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The Green Advisor: Ideas from a Green Investor

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As has been mentioned before in this space, green investing has much in common with what is now commonly known as ESG (for environmental, social, and governance) investing. While not all green investing fits under the ESG rubric, almost all ESG or responsible investing can meet green standards and lessons offered to advisors by responsible investors–the term that has replaced socially responsible investing–are likely to be applicable to green investments as well.

I was fortunate recently to spend an hour by telephone with Amy Domini, founder of both the eponymous Domini 400 Social Index and Domini Social Investments (the investment advisor for the four investment vehicles in the Domini family–Domini Social Equity Fund (DSEFX), Domini International Equity Fund (DOMIX), Domini Social Bond Fund (DSBFX), and Domini Money Market Account, and author (with Peter Kinder) in 1984 of one of the first books on the subject, Ethical Investing, and asked her to explain what it means to approach investing with social and environmental values in mind.

A veteran of the 1980s movement to change the South African government’s policy of apartheid, Domini realized early on that examining how a corporation treated the environment, its workers, and society at large when making decisions would not only, counter to conventional wisdom, not harm returns, but actually enhance them. So together with her partners in KLD Research & Analytics, Peter Kinder and Steve Lydenberg, she created the Domini 400 Social Index to prove her point.

“I didn’t buy this ‘Anything that limits your investment universe’ argument, since every investment advisor has a method of limiting the investment universe in order to enhance returns,” she recalls. “It seemed to me a specious argument being made against the application of things that were not historically considered financial.”

Since its launch in 1990, the Domini 400 on a cumulative basis has outperformed the S&P 500, although the period from 2000-2008 was a negative one for it. Domini attributes that negative performance to the shift to a war economy, which favored companies not included in the index or in Domini fund holdings. Those eight years of negative performance led Domini to make one of the hardest decisions she says she’s ever faced, abandoning the Domini 400, which is now owned by RiskMetrics Group and with which she has no affiliation, as the benchmark for her equity funds and moving to a proprietary quantitative research methodology designed by Wellington Management.

Identifying the Responsible Investor

As Domini explains it, there are three common elements that define the responsible investor–the use of standards to pick stocks, active engagement with company management, and support of community development financial institutions.

On the first point, the use of standards, Domini has a strict list of criteria that range from the general–no weapons, no alcohol, no firms majority-owned by repressive regimes–down to those specific to particular industries and sub-industries. Domini says, “I’m looking for an indication that this company is one that social investors or responsible investors would feel is in the better half of the universe,” she says.

Since the days of the fight against apartheid Domini has placed a great deal of emphasis on shareholder activism. “We’ve filed or co-filed over 200 resolutions as a mutual fund,” she says. Although Domini Social Investments has two people whose primary duties center around activism, much of the most effective work is accomplished through coalitions under the umbrellas of CERES or The Interfaith Center on Corporate Responsibility.

While Domini knows that activism produces results, she also cautions that it takes time, lots and lots of time. It requires the involvement of people who have on-the-ground knowledge of the problem at hand, such as child labor in clothing factories selling to American companies. It takes shareholder education and the threat of proxy resolutions to get the corporation’s attention. Ultimately, it takes a willingness of the company to come to the discussion table. It can take years.

In the area of community development, the Domini Social Bond Fund, which is managed by Seix Advisors in Upper Saddle River, New Jersey, places deposits in about 20 different community development financial institutions as well as buying other high-quality social purpose bonds. The firm’s money market account is with ShoreBank, the first and largest community development and environmental bank corporation.

In assessing the changes over the last few decades, Domini can see that she and her colleagues have made a difference not only in the financial world, but in the world at large, but she still has fights she wants to win. “I’m trying to create ongoing accountability. I will have succeeded when your annual report, 10-K, and proxy address the company’s earnings when taking into account the external factors,” she says. “My goal on standard-setting is to open up the full cost or benefit of corporate behavior. That’s a long-term strategy.”

Managing Editor Robert F. Keane can be reached at [email protected].