This essay presents Domini’s holistic approach to sustainability challenges and how we evaluate our portfolio through the lens of global forest impact. Read to the essay below and learn more about The Domini Forest Project.
Letter to Shareholders
Dear Fellow Shareholder,
The twelve months ending July 31, 2020 brought into sharp focus many forks in the road that we, both as investors and as citizens, find ourselves traveling. Our delicate détente with China is collapsing; our relationships with allies in Europe and Japan have been strained; our commitment to bring human rights into international dialogs has halted. The nation and the planet were pummeled by fires, floods, extreme heat, and swarming desert locusts as we dismantled climate change protections. Our nation’s health care system and workers faced extraordinary challenges as we ineffectively grappled with a national defense against the global coronavirus pandemic. Cities around the world mobilized to protest against systemic racism following the death of Mr. George Floyd. Americans suffered the largest unemployment increase since the Great Depression. While faith in institutions is at an extreme low, we continue to seek a path forward for a better world.
Against this backdrop, the stock markets around the world had a very good year. Markets rallied at the government stimulus that was more than four times what was spent during the financial crisis of 2008-9. Companies that add value to our lives in a manner that reduces the cost, enhances the experience and improves the outcome have always been popular with impact investors, but now became the darlings of Wall Street.
In a relatively short period of time, we have seen an acceleration of technological advances that are without precedent. Zoom Video Communications, which so many businesses now rely on for work-from-home, is less than 10 years old. Payment services company Square is 12 years old. Apple iPhone is less than 15 years old. The first Tesla car was released 12 years ago. The scope of technology and the software that supports it has begun to dwarf more traditional industries. Along the way it provides jobs, wealth, comforts and benefits to individuals and business alike. This has been most evident throughout the global pandemic. Those that could, rearranged their businesses and their lives while growing increasingly dependent upon functioning high-speed internet. Home offices, online video visits with your doctor, virtual conferences, even a livestream of your friend’s wedding became the norm.
We continue to demonstrate the value of applying societal considerations when making investment decisions. Our value of an investment and risk aversion is defined by a company’s impact on people and the planet. We search for companies that effectively manage their key sustainability challenges. The demand for and growth of impact investing products became even more apparent this year and the past twelve months have demonstrated the merits of our approach. Please be sure to review the performance section of this report to see the results.
During the year, we have had two gratifying successes. In December 2018, we determined that it was time to retool our domestic equity fund, the Domini Impact Equity Fund. We made social and environmental information the primary input for the shaping of the portfolio. We built a portfolio we believe is representative of the U.S. economy through the lens of the classic impact investor through macro, top-down assessment of our portfolio. We also complement this approach by allocating investment to a group of solution-oriented companies. The results of the strategy change have been impressive and are discussed on page X of this report.
On April 1, 2020 we launched our first new fund in over a decade. The Domini Sustainable Solutions Fund was launched for the investor seeking an unconstrained portfolio in search of answers to society’s challenges, anywhere in the world and at any market capitalization. We considered the postponement of the planned launch at the onset of the virus, but we proceeded on schedule with the belief that financial markets needed more products of this kind. Although very short-term, just over one quarter, the results have been powerful.
This is a difficult period in the history of humankind, and we are grateful to you, our investors, for your continued loyalty to us and to the field of responsible investing. Your support leaves us with hope and further builds on our belief that your investments will have a positive impact on the future. Please read our essay which continues on the themes of this letter and the urgency we face in recognizing the interconnectedness of our world. We welcome your feedback.
Carole Laible, CEO
Amy Domini, Founder and Chair
The Importance Of Value Creator Companies
An Early Read Out of Domini’s Forest Project
The 2020s opened with convergent and connected crises unfolding on a global scale: the climate emergency, the coronavirus pandemic, and incidents of systemic racism boiling over into the mainstream public consciousness. Despite the continuing tragedies and challenges we face in our own lives, work and communities, this disruption may be cause for hope. It brings a rare opportunity for change right when we need it most and a lesson long overdue: we are all connected.
The health of the planet, the health of people, and the health of the economy all depend on each other. We can’t reopen our economy without first making our communities healthy. We can’t avoid future pandemics if we continue to destroy the natural environment. Favoring one system at the expense of another doesn’t work either. With this truth and opportunity in hand, it is incumbent on all of us to find our way to a more sustainable future.
Domini has been striving to do just that since the inception of our first mutual fund in 1991 by taking a holistic approach to sustainability challenges. We look at the full picture of a company, not just financial statements, to understand its risks and opportunities – an approach now widely accepted as best practice. We also work directly on addressing the biggest risks that face our planet, people and our portfolios.
The health of the planet, the health of people, and the health of the economy all depend on each other.
We launched our Forest project in the hopes that we would build a model to better address those large, intractable, foundational issues. In the context of forests, the dynamics are clear. We all – including companies – depend on forests, whether it’s because they stabilize the global climate, provide a home for pollinators, create rain, or just help us connect with nature. The value may be hard to ‘price’ but it’s not hard to understand. Still, we lost the equivalent of a soccer field of forest every 4 seconds in 2019.
