Bond Fund Standards
On January 7, 2015, Wellington Management became the submanager for the Domini Social Bond Fund, bringing more than eighty years of experience in the fixed income markets to the Fund and extending our ten-year relationship. Each of Domini’s mutual funds is managed through a two-step process designed to capitalize on the strengths of Domini Social Investments and Wellington Management. Domini establishes and applies the social, environmental and governance standards for the funds, and Wellington then uses a systematic and disciplined investment process to create each portfolio.
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.