Fixed-income investments provide an important opportunity to create public goods, address a wide range of economic disparities in our society, and to fill certain capital gaps – funding needs that have often received insufficient attention from investors. We seek to address some of these disparities through the investments of the Domini Social Bond Fund, while simultaneously seeking to achieve competitive returns for our Fund’s investors.
The following provides an overview of the social and environmental objectives of the Fund, particularly those addressing access to healthcare, climate change and affordable housing.
Standard Setting by Asset Class
Stock ownership offers the opportunity to set standards for corporate behavior and to influence management through the exercise of shareholder rights. Fixed income investments offer a different set of opportunities for long-term, lasting impact.
If you think of a bond as a loan, the key questions for responsible lenders should be: To whom am I loaning my money and for what purpose? Despite some of the complex details of the fixed income markets, we believe these are the threshold questions that responsible investors should ask.
Domini’s Global Investment Standards are directed towards two long-term goals: universal human dignity and the preservation and enrichment of the environment. The standards applied to the Domini Social Bond Fund’s portfolio focus on three key themes:
- Increasing access to capital for those historically underserved by the mainstream financial community
- Creating public goods for those most in need
- Filling capital gaps left by current financial practice
These three themes flow from our belief that healthy economies must be built on a strong foundation of fairness and opportunity for all.
We look to diversify our holdings in the Fund across a broad range of social issues, including affordable housing, small business development, education, community revitalization, rural economic development, the environment, and health care.
Below, we provide examples of several types of fixed income investments and the standards we utilize to select the Fund’s holdings.
Governments around the world issue bonds (or “debt”) to finance a wide variety of public goods including education, infrastructure, national defense, the judiciary and social welfare. Although sovereign debt is issued to finance such public goods, debt raised by governments with a history of corruption can be misallocated and misused at the expense of the well-being of the nation and their own citizens.
We therefore use indicators of political freedom and corruption, including Transparency International’s global corruption index, to eliminate from consideration certain countries’ bonds. We use these threshold indicators to help us to identify a country’s ability and willingness to utilize the proceeds of these offerings for proper purposes.
In addition, we will not invest in debt issued by certain “tax haven” jurisdictions -- countries characterized by low or no taxes, financial secrecy laws, and light regulation. Tax havens can help to facilitate criminal activity, including allowing dictators to shelter embezzled funds, and wide scale tax avoidance by corporations and wealthy individuals. Tax havens foster global economic inequality, which is destabilizing to the financial markets and to society.
We do not invest in U.S. Treasuries or Russian government debt, as these instruments partially finance the maintenance of these countries’ nuclear weapons arsenals. The United States and Russia possess over 90% of the world’s nuclear warheads. We believe they carry a special obligation to eliminate this global threat.
We generally consider municipal bonds – debt issued by states, cities or counties or other quasi-public organizations-- to be closely aligned with our investment objectives, particularly when they are issued by jurisdictions with below-average resources. They can help to finance the creation of substantial public goods, such as transportation infrastructure, educational facilities, brownfield redevelopment, technical assistance for small enterprises, and other services needed to close the gap between these localities and the rest of society.
Municipal bonds can also help to ensure broad access to environmentally beneficial technologies to all members of society. We therefore look to invest in municipal bonds that generate environmentally positive impacts for underserved communities. Municipal issuers have a key role to play in terms of climate adaptation, disaster prevention and recovery. We are seeking to purchase these types of bonds as well.
We will seek to avoid purchasing the relatively few government-issued bonds that are explicitly issued to finance the development of projects, such as nuclear power plants or casinos, which are fundamentally misaligned with our investment objectives.
The Domini Social Bond Fund has maintained a long-term commitment to affordable housing, which the Fund supports primarily through the purchase of securities backed by pools of mortgages.
Fannie Mae and Freddie Mac, two U.S. government-sponsored entities, play a particularly prominent role in increasing access to affordable housing and sustaining the housing recovery in this country. Among the range of debt instruments they offer, those targeted to low income neighborhoods, low-income borrowers, multi-family housing or specific community revitalization projects have a particularly direct social impact. Also, these institutions have specific programs to help homeowners stay in their homes or otherwise avoid foreclosure. These efforts have helped to stabilize neighborhoods, home prices, and the housing market.
Green Bonds are designed to finance projects and activities that address climate change or serve other environmentally beneficial purposes. These environmentally themed bonds are rapidly growing as a new asset class, with issuers including supranational banks, governments, and corporate entities. The market for green bonds more than tripled in 2014, rising from only $3-5 billion per year between 2007 and 2012 to $39 billion in 2014.
Today, we are cautiously optimistic about the development of this new asset class. The stakes are high, however, as this market develops. We are concerned, for example, that an overly aggressive use of the word “green” could conceal environmentally harmful impacts, threatening the credibility of this important avenue for financing critical unmet environmental needs. We therefore established our own guidelines to identify appropriate green bonds for the Fund, considering the social and environmental record of the issuer as well as the specific purpose of the bond.
