Keynote Speech by Amy Domini at Socially Responsible
Investing Conference
(September 10, 2007)
Harmonie Club, New York
Good morning. Thank you for the opportunity to
speak to you today.
‘The road ahead.’ My thesis today is that
leadership is shifting. Mega trends are shaping what we do. Our own role is to
provide a vision. Socially responsible investing. Investing. Yes, first let’s
remind ourselves that we work with money. Money rules. A government, society,
corporations, no entity on the planet comes close to wielding the power of
financial services firms. You doubt it? The world’s financial assets (stocks,
bonds, bank deposits) are today approximately $140 Trillion but the figure,
like markets, varies daily. Add to that global derivatives estimated to stand
at $270 Trillion most days. Now consider that the estimated annual global GDP
stands at between $61 and $66 Trillion. GDP represents real stuff like jobs and
products. The rest just freeloads off the real stuff. But the rest represents
about $400 T a day versus the $60-65 T what all nations together are able to
produce in a year.
And what are financial services firms doing with
this power? Recently Bloomberg Markets magazine ran a feature story that began
with the following words: “Hundreds of thousands of workers toil without pay in
Latin America, producing timber, gold and the charcoal used to make steel.
Their labor goes into materials bought by major companies — including General
Motors, Kohler, Toyota and Whirlpool.” The article went on to describe the life
of a slave laborer and employers who are, in the words of a Brazilian labor
inspector, “willing to defend slavery by force.” Yet we on Wall Street chortle
with glee as we review our own cleverness at benefiting from competitive
winners. The commitment from a number of the implicated companies — as soon as
they received the reporter’s initial call — to suspend purchases from the
suspect sources offers no solace. We and they were all eager to take advantage
of savvy competitiveness until we were faced with exposure. Financial Services
are empowering slave owners.
My mother was fond of teasing us kids when we
would fight, she’d put on a serious face and say, “Alright then, first thing
we’ll do is we’ll establish the blame.” When I look for someone blame, I find
Modern Portfolio Theory; not so much the theory as the interpretation that it
dictates fiduciaries behavior. That’s a stretch. It is a theory of managing
money, not well being. Modern Portfolio Theory states that a manager ought to
construct and maintain a diversified portfolio that has the greatest likelihood
of providing the maximum portfolio returns at an appropriate level of expected
risk. Fine.
Modern Portfolio Theory is a fine starting point
for managing money, but the risk horizon is far too constricted. The real costs
of the risks undertaken are not evaluated. Analysis depends on data and
corporations have spent the past 50 years perfecting ways to hide data. The 10K
must report potential costs from employee harm or environmental damage. We CFAs
know that. But it doesn’t. Why? Corporations made accounting rules that state
that accounting can only report what is known, so as long as companies fight
legitimate claims, the costs are not known nor the threat revealed. So they
keep the law suit going for 15 years so they can fail to mention the asbestos
liability. They lobby to change the EPA standards as it applies to their
special waste rather than admit to the cancer cluster along the shores of Lake
Michigan and their potential culpability. The analyst is forced to short term
analysis because long term data is hidden. And there are less specific risks as
well. Don’t we create risk when we create hatred? Are a million slaves a
million potential terrorists? Don’t we create risk when we poison land in our
effort to extract minerals? Don’t we create risk when we build houses and
bridges as cheaply as possible?
As to reward, focusing on portfolio return rather
than on the beneficiary’s well being is okay for a portfolio manager, but in my
opinion violates fiduciary standards. ERISA, for instance, guides the fiduciary
to look after the financial well being of the person. FINANCIAL well being. Am
I financially better off with $14 a month more to retire on if the
asthma/cancer/autism/overweight-related heart condition epidemics cost me,
through my health care bill, $200 a month? The beneficiary is meant to be the
person that depends on the action of the fiduciary a person, not portfolio
return.
Large investors ignored all this for a while, but
that’s changing. The selfishness and hubris of the CEO pay package is finally
beginning to tick off the (relatively) lowly state treasurer. The undermining
of American freedoms to protect corporations from the consequences of harming
their employees or customers is being challenged by state governments who pick
up the tab. Financing the destruction of rainforests is the equivalent of
holding a rifle to your grandson’s head and firing. Real fiduciaries know this.
The sleeping giant is rising. Leadership in our field is shifting to
mega-pools.
Enter the ‘universal’ or ‘permanent’ investor. A
large pension plan actually provides for the present and future generations of,
say, state employees. The funds involved are so large that broad
diversification is a necessity. Domestic, overseas, liquid, illiquid, simple,
complicated, all manner of investment, are owned. In other words the fund is
betting that the economic engine of the planet will expand, then maybe tweaking
the edges. These ‘permanent’ investors, some of whom are speakers today and
tomorrow recognize that to a certain extent, their beneficiary is Tom Typical
Taxpayer and that what’s good for Tom is the guiding light in assessing their
own Duty of Loyalty. This is why you have seen the dramatic growth of institutional
shareholder alliances working on our issues.
Consider the Institutional Investors Group on
Climate Change. The group was launched in November 2003. Membership has since
grown to 50 investors managing nearly $4 trillion of assets. These state and
city treasurers and comptrollers, public and labor pension funds, foundations,
and others promote improved disclosure of the business risks and opportunities
posed by climate change. And as we saw with slavery, disclosure changes
behavior. It is a worthy goal. Further, members have invested over $1.2 billion
in technologies such as hydrogen fuel cells, ethanol, geothermal facilities and
advanced materials and have persuaded several Fortune 500 companies to improve
their climate policies. Ah hah, positive investing and activism. Sounds like
SRI to me.
