March 6, 2014
What lies ahead for responsible investors during 2014? Certainly new products, particularly those that are cleaner or more local, certainly a more predictable stock market, and probably enhanced interest in the value added by utilizing social and environmental considerations when choosing investments. These trends are already evident. Each is good news for the ethical investor.
When Corporations Rule the World, Second Edition by David C. Korten was published in 1995, it was rightly viewed as a challenge to buy local, take personal responsibility for sustainability and to invest at least part of your assets into smaller local businesses. The call was powerful and spoke to something in the psyche. It put into words the unease so many had been feeling and gave a blueprint for action.
Since that time the Slow Money movement has put a voice to one aspect of the sustainability effort. It asks us to invest one percent of our assets into businesses that are small and geographically close to us, businesses that enhance life as a core mission. The first beneficiary seems to be the sustainable agriculture field, with dozens of options springing up. In my home region of New England we see the gamut from a small organic pickling company to an integrated farm-to-table network.
Sustainable agriculture has re-introduced an old concept to many. Rather than investing in exchange for ownership in a company, many investors are investing in exchange for a part of the revenues that the business generates. This has the dual benefit of leaving ownership with the entrepreneur and giving the investor a potential for superior returns. It is a common form of reward in starting a restaurant or making a film, but relatively new in its current use as part of the sustainability trend.
The desire for more direct and useful products has, in recent years, led institutional and ultra-wealthy investors to purchase venture capital funds that promise to seek out and invest in segments of the sustainability market, like clean land or hydro-culture, solar power or bottom-of-the–pyramid wealth creation. But these investment vehicles demand long-term commitments with no liquidity. That isn’t for everyone.
Domini Social Investments has, therefore, launched Nia Global Solutions, an equity portfolio that seeks to bring these concepts into the public market. In seeking the very most impactful companies, meeting the very toughest sustainability questions, we started with our own basic universe of 2,800 companies. Only three worked for Nia. We now have a pool of about 43 to work with in managing the portfolio.
This is likely to be a big new effort in the socially responsible investing world. Bringing the concepts of high impact investing into the public equity setting is filled with challenges, but the industry has long heard the call from investors for something cleaner and more consistent with personal values than what they’ve seen to date.
I’d be remiss to leave this point without addressing fossil fuel free investing. It is real and it is going to become an industry standard. The challenges of investing without fossil fuels have been well stated, but they lack moral validity. As a first step in this direction, Domini launched Nia. I do not know when and how step two will take place, but I do know that it must.
A More Predicable Stock Market
The years between 2000 and 2012 were difficult ones for investors and posed special challenges for the responsible investor. We suffered through two market collapses of roughly 50 percent. The period has been marked by the distortions that war creates and by the distortions that an under-regulated investment community creates. For much of the period the forces of extreme voices dominated public discourse, whether in their calls on our government to wage war, or in their hatred of government actions (oxymoronic as that statement is).
During the first half of that period the investor ran from oil stocks to weapons stocks to gambling stocks to gold stocks and then began the cycle all over. None of these ‘hot’ industries were appealing to responsible investors and markets that witness narrow industry movements without broad market trends joining are hard markets to do well in. For many in the industry, these were the most challenging years we have ever faced.
During the second half we witnessed the complete collapse of the housing market and all the financial structures that depend on housing. We also saw spectacular malfunctions in securities trading, with flash crashes and London Whales, Bernard Madoff and AIG’s failure. The Federal Reserve, left alone to protect our economy once Congress was blocked by the Republican Party’s do-nothing stance, used the only tools they had. They reduced short rates to zero or less after inflation and when that wasn’t enough, they entered the public markets and bought long bonds, pushing long rates down as well. These were unprecedented actions and Wall Street by and large did not know how to cope with them. The result was an approach many called, “risk-on, risk-off.” The right way to invest was to go all in or all out, even if you did that daily. It created volatility and uncertainty.
This past year saw a return to relative normalcy. Companies announced good news and their stock prices rose. When the news was poor, the stocks sold off. The chase after the story of the moment and the take-a-risk/don’t-take-a-risk market behavior has faded. This allows old-fashioned fundamental research to lead to more solid results. And nothing is so fundamental to understanding a company as the sort of knowledge we gain by doing a social and environmental audit.
An underlying threat to the market stability remains. The political environment is very uncomfortable. Non-action has become a tactic used daily, and it is used to make the administration look bad, rather than to hold the status quo. It is a testament to the strength of our recovery that in spite of the inaction we have seen GDP growth. When you consider that Standard & Poor’s estimated that the government shutdown alone cost $24 billion dollars, you get a sense of the horrific economic impact of the Republican Party’s efforts. There will be elections this fall that will stir up markets.