Our Approach to Green Bonds
The following are some of the key questions Domini asks when evaluating green bonds:
- Who benefits from the proceeds of the bond? We favor investments that generate positive impacts for people and communities in need, with a special focus on vulnerable groups, including low-income populations, minorities, and immigrants.
- Can the proceeds from the bond contribute to innovations that address serious sustainability challenges? We favor investments such as those mitigating the impacts of fossil fuels in energy-intensive industries, promoting energy efficiency, or otherwise addressing environmental and social justice issues.
- What is the quality of the issuer’s relations with communities, customers, employees, suppliers and the environment? Does the issuer maintain credible due diligence processes to address environmental and social risks?
We will seek to avoid the following:
- Bonds that finance projects with substantial sustainability concerns such as first-generation biofuels, waste-to-energy plants using toxic substances, or projects that prolong fossil fuel dependence such as carbon capture sequestration or refurbishment of coal power plants.
- Bonds issued to finance nuclear power, activities related to the mining of coal or uranium, or the production of weapons, tobacco, alcohol or gambling.
Significant capital will be needed to finance the transition to a low carbon economy and adapt to the physical impacts of climate change. For example, while current investments in clean energy alone are approximately $250 billion per year, the International Energy Agency has estimated that limiting the increase in global temperature to two degrees Celsius above preindustrial levels requires average additional investments in clean energy of at least $1 trillion per year between now and 2050.
We believe that the real estate industry is in a unique position to reduce greenhouse gas emissions through energy efficiency improvements that are low cost and that create value within the underlying asset. We have therefore purchased several bonds designed to finance green buildings. In particular, we are looking for the U.S. Green Building Council’s LEED (Leadership in Energy and Environmental Design) certification, a comprehensive green building certification program that recognizes best-in-class building strategies and practices.
You perhaps have noticed Valeant Pharmaceuticals in headlines recently. First, the company made news for hiking the prices of life-saving drugs, in some cases quadrupling the prices. Then, the company’s relationship with an affiliated mail-order pharmacy came under scrutiny, prompting comparisons to Enron. Most recently, Valeant’s interim CEO testified before Congress about its pricing practices. (The notorious Martin Shkreli, former CEO of Turing Pharmaceuticals, refused to answer questions during this hearing. Turing is privately held and not eligible for investment by the Domini Funds.)
At Domini Social Investments, our investment standards led us to designate Valeant ineligible for investment a year ago. Before reports of price hikes and shady subsidiaries hit the headlines, we were concerned about the company’s culture and business model – acquiring companies and slashing spending on research & development and on taxes. Valeant spends about 3% of its revenue on R&D, compared to 15% for typical pharmaceutical companies. And by taking advantage of the company’s Canadian mailing address, Valeant (and any companies it acquires) pay only 5% in corporate income tax, instead of the much higher US rate. This ethos of cost-cutting and profit above all else also led the company to delay FDA-required studies on drugs the company was marketing.
For now, the company’s culture is costing its investors dearly. Thankfully, we are not among them. And while we cannot predict what its stock price will do in the future, the Domini Funds will continue to avoid Valeant as long as its values – social as well as economic – are not in line with our own.
In December, representatives of 195 nations met in Paris to respond to the challenge of climate change — perhaps the most significant challenge the global community has ever faced. Although Paris did not produce a binding agreement, it achieved a historic degree of global unity around a single goal — limiting global warming to 2 degrees centigrade above preindustrial levels, with an aspirational goal of 1.5 degrees, the level many scientists believe is a safer ceiling to prevent catastrophic warming.
Many criticized the accord as inadequate to the challenge, but there is no question in our minds that it will move us all in the right direction, around a common goal. We believe we are seeing the beginning of the end for the dominance of fossil fuels.
In this report, we will address one aspect of the set of challenges presented by climate change — electricity generation — with a focus on solar and wind, two of the cleanest and most promising forms of renewable energy.
The cost of producing electricity from wind and solar has dropped significantly over the last five to ten years, and has started to reach price parity with the grid in various markets, including thirty countries and twenty U.S. states. Deutsche Bank predicts that by the end of 2017, solar energy will be at grid parity for most of the world. These trends, of course, will also depend on government subsidies and technological innovation. Today, wind and solar, combined, currently account for only about five percent of U.S. electricity generation. In comparison, renewable energy accounted for more than 25 percent of electricity consumption in the European Union, as of 2013.
Below, we provide a brief survey of some notable companies that are advancing the shift to renewable electricity generation around the world and across the value chain from manufacturers to electricity generators, financiers (banks and other investors, including yourselves), and consumers.
The Domini International Social Equity Fund is invested in some of the largest wind turbine manufacturers in the world, including “pure-play” turbine manufacturers as well as companies that offer a larger portfolio of renewable energy technologies, including solar power, hydropower and biomass.