Or consider the U.N. Principles for Responsible
Investment, whose mission states, “Investors fulfilling their fiduciary (or
equivalent) duty therefore need to give appropriate consideration to these
[environmental, social and corporate governance] issues, but to date have
lacked a framework for doing so.” Its board members include individuals
representing New York City Employees Retirement System, British Telecom
Pensions, New Zealand Superannuation Fund, Government Pension Fund of Thailand,
Government Employees Pension Fund of South Africa and CalPERS, to name a few.
These are the classic permanent investors and they are pledged to creating a
framework that supports our needs.
And they should be. In late 2005, the United
Nations commissioned Freshfields Bruckhaus Deringer, a leading international
law firm, to examine whether institutional investors have the right or perhaps
even obligation to incorporate social and environmental factors into investing
decisions. The study is available at the Freshfields web site. Paul Watchman,
primary author of the report, presents the evolving context of modern fiduciary
theory and challenges previously understood notions of the institutional
fiduciary. His conclusion in every jurisdiction, including the United States,
is that what we are here calling socially responsible investing is probably
mandated and most certainly encouraged by law.
These three mega-developments are my challenge. My
fear is that CalPERS, in its glee to be clean, overlooks public policy. My
role, the role of the smaller, earlier wave, must be to needle, wheedle and
nudge. Large institutions can think a little too big.
At a certain point we need to drop back to our
human selves. My father contracted with farmers in Florida for eggplant crops.
He’d buy the crop, peel the eggplant, slice it, dip it in batter, fry it,
freeze it and sell it to Campbell Soup or the University of Wisconsin for their
Tuesday Eggplant Parmesan offering. When he asked me if I knew of a safe spray
to keep bugs off, I shared an apple cider vinegar remedy and asked him why,
after all, didn’t the eggplants get peeled? He looked at me in astonishment and
replied, “This is food; people eat it.”
Our corporate leaders and many institutional
investors have by and large abandoned this straightforward approach to right
and wrong. They say they have a right to, that it isn’t against the law, that
they already shoulder too many responsibilities that should rightfully lodge in
government. And, here’s the damning part, they argue that their investors
demand nothing less than ruthlessness. Do you? I’m asking each of you in the
room if you intended to poison those pregnant farm workers and blind their
unborn babies. Did you intend to give lead paint disguised as toys to children?
Did you intend to develop the marshes, the link in the song bird flyway, in
such a way as to destroy a species? By your silence you did these things. Ask
management at any investment pool, private or public, you work with. They never
heard from you that you wanted anything but money.
Ah the road that lies ahead. There will be dozens
of issues. What about an anti-terrorist portfolio? What about an anti-poverty
portfolio? What about micro-capital? And so forth. Don’t allow the clutter to
distract you. Here’s what to focus attention on: the investment world matters,
we are creating or destroying the future, we have an absolute duty to do what
we can.
Let me ever so briefly remind you of the impacts
of the other enormous forces shaping our roadlet, our path. The investment
world is global. Social investors in Europe and Asia, growing out of different
investment cultures, will continue to challenge our domestic methodologies and
our research decisions. They will raise the level of competition in our
industry, and the quality of our offerings. They will also force us to live up
to the standards of reporting and transparency that they demand, even when
these standards are new to us. Those of us who do research envy the Japanese
transparency as it applies to environmental impact disclosure and the Danish
mandates for public reports from private companies.
Vendors of SRI products in the U.S. will compete
against a flood of credible and well-financed offerings from overseas
providers. In order to flourish, we must compete on (and effectively
communicate) our core values, especially those that differentiate us - not just
the thoughtfulness of our investment standards and the depth of our research,
but our aggressive form of shareholder activism and our myriad investments in
community development. And we must partner with the Swiss, the Dutch and the
Japanese to develop a both/and, not an either/or, for the greater goals of our
field.
Then there is public policy. With the leadership
of key Congressional committees now in Democrats’ hands, many of the values we
have fought to keep alive will be of keen interest to legislators. Social
investors can play an important role in making corporations accountable for
their externalities, clarifying 10-K reporting needs, and increasing legislated
disclosures. Disclosure is absolutely essential to insist upon for without it,
costs are not counted. Perhaps we can even help ensure that accounting is made
to taxpayers, who after all have more at stake than investors in any given
company. Taxpayer accounting, almost by definition, will lead companies to
begin managing a host of externalities that now go unmanaged, unreported, and
largely unmentioned: labor standards, carbon emissions, product safety, and human
health and safety.
We have the ability to build a financial services
structure that actually supports the creation of universal human dignity and
ecological sustainability. Moving mainstream, going global, achieving political
influence, and reshaping finance from within -- we are ready to emerge as a
powerful and important force that changes the world for the better.
Always remember that the people for whose benefit
we invest are real people, and that the prize for them is not maximum
risk-adjusted portfolio return. They invest so that they can retire in comfort
and dignity, in a neighborhood where their grandkids can feel safe, where their
neighbors, next door and around the world, can live in peace and freedom.
My grandfather was about 92 when he planted two
cherry trees in his front yard. He told me then that they would take about five
years to fully bloom and provide the yummy treats that would bring the birds.
He spoke with such enthusiasm and I silently wondered, did he realize that he
was not likely to see that day? He knew, but it never for a moment occurred to
him to deny beauty and pleasure to the world if he could, by his own hand,
provide it.
This is our challenge.
Thank you.
