ImpactAlpha, Nov. 3 – At an earlier peak of COVID pandemic, Domini Impact Investments launched a mutual fund that looked a little different than its previous funds.
The new thing: identifying major human and ecological needs and investing in companies with the solutions to those needs.
The Sustainable Solutions Fund went beyond merely selecting public equities that demonstrate strong social, environmental and governance, or ESG, profiles relative to their peers – the strategy Domini had built its reputation on. Even before the pandemic, Domini had lined up a portfolio of companies delivering accessible and quality healthcare, climate-resilient food, remote work and affordable financial services.
Suddenly, “there was an acceleration of need for those goods and services that we had discovered,” says Amy Domini, who founded the sustainable investment manager more than 30 years ago. Domini reported just over $2 billion in assets under management in a filing in March.
Asset managers compete on impact as investors move beyond ESG
The portfolio of about three dozen stocks includes Beyond Meat, Sunrun, Teledoc, Atlassian and Hologic (and, of course, Tesla). The fund, which trades under the ticker CAREX, has grown in value by more than 60% since inception on April 1.
“What they aspired to achieve over the next five to seven years, was achieved in five to seven months,” Domini says of the majority of the fund’s holdings. “And now they’re looking to the next goal.”
The shift at Domini tracks a broader shift: As passive ESG funds emerge as the hottest trend in financial services, asset managers are moving beyond ESG to compete on impact.
Domini says such an “impact” portfolio couldn’t have been built even a few years ago. When she created the Domini 400 Social Index in 1998, the example of a company responsible investor wanted to own was Ben & Jerry’s. “They ran a great company, had a great corporate culture, had a lot of fun. But ice cream is not a solution to human needs,” she says.
Now, more entrepreneurs reaching public markets are taking on bigger human and environmental challenges. Just look at the flurry of renewable and clean energy companies, she says. “They want to provide the service beyond petroleum, or beyond meat for that matter.”
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On the eve of the U.S. election, Domini sat down, virtually, with ImpactAlpha to take stock of the state of ESG and impact investing. A culture of individualism and continued political interference, she says, is slowing adoption in the U.S. Her biggest worry is not today’s election, but a series of costly climate catastrophes that will force a massive repricing of risk in global markets.
ImpactAlpha: In full disclosure, I have a small investment in the Sustainable Solutions fund.
Amy Domini: I hope you got in more than a month ago because it has been a rocket ship.
ImpactAlpha: It has been a rocket ship. It’s also been a great case study, especially having launched during the pandemic.
Domini: Of course, you plan these things way in advance. Then you’re sort of saying, “Okay, do we stop, or do we just go on?” And so we went on. But we did have a conversation.
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ImpactAlpha: What was the conversation?
Domini: The Sustainable Solutions Fund, from the beginning, had the mission of attempting to identify major human and ecological needs and investing in companies that had solutions to providing answers to those needs. That led us to identifying some key needs like access to health care, access to food that’s clean and wholesome for the planet. And that didn’t change in the least when we launched. What did happen was that the globe changed. All of a sudden, there was an acceleration of need for those goods and services that we had discovered.
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We had very early on identified a name like Atlassian, which is in the business of facilitating business teams to operate remotely from each other. Then the world changed and work from home became an accelerated process. Atlassian has certainly been a very successful holding for the fund. And this played out across so many of the needs that we had identified.
ImpactAlpha: What will happen to these trends, and solutions, post pandemic?
Domini: There are those that will be less in demand. The vast majority (of the fund’s holdings) – what they aspired to achieve over the next five to seven years, was achieved in five to seven months. They got there sooner. And now they’re looking to the next goal. We did purchase, after launch, but very soon after launch, Beyond Meat, in terms of food that is less destructive of the planet, probably better for people. We struggled a little bit because it’s a high cost product. But that’s a well established pattern with new technologies.
In order to get the technology right, you need to have a core group that’s gonna pay anything for it and then you can get the technology prices down. So we went with Beyond Meat, which has turned out to be very good. We did not expect there to be a sudden, big problem getting hamburger meat.
ImpactAlpha: Was that part of your long term thesis that accelerated by the pandemic?
Domini: The supply drop of conventional meat was not ever in the business plan of Beyond Meat. It was an incident concurrent with the coronavirus as the meat packing plants became coronavirus hot beds. And that will go away. But that’s not the single most important thing. The company has shown a lot of flexibility on whether it distributes through restaurants or in supermarkets and has taken advantage of those paths as they open in either location.
ImpactAlpha: But perhaps longer term, supply chain issues with industrialized meat production are a challenge for that industry.
Domini: We certainly believe that there’s increasing awareness. There was a New York Times article in the last few days about beef farmers addressing methane and thinking about whether or not to change the feed that they give their cattle so as to reduce methane emissions. I couldn’t believe it. I never thought I’d live long enough to have cattle farmers actually want to reduce methane emissions.
ImpactAlpha: Are you surprised by how long it’s taken for markets to adopt ESG principles in investing?