Vestas (Denmark) is one of the world’s largest manufacturers of wind turbines, with a 12 percent global market share in 2014. In 2015, the company installed its products in 34 countries on five continents. Vestas makes the largest turbine in the world, standing 720 feet tall, more than twice the height of the Statue of Liberty. It produces enough electricity to power 7,500 average European homes, or 3,000 American homes, per year. Its great height allows wind farms to take advantage of faster wind speeds that occur at higher elevations.
China has become the world’s largest market for wind power. The Chinese government has pledged to produce 15 percent of all electricity from renewables by 2020. In 2015, the country installed over 28 gigawatts of new wind energy capacity and is aggressively expanding its investments in renewables. As a result, Vestas’ market dominance has recently been challenged by Xinjiang Goldwind Science & Technology (China, not currently held, but eligible for investment by the Domini Funds).
Companies like Gamesa Corp Tecnologica SA (Spain), have concentrated on pushing the envelope in terms of technology, developing turbines that work in low winds, high altitudes, cold climates and deep offshore. Gamesa has been a longtime leader in the field, largely spurred by incentives offered by the Spanish government. More recently, government reforms have cut subsidies and slowed its growth, but the company maintains significant market share in India and Latin America (especially Mexico) and has a foothold in China as well. The company was one of the earliest movers into emerging market countries.
Nordex Se (Germany) focuses on onshore turbines and has lately been designing turbines that are suitable for less windy sites (the “low wind” sector). Onshore wind is considered to be a leading area for the wind sector. The company has developed models with tall towers and long, slender blades, a better design for low wind. The company also has a significant presence in emerging markets, contributing to energy transitions most notably in Pakistan and Turkey.
Others companies, such as Siemens (Germany), have concentrated on affordability and convenience through well-proven designs and economies of scale. Offshore wind farms have grown in popularity because they’re typically built out of sight, and the wind blows harder and more consistently at sea. For many years running, Siemens has been the leading manufacturer of offshore wind turbines. In 2014, the company accounted for 76 percent of new global capacity installed offshore and had a 9.5 percent market share of the global wind turbine market. For all their advantages, however, offshore wind farms are approximately twice as expensive as onshore wind farms. Siemens has focused on lowering the costs of offshore wind power and advancing the efficiency of turbine-to- grid connections. In addition to its wind power products, Siemens also develops small hydropower plants and sells solar power components.
There are two distinct models for providing electricity from solar energy: centralized grid (often advocated by utility-scale users) and distributed grid, which often involves residential, community and commercial-scale users. Distributed energy systems are comprised of small-scale energy- generating devices (like rooftop solar panels) that allow for electricity to be produced onsite and consumed immediately, without drawing from the electrical grid. First Solar (United States) is primarily involved in the utility-scale solar market, as well as the commercial scale market, rather than rooftop solar installations. Utility scale solar refers to large-scale grid-connected solar installations.
First Solar has developed some of the largest solar farms in the world, and is the only major manufacturer of cadmium telluride solar panels in the United States. Although conventional silicon solar cells represent more than 90 percent of the solar power market, cadmium telluride panels offer advantages of lower cost and improved performance in high temperature environments such as desert areas, which is often the preferred site for large-scale solar photovoltaic (PV) arrays. Domini has engaged in discussions with First Solar’s management about oversight of working conditions in its global manufacturing operations and supply chains, and its political activities. Recently, we convinced the company to begin public disclosure of its political contributions. Notably, the company chose to prohibit its trade associations from using its dues to make contributions to political candidates. SolarCity Corp., the largest residential solar installer in the United States,
designs, installs and leases rooftop solar systems. For a 20-year commitment, SolarCity will install panels with no money down. SolarCity’s business model benefits from net metering, which allows homeowners with panels to sell back to the grid any excess electricity they don’t use. This helps offset the cost of power when the sun isn’t shining. The company also partners with other businesses, such as Home Depot and Best Buy, to promote residential solar PV systems. The company’s focus is on marketing, financing and installing panels — not making them. It does, however, plan to open a manufacturing plant in Buffalo, New York, in 2016/17 to produce panels using a new type of silicon-based photovoltaic technology designed to produce more efficient panels at lower cost. We have been in contact with SolarCity to discuss their recent partnership with Grid Alternatives, a non-profit organization working to increase access to clean energy for disadvantaged communities throughout the United States.
Bringing Wind and Solar to Scale
Moving one step down the value chain, we come to companies that help to bring the electricity generated by solar panels and wind turbines to scale, by integrating these devices with the electrical grid. SMA Solar Technologies AG (Germany) is the world market leader for solar inverters, a device that converts the direct current (DC) generated by photovoltaic cells into alternating current (AC), which can be fed into the electrical grid or can be consumed at home.
Along with cost parity, one of the most persistent challenges the wind and solar industries are working to overcome is variability, which is creating the need for some level of backup power to offset times when the sun isn’t shining or the wind isn’t blowing. One solution to this problem is to diversify the sources of energy over a wider area by expanding the number of solar and wind installations. An individual wind farm can be extremely volatile, but groups of wind farms spread out over thousands of miles help to ensure that there is consistent power.
