As a woman working at Domini Social Investments, it can be easy to disregard the pressing issue of gender diversity practices in the workplace. Domini was founded by a woman-Amy Domini-who continues to serve as Chair. Our CEO, CFO, and General Counsel are all women. More than half of the firm’s employees are women. When I attend meetings in the office, most often I am surrounded by more women than men. Although this reality is normal for me, it is especially rare for the financial industry. Recent trends suggest we are in the midst of change, but more assurance is necessary. This is especially true for diversity at the board level.
In 2009, the SEC approved rules for enhanced disclosure about risk, compensation and corporate governance in proxy statements and other corporate reports. Among these new requirements, the SEC required companies to disclose “the consideration of diversity in the process by which candidates for director are considered for nomination.” If a policy does exist, “how this policy is implemented, as well as how the nominating committee (or the board) assesses the effectiveness of its policy” is also required. While this was an important addition to disclosure requirements, the final ruling was a missed opportunity. Companies and shareholders alike are hurt by the fact that the SEC left it up to companies to define “diversity” for themselves. Not surprisingly, many companies define the term broadly, to include educational background, experience, viewpoint, etc.
In 2015, a number of large pension funds petitioned the SEC to require companies to provide investors with information on each nominee’s gender, race and ethnicity, in addition to the skills, experiences and attributes needed to fulfill the corporation’s mission. Early this year, Mary Jo White, Chair of the SEC, said she shared these concerns, and has directed her staff to look into it. This is a hopeful sign. Despite these remarks, last month, a number of lawmakers publicly criticized Chair White, for taking too long to propose new rules for diversity disclosure.
Increased diversity at the board level promotes effective corporate governance. The number of studies that support this conclusion continues to rise with each passing year. Companies with diverse leadership are more likely to avoid group-think and have the potential to better understand customer needs, anticipate new societal trends and emerging issues, and foster cooperation with their workforce and communities.
Since its inception, Domini has advocated for greater gender and racial diversity on corporate boards, and we have a long history of engaging with companies on the issue. However, in order to obtain useful and comparable diversity reporting from all companies, the implementation of explicit guidelines by the SEC is crucial. As boards increasingly become more diverse, we all stand to benefit.
Over the past several years, there has been a sharp increase in the number of new auto loans, driven by a surge in lending to borrowers with poor credit. In 2015, the number of new subprime auto loans reached their highest level since before the financial crisis, surpassing subprime mortgage issuance in volume. While providing access to credit to subprime borrowers is essential for a healthy, functioning economy, it is also a risky business which should be conducted with extra care to protect both the borrower and the lender. Because their credit history is weaker, subprime borrowers often pay higher interest rates on loans due to the perception that they are more likely to miss payments during difficult economic times.
In recent years, Americans have been borrowing record amounts to purchase vehicles, which are among the most commonly held type of nonfinancial asset in the United States. Cars have become a necessity for many families who rely on them as their primary means of transportation and to access greater economic opportunities, including employment. For many, owning a car is seen as such a necessity that they will pay their monthly auto-loan payment before paying their mortgage.
According to Experian Automotive, the average loan for a new car in the fourth quarter of 2015 was $31,008 for prime borrowers and $28,231 for subprime borrowers, with the amounts to both types of borrowers increasing from the previous year. Typically, subprime borrowers tend to stretch the loan for a longer period to reduce monthly payments, increasing the total amount paid over the life of the loan. According to Experian, fourth-quarter 2015 auto loans with a term of 73 to 84 months accounted for 29% of new vehicle loans, with 71% of new car loans exceeding five years. Besides increasing the overall cost of the car, longer loans carry a higher risk of negative equity (when the loan balance exceeds the value of the vehicle) as cars typically lose 15-35% of their value in the first year and 50% or more over three years.
A sizable added cost for subprime borrowers is the dealer markup. When a borrower obtains a loan at a car dealership instead of a bank, the dealer can charge an additional fee for their services. Usually, loans to subprime borrowers have higher markups, which can produce a higher default rate. Federal officials have expressed concern over this practice, as the system incentivizes dealers to charge higher rates. There have also been cases of discriminatory lending practices. Ally Financial agreed to pay $98 million to settle Department of Justice and Consumer Financial Protection Bureau lawsuits that alleged it marked up interest rates on auto loans to minority borrowers.
Providing access to credit to subprime borrowers, especially the under-banked and unbanked, who encounter the most difficulties in obtaining any kind of access to credit is important for individuals, as well as our economy as a whole. At the same time, if companies do not lend in a responsible way, their lending may constitute harmful predatory lending. At Domini, we seek to invest in companies and securities that provide non-predatory access to capital for those historically underserved.
This past December marked a historic moment in the fight against climate change, as the world came together in Paris to address what is perhaps the most significant challenge our global community has ever faced. Representatives from 195 nations reached a landmark agreement that provides a framework for universal long-term action on climate change. Although the agreement is not legally binding, it achieves a historic degree of global unity around the need to avoid catastrophic climate change.
The Paris Agreement sends a strong, unified message to businesses and investors around the world that the time for relying on fossil fuels for economic growth is over. We hope that this will spark a new wave of investments and public policies that help to accelerate the shift to renewables around the world and across the value chain—from system manufacturers and electricity generators, to financiers and consumers.
In our just-released Semi-Annual Report, we take a closer look at some of the ways the Domini Funds are helping to promote a clean-energy future. This includes investments in manufacturers of wind- and solar-power systems, utilities generating electricity from renewable sources, banks financing renewable projects, corporations purchasing renewable energy to cover electricity consumption, green bonds, and more. We also discuss how we our using our voice as investors to talk to companies about their commitments to address climate change.
Domini Funds shareholders are playing a role in the world’s crucial transition to renewable energy. Click here to learn more about key issues we seek to address in our approach.
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.