Domini: There have been a couple of trends that were difficult in the United States to overcome. It was a much steadier infiltration globally than it was in the US. And in the US, I think we had a very direct counter campaign going on from corporations that didn’t particularly want a new set of things they were supposed to pay attention to and distract them from what they view as their primary mission – making money. There were big social differences going on globally, that I believe, led to that.
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I am 70 years old. I am the daughter of people who survived World War Two. The people who survived World War II, who were in Europe during World War II, as my father was, or in Japan, or other places – all of these families have a story where they were saved, the father was saved, or the sister was saved, because a stranger opened a door. That culture survived into what we think of as the northern European nanny state, but that they think of as the only thing that kept them alive during those tough times. And it’s not a culture Americans had to deal with. It’s not a lesson that we had to learn.
Even when I launched this way back 40 years ago, German companies, French companies, English companies had to report in their annual report to society. You know, proudly announcing that 70% of their workforce was unionized and these kinds of things that were societal goods. They were justifying their existence. They had an actual bookkeeping system. If you had any Japanese government business that you conducted, and you were a publicly traded Japanese company, until about six years ago, you had a section of your annual report to shareholders that reported to Japanese society the benefits that you inferred upon them in a monetary way.
ImpactAlpha: How is it different in the U.S.?
Domini: We still have some walls here in America and some of them are governmental. We have a sense of the fiduciary, and if it’s a fiduciary of a pension fund, then that generally is under the guidelines of the Department of Labor. And they have a series of rulings under what’s called ERISA. And that is clarified from time to time. And there’s been clarifications since 1971 that said, “if you’re going to take into account environmental considerations when you’re making investments or good-to-society considerations, you can’t completely ignore the financial, you’ve got to also be looking at the financial side.” That was rewritten in George Bush’s Department of Labor to say “the fiduciary has to make the best possible decision. If you’re going to do green investing, you have to believe it’s the single best investment you can make.” Nobody knows what’s the single best investment they can make. For everything else, the standard was it was a good way to diversify the portfolio and reduce risk and blah, blah. All of a sudden, if it’s green, “it better be good.”
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The Obama administration went back to the ‘71 but only in regards to green investing, not in regards to proxy voting. And the Trump administration flipped it back again. So you’re really having some interference politically, in trends that are very well established. You’re going to have Blackstone abandon this field now? No, they’re not going to abandon the field.
There’s no real world implication to these Department of Labor actions anymore, except if somebody wants to sue somebody, and they can say, well, here’s the letter, and we’ve got our ground for suing you.
ImpactAlpha: Do you think this all has left American companies at a disadvantage, because they haven’t been forced, or forced themselves, to consider their impact on society?
Domini: Yes, management has been forced (in Europe and Japan) to consider its impact on society but then it becomes Part of the DNA. Prior to the creation of the securities exchange commission and the Acts of ’32 and ’34, a fellow running the railroad company would say that the railroad company was profitable, and that this was the profit. But there was no standard accounting system and checks and balances to it being accurate. And this led to the crash in 1929, led to the Great Depression and led to the creation of protections for investors by standardizing the reporting.
That standardization of the reporting they got is now closing in on ninety years old and has been phenomenal. Companies really focused on their cash flow, changes in financial conditions, what goes on the balance sheet, what goes on the income stream. It has worked. I am arguing that as they have increased accounting requirements, on issues not addressed in that first round of SEC, that it will work. It will have these companies focused on the kinds of issues that they currently have no mandate to focus on.
ImpactAlpha: As ESG practices within a company become standard, are investors demanding to understand more about the impact of company products and services?
Domini: We could not have done the Sustainable Solutions Fund much sooner than we did. Back in 1998, when we launched an index of our own, the Domini 400 Social Index, the construction of that was that we took 250 S&P names, we added another hundred names of non S&P companies that would address industry, misalignments, and things of that nature. And then we had 50 really great companies that any responsible investor wanted to own. And at that time those 50 really great companies were things like Ben and Jerry’s ice cream. They ran a great company, had a great corporate culture, had a lot of fun. But ice cream is not a solution to human needs.
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I don’t think you had anything like the number of entrepreneurs who have gone out to create a company because they wanted to address a human need or ecological need. All of the solar companies. All of the alternative ways of getting energy, micro grids, all those kinds of things. They want to provide the service, beyond petroleum, or beyond meat for that matter.
ImpactAlpha: In a recent Bloomberg interview, you said a series of costly climate catastrophes will jolt markets more than the outcome of the upcoming U.S. election. What does that jolt look like?
Domini: Collapse of the financial systems for one. We had a one-week fire in California last year and a multibillion dollar utility went bankrupt. Let me give you a scenario. You have Sandy hit in New York City, and the generic equivalent hit in Honolulu, and the generic equivalent hit in Miami, and the fires of California and the floods of the upper Mississippi in one month. You have roughly a third of the nation suddenly going from having a home to living in a garbage dump, if they’re fortunate, and desperately scraping for access to their bank accounts to get them through the next week. Every mortgage fails, every insurance company fails. Practically every healthcare company fails. Practically every municipal government fails. It’s a massive threat that we’ve been just gliding by because it hasn’t happened yet.
ImpactAlpha: Do you think we have the ability to deal with this?
Domini: We have the ability. Do we have the political will?