Decades before Wall Street jumped on the ESG bandwagon, Amy Domini was an early and unwavering believer in the value of considering environmental, social, and governance issues in the investment process.
Her interest in sustainable investing took root when she was a stockbroker in the late 1970s. “I’d call clients with a stock tip and be startled when they would get mad and say, ‘I’ll never buy a company that makes weapons or does business with South Africa,’ ” says Domini, who started asking about such preferences on new client questionnaires.
In 1984, she co-authored the book Ethical Investing. In 1990, she co-founded KLD Research & Analytics with Peter Kinder and Steven Lydenberg, created the Domini 400 Social Index, and, soon after, launched a passive U.S. equity fund pegged to the index. They eventually sold the firm and its flagship index, which is now owned by MSCI, and converted the fund to an active strategy, the $1.1 billion Domini Impact Equity fund (ticker: DSEPX).
Today, sustainably managed portfolios represent $8 trillion in global assets—a figure that’s on track to quadruple by the end of the decade—while a growing number of traditional fund managers now integrate ESG considerations into their investment process.
As this approach to investing has soared in popularity, some of the biggest names in finance have taken the bullhorn. Domini, 71, isn’t complaining. “Addressing the most pressing environmental and social issues will take a whole lot of energy, and we’ve got this beautiful system called finance that is capable of providing that,” says Domini, whose firm, Domini Impact Investments, manages $3 billion across five funds.
She recently published a collection of her essays on responsible investing in the book Thoughts on People, Planet, & Profit. Barron’s spoke with Domini about the evolution of sustainable investing and her vision for where it’s going. An edited version of our conversation follows.
Barron’s: When I first interviewed you 20-plus years ago, the conventional wisdom was that socially responsible investing came with a trade-off of lower returns. Now, mainstream fund managers sing the praises of ESG. What changed?
Amy Domini: There’s that old saying: Before I became an overnight success, I put in 30 hard years. I do think that a lot of the groundwork that was laid over these past 30 years has finally paid off. When we started KLD, our mission was to remove the barriers to responsible investing. The industry still has a long way to go, but we’ve seen a lot of progress.
What were the biggest barriers, and where do things stand?
The first was getting nonfinancial data. It’s still tough and there needs to be more standardization, but there are lots of places to do core ESG research. The second was this presumption that anything that limited your investment universe would limit your return. Today, more investors understand that avoiding trouble is a good way to make money, and you can learn a heck of a lot about management when you look at nonfinancial information.
The third barrier has recently started to crumble—that investors shouldn’t get involved with social issues because that’s the role of government, philanthropy, or religion. Now the public is starting to understand that certain corporate behaviors aren’t easily controlled or affected by government, and you need to have a voice from within. The financial system is a great vehicle for making the world a better place. It’s almost instantaneous in its transmission of information, and it’s capable of incredible innovation and has tremendous resources.
Let’s get back to the topic of reporting and standardization. What changes would you like to see?
Europe is ahead of the U.S. on this front. In 2005, the United Nations Environment Programme published the Freshfields Bruckhaus Deringer report, which created a legal framework for the integration of ESG. When that came out, Europe turned on a dime and started to say that pension funds needed to integrate these things. This spilled over to many U.S. firms, which realized that if they wanted European business, they would need to build their ESG capacity to serve that audience.
Now that there is so much demand from Wall Street to standardize ESG information, the Securities and Exchange Commission needs to do something. In the meantime, investors need to keep management firmly focused on the impact they have on people and on the planet. We also need the Department of Labor to clean up its language about the role of the fiduciary.
You’re referring to Trump-era rules that limit ESG funds in retirement plans. The DOL is expected to reverse those rules. Why do you think this is important?
This makes me so angry that I keep a DOL letter on my desktop [that laid the groundwork for these limitations]. I have it here. It’s dated Friday, Oct. 17, 2008. I personally went through and wrote in what they added and what they deleted.
So here, for instance, is a sentence that had been: “The named fiduciary must carry out this responsibility solely in the interest of the participants and beneficiaries’ interest in the plan.” What did they do? They changed it to the interest of “the economic value of the plan.” The Obama administration reverted back to the previous letter, and then the Trump administration reverted back to the 2008 changes. The big picture is we have got to get rid of this concept of economic value. This is about making life better for plan participants. I don’t care if I’ve got an extra 50 bucks in my pocket if it’s dangerous to walk down the sidewalk, or if my grandson has leukemia because the water system is so polluted.