Improvements in batteries and other storage technologies are another way to counter wind and solar’s intermittency. Many companies are working on solutions. Tesla Motors Inc., (not currently held, but eligible for investment by the Domini Funds) best known for its electric vehicles, is the current technological leader in lithium batteries. The company is working on developing batteries for residential and industrial uses. In May 2015, the company introduced the Powerwall, a low-cost home battery pack designed to capture and store energy from wind turbines or solar panels. The reserves can be drawn on when sunlight is low, during power cuts or at peak demand times, when electricity costs are highest.
The company also unveiled the Powerpack, a battery block designed to help utilities smooth out their supply of wind and solar energy or to feed energy into the grid when demand increases. Although the technology is very new, Tesla’s ever-ambitious founder Elon Musk believes that “two billion Powerpacks could store enough electricity to meet the entire world’s needs.” The company is currently building a battery factory with 1GW annual production capacity in Nevada to meet future needs for energy storage along with electric vehicles.
Unless you live entirely “off the grid”, you purchase your electricity from a utility that generates energy from a diverse portfolio of sources, ranging from coal to nuclear and wind. Utilities produce more than 30 percent of greenhouse gas emissions in the United States, relying on coal for roughly 40 percent of their total energy requirements. As of 2014, coal burned for electricity generation accounted for 93 percent of all coal consumed for energy in the United States. We seek to avoid investment in any utility that derives the majority of its power from coal, and do not invest in utilities that are owners or operators of nuclear power plants, due to our serious concerns about safety, waste storage and the link between nuclear power and nuclear weapons globally.
Consolidated Edison, more commonly known as “ConEd”, the dominant utility in New York, develops, constructs, owns and operates renewable energy infrastructure projects throughout the country. At year-end 2014, Con Edison Development had 446 MW of solar and wind projects in operation. At the end of 2015, ConEd reports that it is the sixth largest owner of operating solar capacity in North America.
Meridian Energy (New Zealand) is the largest electricity generator in New Zealand. Most of the company’s energy is generated via large-scale hydropower. Meridian has also developed ten wind farms in Australia and New Zealand, which generate enough electricity to power around 152,000 homes each year.
Financing Renewable Energy
In 2015, $329.3 billion was invested in clean energy globally, a 4 percent increase over 2014. This investment was primarily directed to large-scale projects, including a number of major offshore wind farms. The International Energy Agency estimates that an additional $36 trillion in clean energy investment is needed through 2050 — or an average of $1 trillion more per year — if we are to have an 80 percent chance of maintaining the 2°C warming limit.
We are therefore very interested in identifying notable renewable energy investors for our funds, such as Banco Santander (Spain), which was one of the largest financiers of renewable energy in the world in 2015. ING Groep (Netherlands) has financed several large renewable energy deals including Westermeerwind, a Dutch lake shore wind project that will provide enough energy for 160,000 homes a year. As of 2014, 43 percent of ING’s project financing was directed to renewable energy (wind, solar, hydro and geothermal power). In our view, 43 percent represents a substantial commitment to renewables. In November 2015, the company chose to end financing for new coal-fired power plants and thermal coal mines worldwide. Muenchener Rueckversicheregungs-Gesellschaft AG (MunichRe, Germany), a leading reinsurance group, has been offering innovative insurance products specialized in renewable energy to meet increased demands, including performance guarantee insurance for long- term renewable energy contracts. The company has been outspoken about the risks of climate change for many years.
There are several other banks, including Goldman Sachs and JPMorgan Chase, that have made significant commitments to renewable energy, but are currently ineligible for investment by our funds due to unrelated concerns. In the past, when JPMorgan Chase was held by the Domini Social Equity Fund, we helped to convince the bank to hire its first Director of Environmental Affairs, and to adopt a comprehensive policy addressing climate change. We were pleased to see the bank’s recent announcement that it will no longer finance new coal mines around the world and will end support for new coal-fired power plants in “high income” OECD countries. A growing number of banks have made similar commitments. Domini has been participating in meetings with Citigroup (not currently approved for the Domini Funds) regarding its $100 billion commitment over the next ten years to clean energy investments. We also continue to participate in a multi-year dialogue with PNC Bank (United States), about its approach to climate risk. The discussions, which began with concerns about the bank’s past involvement in mountaintop removal coal mining, include the direct participation of the company’s CEO.
Investors in the Domini Social Bond Fund are also playing a role in financing the transition to a low-carbon economy. We are particularly excited about the growth of the market for “green bonds”, which are bonds designed to finance projects and activities that address climate change or serve other environmentally beneficial purposes. These environmentally themed bonds are rapidly growing as a new asset class, with issuers including supranational banks, governments, and corporate entities. The market for green bonds more than tripled in 2014, rising from only $3-5 billion per year between 2007 and 2012 to $39 billion in 2014. When evaluating potential green bonds for our fund, we favor investments such as those mitigating the impacts of fossil fuels in energy- intensive industries, promoting energy efficiency, or otherwise addressing environmental and social justice issues.
