An ESG Trailblazer Talks About Making Investing Moral, Greenwashing, and Sustainability Trends

The founder of Domini Impact Investments, Amy Domini is a widely recognized trailblazer of sustainable investing (which she still calls by its older name, “socially responsible investing"), who has lent her name to a prominent sustainable equity index (she is the “D” in the MSCI KLD 400 Social Index). Domini, 71, recently published “Thoughts on People, Planet and Profit,” a collection of closely observed essays about her career and the world of sustainable investing. Domini is descended from a family of Italian immigrants. Her father was a serial entrepreneur, and her grandfather taught Domini to distinguish between stocks and bonds and how to read an annual report. Morningstar checked in with Domini about her outlook for sustainable investing for 2022. Read the following edited excerpts for more.

Q: In your new book, you say that investing is innately immoral. Why?

A: I recognize it's an oversimplification. But writ large, the financial asset management system is a means of extracting value from the real world, from enterprise. You manufacture a pair of shoes and sell them. That's two levels of profit--the people who sold you the supplies, and you. Once you bring that into a corporate format, you need profits for yourself, and for your corporation and the extraneous outside owners of that corporation, and the layers of people in the business of extracting value from your work. In the long run, the reason corporate capitalism in that format has become the world's dominant economic system is that it provides more people with needed goods and services at a lower cost, even with all this extraction going on. It allows the consumer to have a lower-cost shoe. But there's an imbalance between the financial world and the real world. By my best estimate, the dollar value of all transactions in the financial markets is 11 times greater than the world's GDP. It is always going to be cheaper to throw your trash over the fence, have a slave rather than a paid employee. It is always going to be lower cost, more profit. But the power and importance of responsible investing is that it says first, do no harm. That influences the whole pyramid. Finance is a beautiful machine. It's global, it has near-perfect information, transmits information almost instantaneously and responds to it almost instantaneously. What a fabulous mechanism for addressing human hardships and climate disasters. How can you engage it? You must have investors who care to do that. And you're beginning to see them. Now, virtually every Fortune 500 company has a corporate social responsibility or sustainability officer. Now, 80% of European companies integrate [sustainability metrics] into their ordinary annual report. We've already getting investors into that big pool that is so much larger than trade. Now, we need to see actual solutions to the ecological degradation of the planet and steps toward giving every human on the planet a life worth living.

Q: How do you thread the needle when morality means different things to different people?

A: I once used the term “human rights” in a talk, and was taken aside by people from Thailand who said that in their culture, putting an individual ahead of society is morally wrong. So I came up with this concept of universal human dignity. Strip away the buzzwords and revert to core values that are universal. I don’t know of a culture that doesn’t believe in human dignity. Do you believe that we are fighting for the well-being of the planet, do you believe in this goal of universal human dignity, do you believe that investors have a role in bringing these things about? If you do, then you’re my kind of investor. I don’t worry too much if animal well-being or clean rivers is your single most important cause. I want people to understand that a mutual fund like my own, and now this exploding field [of sustainable investing] can be a big part of the solution for all these individual issues.

Prior to the Securities & Exchange Commission telling companies to tell investors what earnings were, you had a bunch of bosses saying they had a great year and it didn’t mean anything. We’re at that juncture again. Wall Street is clamoring for clarity on certain disclosures, across certain industries. As that happens, corporate management will start reporting ever more detail on the resources, both human and ecological, they employ to provide the goods and services we receive. Examples today include K-1 partnership disclosure on human health and safety and on potential environmental liabilities. Equal Employment Opportunity metric reporting to the public is increasing. Investors want to see progress towards not just net zero carbon but towards remediation. Investors want to see not just cost of goods but benefits to the workforce supplying them. Investors will not get everything we desire, but there is great momentum towards transparency on a host of issues just as today they report extremely detailed earnings that cause analysts up and down Wall Street to recommend buying or not buying.

Q: What do you make of the recent criticism that ESG is only about the bottom line, rather than addressing a company’s impact on Earth and society?

A: There was a distinction without a difference. Risk reduction is very appealing to investors and that’s one of the reasons that the ESG approach has been able to take hold. As investors look for risk reduction, you’re creating management incentives to reduce risk. People who thrive on Wall Street define themselves as a hard-nosed and hard-charging audience, and have trouble perceiving themselves as avengers for good, and coming across as some sort of softy. There are two audiences for corporate transparency on impacts on people and planet: One, the class of investments that don’t know or interact with their customers--the Vanguard 500 funds come to mind--and the high net worth investor; or Two, a labor union, which hears about impact all the time from customers. That second group is the answer to gradually changing that classic hard-nosed investor. That hard-nosed investor will lose the client, lose the chance to compete for the client, if they fail to see the helpful impact accomplished through their investment. For example, CCM Community Impact Bond Fund CRAIX, which started as a fund qualified for Community Reinvestment Act investments, sends press releases out about what they invested in. It is very indirect and yet it does help the audience understand why it matters what the bond you buy is.

I’m not sure that the fact that people don’t talk about impact prevents it--it’s still impactful.

Q: Why did you write this book?

A: I hoped to pull together some thoughts that would help people to understand that corporations have a role and are already making situations or better or worse in places. Corporations have their own management teams, but they’re also owned by you and me. So we are harming ourselves when we invest in corporations with irresponsible practices. Where’s the logic in that?

Q: There’s real alarm about greenwashing by investors, both individuals and institutions. How to avoid it?

A: There are two kinds of greenwashing. One is at the corporate or bond issuer level. It doesn’t take long before a research analyst can have a set of criteria that distinguishes between what’s greenwashing and what’s not. Two, when it comes to the mutual fund level, the struggle internally is that there are a great many newcomers with a single product. The problem is they don’t follow through. The real responsible funds do these things: Set standards on what they will own based on people and planet, vote proxies on things consistent with people and planet, and either through management or through investments like bonds find a means to invest in disenfranchised populations. And they join our trade organization, US SIF.

Q: What trends do you expect for 2022?

A: A continuation of this explosion of new companies founded for social purpose. That whole category didn’t exist in the publicly traded stock arena two decades ago. You now have companies like Allbirds BIRD and FIGS FIGS and AppHarvest APPH and Beyond Meat BYND, saying their mission is to be an excellent place to work that generates lower waste. We are also within a decade of having some standardized sustainability reporting coming out of the SEC or the Financial Accounting Standards Board, which in and of itself will lead to very direct focus by management teams who say “What do we need, to appeal to analysts looking at these factors?” And internally, responsible investors are facing increased tensions around manufacturing in China, a nation which has employed forced labor. Responsible investors will become more aware of which corporations turn a blind eye to such practices. We’re all going to have to deal with defining human dignity in that environment. Finally, the public and responsible investors will take a harder line on ecological issues. The right thing to do is to have a functional government that mandates that for every square foot of ground that goes down, a square foot of canopy goes up. That would take care of the problem.

Q: Thank you, Amy.