How do we decide?
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.
Our analysis focuses on the most important sustainability challenges each company faces, within the context of its business model.
For example, a solar cell manufacturer would be considered fundamentally aligned with our standards (last column in the diagram above) due to the ecological benefits provided by its core business model. Without severe stakeholder relations challenges, it would probably be considered eligible for investment in our portfolios.
For a company in a more problematic industry, we set the bar higher. Partially misaligned industries include those that are major contributors to global warming, such as automobile and truck manufacturers, electric utilities. Companies in these industries must demonstrate a relatively stronger stakeholder relations record in certain key areas relevant to their industry that we have identified. In the table above, this record must be at least “mixed or neutral” to qualify for inclusion in our funds.
Most companies fall somewhere in the middle. For example, a bank that provides important benefits to society may have a poor track record of lending to the poor. Our Impact Review committee, which is responsible for determining which companies are eligible for our funds, will evaluate 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?
Companies are reviewed on a regular basis to allow us to evaluate long-term patterns of behavior, new business lines and emerging issues. Current holdings are reviewed on a continuous basis.
Some industries present such severe risks to society that we consider them to be fundamentally misaligned with our goals, and ineligible for investment (first column in the diagram above). We do not believe the risks they present to society can be managed.
These industries include:
- Tobacco and Alcohol manufacturers
- Gambling products and services
- Nuclear Power
- Coal mining
- Fossil Fuel Owners and Producers
- Military Weapons and Firearms manufacturers
Our thresholds for exclusion are generally determined by such factors as percentage of revenues, magnitude of involvement (market leadership), or ownership.
Companies with less significant involvement in these areas may also be considered ineligible for investment, but are evaluated case by case. In these cases, we may consider such factors as the absolute size of the involvement, the trend of the company’s involvement, and the prominence of the company’s role in the subindustry, along with the company’s overall social and environmental record in making our decision.
Wellington Management Company LLP
Once we have determined which companies are eligible and which are ineligible, we provide these lists to Wellington Management, the submanager of our funds. Wellington Management then utilizes their financial expertise to build a portfolio of companies selected from the eligible list. Wellington Management is not permitted to invest in any company that has not been approved by Domini.