In November, the Fund purchased a bond issued by Southern Power Company to finance existing or planned solar and wind power generation facilities in the United States. Southern Power Company derives 9GW of its total power output from renewables and gas burning facilities and does not burn coal or deal in nuclear power. Although Southern Company, the issuer’s parent company, is ineligible for our portfolios because it is a large user of coal and owns nuclear power plants, we chose to purchase this bond due to the urgent need to finance renewable energy and stabilize the global climate. Our purchase is also a sign of support for other utilities that choose to transition their generation mix to lower-carbon fuel sources.
Purchasing Renewable Energy
Corporations in all industries can help to mitigate climate change and future carbon pricing risks by making commitments to convert their energy usage to renewables.
In 2012, the New York Times reported that internet companies are enormous users of electricity, primarily to power and cool their data centers. Data centers, which are typically run at maximum capacity to meet consumer demands for 24/7 access to information, used roughly 2 percent of all the electricity in the United States, according to the Times.
According to the most recent Bloomberg New Energy Finance Report, Google (Alphabet, Inc.) is the largest corporate purchaser of renewable energy globally, followed by Amazon. Facebook and Apple were also highlighted as “key players.” Google has signed long-term purchase agreements for renewable energy covering 28 percent of its total electricity consumption. The company also obtains green power from the grid and on- site renewables, making the total share of renewables in its mix over 37 percent. The company wants all of its consumption to be from renewables by 2025. As of 2016, Google also maintained a substantial portfolio of investments in renewable energy projects, providing almost $2.5 billion to fund wind and solar projects with a potential to generate over 2.9GW, enough to power 500,000 homes.
We recently signed an investor letter to Google’s CEO, raising concerns about the company’s investment in the Turkana Wind Project in Kenya, a project that is being developed on communal land, allegedly without the full knowledge and consent of local indigenous pastoralist tribes. We are seeking to open dialogue with the company about its consideration of indigenous peoples’ rights.
As of April 2015, approximately 25 percent of the power consumed by Amazon’s global infrastructure came from renewable sources, and the company intends to reach 40 percent by the end of 2016. Amazon contracted for 80MW of solar and 458MW of wind in 2015. We welcome Amazon’s renewable energy commitments and its decision to disclose this data, but continue to pursue a shareholder proposal asking the company to produce a more comprehensive sustainability report on an annual basis.
Approximately 35 percent of the electricity used to power Apple’s data centers is derived from renewable sources. The company has also made ambitious commitments to green its supply chain. In October 2015, Apple announced the construction of 40 megawatts of solar projects in the Sichuan Province of China, producing “more than the total amount of electricity used by Apple’s offices and retail stores in China, making Apple’s operations carbon neutral in China.” In addition to other investments in solar energy in China, Apple is also working to encourage its manufacturing partners to become more energy efficient and to use clean energy for their operations. As a result, Apple reports that it is “powering 100 percent of its operations in China and the U.S., and more than 87 percent of its worldwide operations, with renewable energy.”
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Investing in renewable energy is more than simply buying shares in companies that make solar cells or wind turbines. Each of these technologies depends upon the entire range of companies discussed above, as well as sensible public policies to hasten the decarbonization of our electricity grids.
Climate change presents the most dramatic risks and opportunities for investors in the 21st century. Investing in renewable energy production and consumption is an important aspect of Domini’s long-standing commitment to fight climate change. This report only focuses on one facet of our approach to climate change, however, an issue that drives many of our investment decisions, across industries. Climate change is also a persistent theme in our engagement with companies on many issues, including political accountability and deforestation, and with policy makers.
Domini has a longstanding policy to avoid investment in the manufacturers of weapons, including military weapons and civilian firearms. This policy extends to firms that derive a significant percentage of revenues from the sale of firearms. We believe this industry is inherently damaging to society, due to the intersection between a particularly dangerous product and the extraordinary pressures to maximize profits and increase market share—pressures which are exponentially heightened for publicly traded companies.
There are very few publicly traded gun and ammunition manufacturers. Most gun manufacturers are private—they are owned by private equity firms, which pump money into expanding their markets. The ultimate challenge facing the industry today is to expand a market where an estimated 70-80 million Americans already collectively own 300 million firearms.
In response, the industry has undertaken a strategy focused on designing and marketing military-style semiautomatic weapons for the civilian market. A detailed study released by the Violence Policy Center, a gun control group, found that “the flood of militarized weapons exemplifies the firearms industry’s strategy of marketing enhanced lethality, or killing power, to stimulate sales.”
Distressingly, but perhaps not surprisingly, much of this marketing has been targeted at children and teens. The New York Times reported, “Threatened by long-term declining participation in shooting sports, the firearms industry has poured millions of dollars into a broad campaign to ensure its future by getting guns into the hands or more, and younger, children.” The editor of Junior Shooters magazine noted that if the industry is to survive, gun enthusiasts must embrace all youth shooting activities, including ones, “using semiautomatic firearms with magazines holding 30-100 rounds.”