Let’s talk about the Domini Impact Equity fund. Wellington Management subadvised it from 2006 until late 2018, when you and Carole Laible took over. What prompted the decision?
I don’t fault Wellington. They still manage our international and bond funds, and those have been terrific. They had a [value-oriented] quantitative team managing the U.S. equity fund, and we think responsible investing needs to be more future-looking, with a bigger emphasis on growth than value. [Over the past three years, Domini Impact has returned an average of 29% a year, better than 94% of all large-blend funds.]
How is the fund invested?
The fund has two sleeves. The core sleeve is 80% to 95% of assets, and is driven entirely by the social and environmental profile of companies. We attempt to get as close to the S&P 500 as we can [while] excluding energy. We have ESG analysts who, twice a year, identify companies that should be included.
The other sleeve is thematic. We are attempting to introduce stocks that are of particular interest to responsible investors. When we started the fund, the universe was pretty small, companies like Ben & Jerry’s [now part of Unilever (UN)].
Today there are fabulous opportunities because so many companies with a social purpose have come public. We had Zoom Video Communications (ZM) in that category before the pandemic because there are social benefits to making it easier for people to work remotely. We would also put DexCom (DXCM) in that category because it improves the lives of people with diabetes [with continuous glucose-monitoring systems that don’t require a finger prick], which the World Health Organization has identified as one of the most dangerous diseases out there. Another thematic company is Ameresco (AMRC), which specializes in renewable energy. It installs solar panels on municipal buildings in exchange for selling excess energy back to the grid. It costs state and local governments almost nothing, and benefits users downstream.
The first iteration of sustainable investing focused on excluding companies, or even entire industries, that did harm. Today’s ESG funds often invest in the most sustainable companies in these problematic industries. Which perspective do you take?
We have and always will exclude certain industries, without fail. We don’t buy companies whose primary business is tobacco, alcohol, gambling, weapons, for-profit prisons, nuclear power, mining, and traditional energy. We have gotten to the point where we don’t want to buy any oil company because of the employee deaths and the environmental liabilities litigation.
Beyond that, we put companies into five different categories, ranging from companies that are clearly providing a social benefit to companies that aren’t perfect but that are plenty good enough from an ESG perspective—and that’s where our engagement comes in. Our ESG analysts spend about 20% of their time on engagement work with companies.
You’ve talked about how larger firms make a point of trying to recruit people from your firm. What do you do that’s different?
Before I met Steven Lydenberg, he wrote a book, Shopping for a Better World, where he designed a way of evaluating companies that was specific to the products they made. And that remains the core difference in what Domini does. The large ESG research firms often apply a universal standard to companies, whereas we are very industry-specific. If you’re a food company, your supply chain is a bigger risk than if you’re a software firm. Each industry has key performance indicators that are unique to that industry.
Also, we define some industries a little differently. For example, we have a classification for infant formula: We consider it a negative if a company derives more than 10% sales from formula, because it’s heavily marketed to populations that don’t have clean water to mix it with. Nestlé [NESN.Switzerland] and Danone [BN.France] both fit in that category, which is why they’re excluded.
Is sustainable investing being watered down as more firms integrate ESG into the process?
No, no, I’m very enthusiastic about it. My goal has always been to see 15% of investors actually go for it. To get there you need to start with something like 40% because you’re going to have a bunch of lightweights. But what I’ve seen over and over again is it starts light, then eventually [investors] see that they can make money investing this way and they start to run with it. I don’t need people to buy in 120% and be sophisticated the day they begin. I just need them to begin.
You’re widely considered a pioneer in sustainable investing, but relative newcomers— BlackRock CEO Larry Fink, for example—have become louder voices. That’s got to bug you.
When people ask me how to tell if a firm’s ESG efforts are genuine, I tell them the low-hanging fruits are whether they are a member of our trade organization, the Forum for Sustainable and Responsible Investment, and if they vote their proxies in a manner that’s consistent with their stated ESG goals. BlackRock tends to vote with management across the board. [BlackRock declined to comment.]
That’s my beef with Larry Fink. But Larry made sustainable investing legitimate. I don’t mind if other people are in the spotlight, because we need all the resources we can get to help the planet survive and make life on it worth living. If I can help get someone who manages trillions of dollars to get on board, that’s a win.