Growing Understanding of the Value of ESG research
We are at the tipping point here. Environmental, social and governance evaluations are baked into most research platforms today and some street research. Do you have an account at Fidelity? Click through the research on your portfolio and you’ll see what I mean. Do you rely on Factiva, FactSet or Bloomberg? They all provide this. Even street research occasionally references it in the U.S. and always bakes it into their European reports. This was the core goal of introducing ethics into investment decision making, to influence Wall Street to be a force for good, and we’re seeing it unfold.
We are just moving from the point of this research being available due to client demand to seeing it used by conventional analysts. Wellington Management Company recently published a short article on their work with a Wall Street broker that provides ESG research and found, as each study has, value added. Like many such pieces, it was quick to disavow that this was socially responsible investing, but the subtleties are lost on me. As the recognition of value grows, the feedback to corporations will as well.
In fact we know that corporations have been receiving the feedback. We know because they publish Corporate Responsibility Reports. Corporate Register reports that 7,000 or so companies (private as well as public) report on some aspect and that about 80 percent of these report on a spectrum of issues. As a founder of a company that scoured corporate reports for any indication of interest, this both astounds and delights me. It validates the effort.
The growth of understanding that there is value added to research by knowing the full spectrum of corporate impacts on people and the planet in turn assists those of us who are professionals in the field of socially responsible investing. We will begin to feel the wind at our backs for a change. Many of us have grown weary of the question, “how do you compare to regular managers?” As ESG research gains acceptance, so do we.
2014 – A Good Year
2014 is unlikely to see the spectacular equity returns that we enjoyed in 2013, but it will be a year in which we can manage assets in a logical manner. We will begin to see the development of real products for the public’s new interest in the ideas of Slow Money, Sustainable Agriculture, Fossil Fuel Free investing and High Impact. And these products will themselves spur new interest in our field. 2014 will see the continuance of mainstreaming, particularly in the acceptance of ESG research as an important tool in understanding the company whose stock we are buying.
Although we have some cross currents to navigate, the general thrust of these three points I have been making is toward a good environment for the field. We do not know what the Federal Reserve’s gradual reduction of their actions will be, but they do seem to be moving slowly. This in turn has reduced our concern that growth in emerging markets will be impaired, which would be a negative for our economy. Yes, there are risks. But I argue that this is the beginning of an exciting decade.
During 2013 we saw the start of drivers for truly robust growth begin to emerge. We saw the emergence of Tesla, a major new disrupter in the automobile field, with a battery solution that will drive other industries. We saw the cost of solar equipment plummet and the efficiency soar, and with it, companies that install solar on hospitals or industrial settings. And we saw shifts in disease treatment moving us more to personalized medicine, privacy options, and increased tools in the fight against cancer. This is in a way an even better set of circumstances than the computer revolution brought us. It is a broader base and brings in both low and highly skilled workers. And we saw the emergence of KickStarter and other such group funding opportunities, which support local economies and the emergence of new entrepreneurs.
2014 will see these trends continue, and these are trends that speak directly to the socially responsible investor. Within this context will come the new products, the calmer markets and the growth of acknowledgement that ESG research adds value. This is the environment we have long been waiting for. I look forward to seeing the year unfold.
Article by Amy Domini, who is a partner in the Sustainability Group in Boston where she manages roughly $1 billion in liquid assets for high net worth families. Additionally she is the founder and CEO of Domini Social Investments, a New York City based mutual fund family. She is widely recognized as the leading voice for socially responsible investing. In 2005 she was named to the Time magazine 100 list of the world’s most influential people, and in 2009 Time listed her as one of 25 “Responsibility Pioneers”. In 2005, President Clinton honored her at the inaugural meeting of the Clinton Global Initiative.
Ms. Domini co-authored the groundbreaking book, Ethical Investing in 1984. Since then she has authored or co-authored several books. Her articles have been widely published and she is a regular contributor to The Intelligent Optimist magazine.
Ms. Domini serves or has served on several boards. She is a member of the Boston Security Analysts Society and holds the Chartered Financial Analyst designation.
Ms. Domini holds a B.A. in international and comparative studies from Boston University. She is the recipient of two honorary degrees: a Doctor of Business Administration, from Northeastern University College of Law and a Doctor of Humane Letters by the Berkeley Divinity School at Yale.
Photo Credit: Flickr/ Tddy, ota_photos,