Many of our shareholders may be pacifists, or opposed to hunting. Their investment in our funds may be seen as a reflection of these personal commitments. Other Domini Funds shareholders may be hunters or sharpshooters. Their avoidance of gun-makers through their investment in our funds may be seen as a recognition that the stock market is not a safe mechanism to finance the makers of such inherently dangerous products. Either way, our shareholders understand the importance of taking full responsibility for the implications of their investment decisions.
- De-Militarizing Amazon.com
- Let's stop investing our retirement funds in lethal weapons
- Divesting is an exercise in real fiduciary care
At Domini, we believe it’s possible to make money and make a difference at the same time.
We are pleased to report that the Domini Social Equity Fund and the Domini International Social Equity Fund both outperformed their benchmarks for 2014. The Domini Social Equity Fund – Investor shares (DSEFX) returned 13.97%, beating out the S&P 500 Index, which returned 13.69%. Meanwhile, the Domini International Social Equity Fund – Investor shares (DOMIX) outperformed its benchmark by more than 1%, returning -3.27% versus -4.48% for the MSCI EAFE Index.
Each of the Domini Funds pursues an innovative strategy that combines our expertise with the strength of a financial submanager. Domini is responsible for the development and application of each Fund’s social and environmental standards. In addition, we engage with companies in our equity fund portfolios to encourage improvements in their social and environmental performance. Wellington Management Company is responsible for the Domini Social Equity Fund and Domini International Social Equity Fund’s financial standards and portfolio construction.
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Several years ago, at a Goldman Sachs annual meeting, time was set aside for shareholders to ask questions of the CEO. A man approached the microphone and announced that he was a guest, not a shareholder, and wondered if he could ask a question. “No,” he was politely informed, “only shareholders can ask questions.”
It was a telling moment that spoke a significant truth about the corporate system – only shareholders count. For many, a responsible company is defined as a company that takes care of its shareholders. A nod will be given to other “stakeholders,” such as employees and community members affected by corporate activity, but only to the extent that these good relationships help create wealth for shareholders. Shareholders? That’s us. Most of us don’t know much about picking stocks, so we trust a financial advisor or a mutual fund manager to do this for us. Nearly 100 million Americans invest in mutual funds.
When you invest in a mutual fund, your money becomes part of a common pool of assets that the fund manager uses to invest in stocks or bonds or other financial instruments. It’s their job to look out for your best interests. A mutual fund is a profit-seeking vehicle, but it can also become a vehicle for the common good. Your small investment can be leveraged to help produce significant change.
Shareholders have not done a particularly good job monitoring the behavior of the companies they own. In fact, they are often a significant part of the problem. Corporations are some of the largest economic entities in the world, and they are managed with the steady drumbeat of "make me money" in the background. It should come as no surprise when companies cut corners on safety, oppose environmental regulations and outsource production where wages and worker protections are weakest. They do this to satisfy their shareholders. A year before the explosion in the Gulf of Mexico, Tony Hayward, BP’s former CEO, quipped that he pays his shareholders an annual dividend “to keep his job.”
Moral and financial concerns are not independent but interdependent. Corporate success depends on a delicate web of relationships with employees, customers, communities, governments, suppliers, investors, and ecosystems. Companies that treat these stakeholders with dignity and respect can prosper in the long run by avoiding problems and winning the loyalty of their employees and consumers. They can also create tremendous value for society. When oil companies like BP pay insufficient attention to worker health and safety, however, shareholders also suffer. And CEOs, like Mr. Hayward, lose their jobs.
So what does it mean to be a shareholder? A shareholder is a person of influence. Together, we have an opportunity to seek profits and wield that influence for the common good.
Read why Domini chose not to invest in BP, years before the Gulf of Mexico disaster. .
The complexity of our food production systems is astounding, as are its staggering impacts on climate change and human rights. Any given meal or afternoon snack can touch on issues as far-ranging as the survival of the orangutan or a land rights dispute in Africa. Climate change, water scarcity, nutritional content, marketing to children, animal welfare and labor rights are all on the table.
Behind each familiar brand lies a complex set of relationships stretching across the globe. We view these relationships as opportunities for positive impact. As investors, we can create the incentives for companies to simultaneously be more transparent and to dig deeper to ensure their businesses are operating responsibly. Through your investment in the Domini Funds, your money is working to help catalyze this process of transformation.
For example, deforestation is an important driver of climate change, accounting for an estimated 10 percent of greenhouse gas emissions. The Consumer Goods Forum, an industry association, has acknowledged that “the consumer goods industry, through its growing use of soya, palm oil, beef, paper and board, creates many of the economic incentives which drive deforestation.” All 400 members of the Forum, representing all the world’s major consumer goods manufacturers, retailers and service providers, have committed to zero net deforestation by 2020.
Who will hold these companies accountable for these commitments? What do they mean in practice?
