Approving Corporations for our Funds
Each industry carries its own costs and benefits to society. We have developed a matrix to help us determine each industry’s degree of alignment with our sustainability objectives. You can see the spectrum of industry alignment in the diagram below.
We evaluate companies in two dimensions – its business model and the strength of each company’s stakeholder relations – how the company treats its employees and its customers, or how it addresses its environmental impact. A company that is fundamentally aligned with our standards will have a lower stakeholder relations threshold to cross than one that is partially misaligned.
For example, a solar cell manufacturer would be considered fundamentally aligned with our standards (first column in the diagram above) due to the ecological benefits provided by its core business model. Without severe stakeholder relations challenges, it would probably qualify for inclusion in our portfolios. For a company in a more problematic industry, we set the bar higher. For example, partially misaligned industries include those that contribute to global warming to a major degree, such as oil and coal companies, automobile and truck manufacturers, and electric utilities. Among this group, companies deriving significant revenues from coal are not eligible for our funds.
Some industries, like tobacco manufacturers and nuclear power operators, present such severe risks to society that we consider them to be fundamentally misaligned businesses, which are excluded from the Domini portfolios (last column in the diagram above). We do not believe the risks they present to society can be managed.
We are not looking for “perfect” companies. We are seeking to identify companies that are responsibly addressing the key sustainability challenges and rewards presented by their business model. Most companies fall in the middle of the spectrum (the yellow areas in the diagram) of business alignment, in which case stakeholder relations play a key role in determining eligibility.
Ultimately, our investment committee, chaired by Amy Domini, is responsible for determining which companies are eligible for our funds. Our framework helps us to identify the risks and opportunities for each industry as well as how they are being managed. It helps us to keep in mind the unique benefits and risks of the industry and to evaluate its performance in that proper context. A bank, for example, may provide important benefits to society, but may have a poor track record of lending to the poor. Our investment committee will want to know whether this is a pattern of behavior or a single instance. How severe is the impact? How does the bank’s performance on lending compare to its peers? Does this problem warrant exclusion from our Funds, or should we keep an eye on the issue and contact the company?
Once we have determined which companies are eligible and which are ineligible, we provide these lists to Wellington Management (submanager for our stock funds) and Seix Investment Advisors (submanger for our bond fund), who utilize their financial expertise to manage the funds. Wellington and Seix are not permitted to invest in any company that has not been approved by Domini.
Companies are reviewed on a regular basis in order to allow us to evaluate long-term patterns of behavior, new business lines and emerging issues. Current holdings are reviewed on a continuous basis.