The world appears to be caught in this losing paradox: Forests provide essential value on which we rely and offer solutions to the biggest problems we face, yet we continue to participate in their destruction, as consumers, as investors, and as a global community. We can observe a similar paradox in the coronavirus pandemic: ‘essential’ frontline workers on whom we rely for our health, food, deliveries and so much more are lacking the basic protections they need in return. (See domini.com/covid19-statement.)
The world appears to be caught in this losing paradox: Forests provide essential value on which we rely, yet we continue to participate in their destruction.
In order to find the answer to why this paradigm continues and in search of a more sustainable future, we looked across our portfolios for the industries that most clearly embody the forest paradox: companies that negatively impact forests but depend on forests for a key resource or service. Those companies have the strongest business case to innovate and take action.
While the work is ongoing, some pieces of that picture are coming into view. Out of our conversations with those companies emerged a profile of a forest value creator, i.e. a company that delivers returns to shareholders by creating value alongside and for other stakeholders rather than relying on extracting or destroying value for profitability.
Crucially, we went beyond asking companies to be neutral with respect to the forest, and instead focused on identifying those that have aligned their business strategies with solutions for shared value creation that we can help to accelerate. However, this analysis is not limited to forests. Indeed, we are seeing many of the same characteristics emerge in companies’ responses to the coronavirus pandemic as well.
To be sure, these companies have not cured the world or even themselves of destroying value in pursuit of profit. The examples that arose are largely pilot projects not yet implemented at scale, but they show a commitment to innovation and offer a potential road map to a sustainable economy, where systems like forests and communities are stronger, healthier and more resilient for the benefit of all stakeholders (companies included).
Forest Value Creators
The following characteristics were gleaned from a series of conversations with portfolio companies and comprise the profile of a forest value creator (FVC), a company that has aligned its core business strategy with sustainable and shared value creation.
Seek solutions proactively.
Obstacles to action and excuses for inaction are plentiful, for example, what some psychologists have called the “It’s Not My Problem” problem1 when it comes to climate change. FVCs act, they are willing to lead.
Recognize the scale and larger scope of the problem.
System level risks like deforestation, climate change and the coronavirus are not addressable by individual actors. FVCs take responsibility for their impact but recognize that the problem to be solved goes beyond their organization.
Cooperate with communities and nature.
Working with the flow of existing systems helps to leverage natural efficiencies and avoid unintended consequences. FVCs rely on practices like regenerative agriculture and empowering emergent community and worker organizers.
Collaborate vertically, horizontally and across sectors to scale up solutions.
Agility and resilience are built on networks. FVCs work with diverse and outside-the-box partners to innovate and scale solutions.
Focus on impacted communities first and adopt an inclusive approach.
Designing for and from the margins leads to inclusive solutions that better serve all stakeholders. FVCs can deploy learnings from all corners to develop solutions more likely to gain traction and succeed.
VALUE CREATORS IN ACTION
Lowe’s Home Improvement: Building Resilient Cities
Lowe’s partnership with The Nature Conservancy (TNC) on resilient cities provides an example of a shared value creator in action.2 The project started with three pilot programs in Houston, Louisville and Philadelphia3 that leverage planting trees and gardens to address heat islands, public health, and stormwater surges. In Louisville, for example, the “Green Heart Project” partnered with over 20 community organizations to plant 8,000 trees and shrubs and conserve over 100 ash trees.4 It will study the long-term effects on air quality and noise pollution and the corresponding health impacts for the community. Urban green spaces can also combat excessive heat, slow flooding, decrease stormwater runoff, and increase property values.5 More resilient communities and homes may also be eligible for improved insurance premiums.
While this approach clearly leverages natural solutions and key partnerships, it is also aligned with Lowe’s core business. Lawn and garden, seasonal and outdoor living, hardware and tools together represent 30% of its revenue base. Do-It-Yourself (“DIY”) homeowners represent a key customer base. Through strategic marketing and education campaigns, Lowe’s can drive sales and build brand engagement and loyalty with key customers by deploying sustainability solutions that generate collateral benefits for other members of the community. The project has delivered value not just to the company’s shareholders, but also to its consumers, their communities and their cities.
Other Value Creators Respond to a Pandemic
While corporate responses to the coronavirus are still unfolding, some companies were quick to find creative ways to leverage their core business and networks to help address the crisis. Old Mutual, an insurance company in the UK, provided free life insurance to 25,000 frontline workers through this fall. Helvetia Holding, an insurance company in Switzerland with its own real estate portfolio, waived rents for some tenants especially small and mid-size companies that haven’t been able to operate during the pandemic. Companies like Zoom provided free unlimited access to its services and offered support for users quickly transitioning to remote work like schoolteachers and mental health providers. Tingyi Holdings Corp., a leading producer of instant noodles in China, captured market share by cutting the price of its products.
Each of these actions created value for the companies – whether through protecting its value chain, its workforce, building brand awareness and loyalty, or capturing market share – while also creating value for other stakeholders.
As we recognize the interconnectedness of our people, planet, and profit, we see the characteristics of a Value Creator as a model to persuade companies to contribute to the social, environmental and financial systems that we all rely on for our health and well-being. Given the scale and scope of the challenges we face, we all need to be value creators for a healthier, safer and stronger future.