The shareholder proposal is an effective tool for encouraging corporate management to come to the table to discuss our concerns. We developed a proposal that we have submitted to several of the largest food companies, asking for public reports assessing each company’s impact on deforestation and its plans to mitigate these risks. We’ve asked these companies to report on their impact by commodity, as each carries its own set of risks and possible solutions. Among these commodities, palm oil has received the most attention because its production is responsible for large-scale forest conversion in the tropics and extensive carbon emissions.
At Domini Social Investments, the research we conduct to understand the dynamics of our food systems is core to the investment process. Whether it is expressed in the avoidance of many manufacturers of agricultural chemicals, in the search for systems that provide safer food for all, or in the proxy votes we cast or the hard questions we ask of corporate managers, we view our social and environmental standards as key to the process of helping both the public and corporations understand what is at stake.
Download our 2014 Annual Report (PDF) to learn more about the ways the Domini Funds are helping to promote better food production around the globe, including our approach to local and organic sourcing, genetically modified organisms, pesticide use and deforestation.
Climate change presents a real and present threat to human civilization. It also presents tremendous risks and opportunities to the corporations in your mutual fund portfolio. How they handle these challenges may make the difference for all of us. Does your mutual fund manager agree with this, or do they deny the seriousness of the issue?
Concerned investors have been submitting shareholder proposals for years, asking corporations to report on their greenhouse gas emissions and take meaningful steps to address climate change. These proposals are put to a vote of all shareholders at each company’s annual meeting. Your mutual fund – in your 401(k), or your IRA, or your personal investment account – uses your money to buy shares in corporations and to vote on your behalf. A recent mutual fund study conducted by Ceres tracked the 39 shareholder proposals on climate change that went to vote in 2013. How did your mutual fund vote?
First, the good news. A handful of large fund managers supported climate resolutions more than 50% of the time. The largest fund managers, however, managing trillions of dollars, voted against these proposals, or sat on the sidelines by abstaining. According to Ceres, one of the largest mutual fund managers in the country has never cast a single vote in support of a climate-related resolution in the 10 years covered by the survey.
Socially responsible funds like the Domini Social Equity Fund are different. We not only vote in favor of these proposals, we also take the lead by drafting and submitting proposals, and by engaging in long-term dialogues with companies in our portfolios on climate change, deforestation and human rights. All of our investment decisions are based on considerations of environmental sustainability and universal human dignity.
In an article titled “The Coming Climate Crash”, Henry Paulson, former US Secretary of the Treasury wrote: “We’re staring down a climate bubble that poses enormous risks to both our environment and economy. The warning signs are clear and growing more urgent as the risks go unchecked.” Perhaps your fund manager believes in the reality of climate change, but doesn’t believe it will impact your investments. Isn’t this also a form of climate denial?
You wouldn’t vote for a climate denier. Why would you allow one to vote for you?
View Domini's Proxy Votes
On May 14, Google Inc. shareholders rejected a proposal sponsored by my firm, seeking the adoption of a responsible code of conduct to guide the company's global tax strategies. I suspect this proposal prompted a quizzical reaction from many investors who assume that minimizing corporate tax payments is good for shareholders. An April 28 Pensions & Investments editorial, “Tax exempt but tax conscious,” wrestled with this issue, ultimately concluding fiduciaries could not ask companies to pay more.
We believe a deeper analysis is required. Corporate tax minimization strategies present serious threats to long-term wealth creation and might pose greater risks than corporate taxation itself. But first, I think it is important to dispel a few myths.
The P&I editorial reports the U.S. has the highest effective tax rate in the industrialized world, at more than 40%. According to the Congressional Research Service, however, the average effective corporate tax rate in the U.S. is 27.1%, compared with 27.7% for the rest of the world. In fact, a number of multinationals pay far less than 27%, and some pay nothing at all. But this is not solely a U.S. problem. According to MSCI research, 21.4% of companies in the MSCI World index paid tax rates substantially below the weighted average tax rate of the countries in which they generate revenues.
Why would a company pay even 20% when it could go to Bermuda and pay nothing? The statutory rate is irrelevant. At issue is the ability of multinationals to pay nothing.
The P&I editorial repeats another common myth: “Corporations don't pay taxes, they collect taxes. They allow Congress to hide the true level of taxes.” This version of the “corporate taxation is double-taxation” rhetoric is also false.
Corporations collect payroll and sales taxes, and also pay real estate and income tax. A portion of corporate profits are taxed twice if they happen to be paid out in the form of dividends. But, of course, companies are not required to pay dividends and they do not pay out all of their profits. Shareholders are taxed on capital gains, based on their cost basis when they sell their shares, and on dividends. These taxes bear no direct relation to annual corporate profits.
Perhaps the biggest myth of all is that fiduciary duty compels us to look the other way. Imagine a legal obligation, based on principles of prudence and loyalty, that compels us to condone behavior that stifles innovation, destroys local and national economies, and shifts heavy financial burdens to our own clients and beneficiaries.
Fortunately, this obligation to minimize tax payments does not exist.
