The industry has exploded in size and credibility and impact.
Only the socially responsible investment industry has put into place an ongoing baseline global corporate accountability collection and reporting system. Nothing existed before we came, and without us, nothing would have existed. This is our greatest impact.
And what is the impact of ethical investing on motivation? Are you getting what you came for? If the motivation is inward in direction, having to do with institutional or personal consistency or integration of money and self, then every step in that direction brings one closer to that goal. If the motivation is social change, then every company that receives acknowledgment for their positive social impact serves as a model for other companies as well as gaining positive reinforcement for more socially conscious business practices. In addition, the standards we set help companies to understand what the investing public really cares about
In Europe, that a social safety net is of value is presumed. The economy is there to serve the people and their leaders will stand up and talk about the right and just thing to do. When Citroen had to lay off 15,000 people, the Premier of France announced that it was the wrong thing to do. He pointed a finger at Fidelity Investments and said "Citroen is not a French company any more. US investors have demanded this." Perhaps this is why the total SRI assets under management had reached €2.665 trillion by December 31, 2007 and represents as much as 17.5% of the asset management industry in Europe. That's growth of a double in 2 years.
Emerging nations also bring something to the table. There are two SRI funds in China, two in Thailand, one in India, ten in South Africa. Brazil's primary stock exchange, in 2002, began its own corporate sustainability index.
I was fascinated to read in the Wall Street Journal a decade ago that the man on the street in Tokyo was personally ashamed of the then current Japanese banking collapse. Now we too have had a banking collapse here in the United States. For this collapse, I did not feel any personal shame or personal responsibility. That sense of personal responsibility for the well-being of the nation is something we certainly lost years and years ago, and it is something we must recover and bring back to our society. Our Asian counterparts in SRI can help us with this. Perhaps this is why Japan and South Korea each have over 40 SRI mutual funds. There are over 200 SRI funds based in Asia.
What a relief. What a relief.
Thank goodness for the growing number of SRI mutual funds.
Our system of finance has been writing the rules that enable corporations to focus on one stakeholder and one need of that stakeholder only. Corporations now have only one job - maximizing their shareholder's total return. Fiduciary responsibility has been reduced to one simple directive: "Make me money!"
FTSE KLD does better than S&P so where do they get off?
A mutual fund with active management portfolio turnover averages 200% a year. That means that the manager of funds that are not index funds buys and sells the entire portfolio, on average, twice a year. I don't call that investing. I call that renting a ride. The mutual fund industry has way too much influence. 2008 numbers tell us that globally, it controlled $69 Trillion worth of publicly traded securities. That represented 42% of all traded securities. Using CIA World Factbook numbers, this meant it controlled more money than global GDP, 11% more money. And it's all renting a ride. The implications of this situation are that a huge new owner -- the primary owner -- of the corporation is one that only cares about next quarter.
What we have in place is a structure in which there are no relationships. There is no ongoing sense of the impact of one's actions. I, as a mutual fund manager, will not have to look into the faces of those who have been forced into unemployment due to my efforts to press management to create higher profit margins. I will wring my hands over the thoughtless destruction of the rainforest and never face my own role in the creation of the event. No institutional sense of responsibility.
Then there's personal responsibility.
Finally, we must instill a sense of urgency of the personal responsibility each of us carries to do our best. My mother, over 80 years of age, drives me crazy. She cooks a fried egg and potato dish, puts it between pieces of bread, and wraps it in waxed paper (which is the waxed paper that she saved from yesterday) before we go out for the day. Why buy a sandwich that costs $4.50 when you can make an egg sandwich for almost nothing? She smoothes out her tinfoil, she washes out her plastic bags, and she saves her used string. Before we go to the supermarket, she collects all the bags from the last visit and carries them with her. My mother would never consider herself to be an ardent environmentalist. She cannot bear the thought of waste. She is a product of World War II. Our boys were out there fighting and dying. The least she could do was conserve our nation's resources, and she has never forgotten that. She has never changed her pattern of behavior. Now let me ask you. How do we re-train global citizens to understand that the enemy is upon us and that only by our own efforts can we save ourselves?
What does it take to bring us to this point of personal commitment? What will it take to shake us from our lethargy?
We are the ones who can make the difference. We, here in this room, can tip the scales of history. We do this by not only taking responsibility for our waxed paper or bags, but also for doing whatever we can do. I am tired. I'm well enough off to spend the rest of my days sailing a catamaran, listening to Jimmy Buffet tapes and sipping lemonade. But I won't do it. I will continue to use every tool at my disposal because yes, it must be done.
This will be our impact. We will create the data that civic society uses to begin taking action globally. As investors, we will demand a future. It must come from investors. Wall Street created the current rules that will surely destroy this planet. Trade was not created to transport the wealth of the many to a few. It was created because it works for the many. Fiduciary responsibility must no longer be defined as "make me money."
We work in partnership with NGO's around the world. We work in the city and on Wall Street. We rely on faith-based organizations struggling for peace and justice. We must continue to work together to be recognized as the force for positive social change that we are.
There is evil and injustice in the world. But it wears a grandfather's face. It calls itself a profitable quarterly report. It poses as a friendly financial advisor, one who understands your personal dreams and who works night and day to help you achieve them. We in this room cannot do everything, but unless we are involved, unless we can harness the power of the financial services industry to work for human dignity and a clean planet, it will work against those goals and cost us a future.
Domini Social Investments has a starfish as a logo. The reason is this; some years ago I heard a story and feminized it. The original version of the starfish story was in The Star Thrower, a collection of essays by the naturalist and writer Loren Eiseley that appeared in 1978.
My version goes, "Thousands of starfish washed ashore. A little girl began throwing them in the water so they wouldn't die. "Don't bother, dear," her mother said, "it won't make a difference." The girl stopped for a moment and looked at the starfish in her hand. "it will make a difference to this one."
The Domini Funds are not insured and are subject to market risks. Investment return, principal value, and yield will fluctuate so that an investor's shares when redeemed may be worth more or less than their original cost. You may lose money.
On November 30, 2006, the Domini Social Equity Fund, formerly an index fund, transitioned to an active management strategy. The Fund does not invest in the Domini 400 Social Index.