According to a legal opinion issued by the U.K. law firm Farrer & Co., “the idea of a strictly "fiduciary' duty to avoid tax is wholly misconceived” and a duty on corporate directors to maximize profits for the benefit of shareholders is “unknown to English law.” In the U.S., I believe a legal analysis would produce the same conclusion — the business judgment rule protects directors who choose to assess their company's “fair share” of taxes, in light of the reputational and legal risks presented by aggressive tax avoidance measures.
For fiduciaries serving investors, the duties are similarly clear — to diversify assets and pursue long-term risk-adjusted returns on behalf of their clients and beneficiaries. Even if Google itself is somehow shielded from costly liability as a result of its tax strategies, it is necessary and appropriate for fiduciaries to consider how Google's activities affect the portfolio, the broader economy, and participants and beneficiaries “in their retirement income,” to quote the Department of Labor's interpretation of obligations under the Employee Retirement Income Security Act. Trustees of underfunded state pension funds might want to do a bit more than merely consider these things.
Aggressive tax avoidance is not the norm, nor should it be. It is a short-sighted and risky strategy that harms investors and society.
Corporate tax avoidance is a direct threat to government and rule of law, and, at a time of high unemployment and high government debt, tax-avoidance strategies have prompted many countries to fight back, including active work by the G20 group representing major economies and the Organization for Economic Co-Operation and Development. Reliance on aggressive tax strategies targeted for reform could result in financial shocks for investors. Google's effective foreign income tax rate has been in the single digits for more than a decade even though most foreign countries it operates in have corporate tax rates in the mid-20s. Does anybody think this can go on forever? The U.K. House of Commons Public Accounts Committee published a report in June 2013 criticizing Google's U.K. tax-minimization approach. The committee chair referred to these tax arrangements as “highly contrived,” “devious” and “unethical.” The French government just handed Google a tax bill for nearly $1.4 billion. If France is successful in collecting even a portion of this, we will see other aggrieved countries stepping up for their share.
Certain multinationals are weaving intentionally opaque and winding trails in and out of every loophole they can find. This global shell game not only hides taxable revenues from governments, it also hides the true sources of corporate value from investors. What portion of Google's profits are derived from superior products and services, and what portion from creative accounting? I would certainly like to know.
Tax should be viewed as an investment, not a cost. To paraphrase Oliver Wendell Holmes, tax is an investment in civilization. Too often in these debates over the burden of corporate tax, we fail to consider what corporate taxes deliver in the long run. What is our return on investment?
Corporations and investors depend upon government services funded by tax revenues, including law enforcement, market regulation, judicial systems, infrastructure maintenance, public education, poverty alleviation, environmental protection, national defense and scientific research. These indispensable services cannot be funded by corporate philanthropy or a rise in share price.
Economist Joseph Stiglitz warns that corporate tax avoidance threatens the wellspring of “future innovation and growth.” Other economists have documented the critical and visionary role government has played in spurring scientific and technological innovation when private investors were unwilling to take the risk. Google and Apple Inc. might not exist today if it had not been for taxpayer funded research. Larry Page and Sergey Brin's initial research was financed by a taxpayer funded National Science Foundation grant.
Investors should be asking Google and other multinationals to adopt ethical principles to guide their tax strategies, considering their impact on society and brand value. Just as corporations should be expected to follow consistent standards globally regarding bribery, child labor, greenhouse gas emissions and non-discrimination, they should adopt principles to help navigate the complexity of local and national tax systems.
We believe this is what fiduciary duty demands.
For the past twenty years, shareholders of the Domini Funds have used their investments to enable conversations with executives at some of the largest and most influential corporations in the world on a wide range of social and environmental issues. Domini Funds investors can take credit for helping to convince JPMorgan Chase* to hire its first Director of Environmental Affairs and to adopt a comprehensive set of environmental policies. They can take credit for helping to convince Nucor, the largest steel producer in America, to adopt stringent human rights policies to address the risk of slavery and illegal deforestation in its Brazilian supply chain. After a five year campaign, they helped convince Emerson Electric to ban discrimination against its gay and lesbian employees, and after a three year dialogue, Toyota Motor* announced that a major trading partner had ended its joint venture with the Burmese military regime. Domini Funds shareholders have helped convince numerous companies to measure their environmental impacts and to adopt strong protections for vulnerable workers in factories around the world.
Since our first shareholder resolution was submitted in 1993, Domini has filed more than 240 proposals at 95 different corporations. The use of social, environmental and governance standards to select investments, combined with a shareholder activism program to help move companies further in the right direction, has proven to be a powerful vehicle for change.
Archimedes, the ancient Greek scientist, once remarked, “Give me a lever and a place to stand and I will move the earth.” For the past twenty years, Domini has provided “a place to stand” for its mutual fund shareholders, finding as many ways as possible to amplify their voice on some of the most pressing challenges of our time. Over the course of 2014 and beyond, we look forward to sharing more success stories about how Domini Funds investors have helped to create positive change.
For more about Domini’s shareholder activism successes over the past twenty years, read our full essay in the Domini Funds 2014 Semi-Annual Report.