RESPONSIBLE INVESTING:

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1 RESPONSIBLE INVESTING: Is It Right for Your Clients? A Presentation for Financial Advisors Investing for Good sm

2 A All investments have social and environmental impacts that can be positive or negative. We believe investors are well served to consider these impacts to address both security-specific and systemic risks that can affect investment performance. In times such as these, a company must invest in the key ingredients of profitability: its people, communities and the environment. --Warren Buffett* * 2011 Sustainability Report. Johns Manville, pg. 4.

3 A BROAD RANGE OF TERMINOLOGY Responsible Investing: the discipline of incorporating social and environmental criteria into the investment decision-making process. Also known as: - Socially Responsible Investing (SRI) - Ethical Investing - Environmental Social, and Corporate Governance (ESG) Investing - Impact Investing - Best in Class Investing - Triple-Bottom-Line Investing - Sustainable Investing - Values Investing There is no universal standard for use of any of these terms. Over the years, a variety of terms and practices have emerged in the field broadly known as Responsible Investing. Although RI goes by many different names and can vary in its emphasis, these variations all share the fundamental goal of incorporating social and environmental factors into the investment decision-making process. 1

4 PRINCIPAL STRATEGIES OF RESPONSIBLE INVESTING Responsible Investing ENVIRONMENTAL & SOCIAL STANDARDS CORPORATE ENGAGEMENT COMMUNITY INVESTING Responsible Investment managers may use some or all of these three practices in addition to consideration of financial factors. Responsible Investing as an investment strategy may incorporate some or all of three principal practices: 1. Application of social and environmental standards that influence the investment decision-making process These standards can emphasize companies with positive attributes, exclude companies with negative attributes, or both. 2. Corporate engagement Communication with companies to improve their policies and practices in social and environmental areas (green house gas emissions, supplier labor standards) through proxy voting, letter-writing, filing shareholder resolutions, and direct dialogue with management. 3. Community Investing Investments that promote community economic development and access to capital in historicallly underserved regions. 2

5 INVESTING WITH IMPACT Responsible investors recognize that their investment choices are not lifestyle choices. They may personally consume alcohol, for example, but agree that alcohol manufacturing by large publicly traded corporations may create significant problems for society. LARGE PUBLICLY-TRADED COMPANIES PRODUCING ALCOHOL ADVERTISE TO AT-RISK POPULATIONS ADDICTIVE QUALITIES OF PRODUCT LEAD TO SOCIETAL PROBLEMS DOMESTIC VIOLENCE DRUNK DRIVING HEALTH ISSUES Since large publicly-traded corporations are generally focused on maximizing shareholder value, marketing and distribution to at-risk populations can be problematic. Responsible investors believe that products that are addictive and potentially harmful should be treated with exceptional care and should not be aggressively marketed or sold indiscriminately. Investors have an opportunity to pressure corporations to exercise care and to send that signal by avoiding such stocks altogether. 3

6 RI CAN YIELD COMPETITIVE RETURNS The argument that integrating ESG factors into investment analysis and decision-making will only lead to underperformance simply cannot be made. -UNEP-FI and Mercer 1 Just like mainstream investing, some responsible investment managers show outperformance and some show underperformance. A study completed by Mercer notes that, in evaluating a responsible investment product, the financial strategy employed and the skills of the manager are particularly important factors, just as they are when evaluating any investment strategy. 2 The RI index with the longest track record is the MSCI KLD 400 Social Index. It outperformed the S&P 500 in its first 20 years (May 1, 1990 through April 30, 2010). Sustainability factors can be an excellent proxy for the quality of corporate management teams, which in turn is a key component of these companies future success. They may also help investors capture sources of risk and opportunity generally overlooked by conventional analysis. 1 Asset Management Working Group, UNEP-FI and Mercer, Demystifying Responsible Investment Performance: A review of key academic and broker research on ESG factors (October 2007), available at 2 Shedding light on responsible investment: Approaches, returns and impacts (Mercer, November 2009). Many academic studies indicate that the use of sustainability factors is neutral to performance. See sristudies.org for a thorough listing of academic studies on the financial performance of SRI. 4

7 RECEIVE A SOCIAL BONUS EXTRA SOCIAL AND ENVIRONMENTAL BENEFITS FINANCIAL RETURNS POSITIVE/NEGATIVE FINANCIAL RETURNS POSITIVE/NEGATIVE NON-RI APPROACH RI APPROACH Responsible investing provides a social bonus. Financial returns depend on many factors, such as the skill of the money manager and the direction of the overall market. They can be positive or negative. However, regardless of the financial return, a responsible investment product provides a social bonus for investors. This social bonus to the investor can be the knowledge that: their investment is adding value to society, for example, by favoring companies that promote energy efficiency, vaccines for debilitating childhood diseases, financial services for the economically disadvantaged, or fair treatment of employees. their investment is not detracting value from society, for example, by investing in nuclear weapons manufacturers, producers of harmful and addictive products such as tobacco, or companies that have a record of polluting the environment or poor labor practices. the voting power of their investment is being used to urge management to improve its social and environmental behavior. Why pass up on the extra benefit? 5

8 IT S A GROWING TREND Investment Funds Incorporating ESG Factors YEAR FUNDS ASSETS (BILLION) $12 $96 $154 $136 $151 $179 $202 $569 Responsible Investors are part of a large and growing market. According to US SIF: $3.07 trillion in total assets under professional management in the United States use at least one of three socially responsible investing strategies (environmental and social standards, corporate engagement, and community investing). The 2010 trends report notes the pool of assets engaged in RI strategies has grown more rapidly than the overall investment universe due to a number of factors, including net inflows into existing RI products, the development of new RI products and the adoption of RI strategies by managers and institutions not previously involved in the field. Since 2005, RI assets have increased more than 34 percent while the broader universe of professionally managed assets has increased only 3 percent. The above chart shows the growth of assets in publicly traded RI funds in the US through 2010 with assets well over $500 billion. Source: 2009/10 edition of Socially Responsible Investing Trends in the United States published by US SIF and available at: Note: ESG funds include mutual funds, annuity funds, closed-end funds, exchange-traded funds (ETFs), alternative investment funds and other pooled products, but exclude separate account vehicles. 6

9 RI INCREASES CORPORATE TRANSPARENCY Companies Publishing Sustainability Reports Copyright 2012 CorporateRegister.com LTD Responsible investors often want to know that their investments are having a large-scale impact on corporations around the world. One of the effects of the RI industry is that more and more firms are measuring and reporting on their corporate social responsibility records. In 2011, more than 6,000 corporate social responsibilty reports were published, up from only a handful in the early 90s. These reports provide a wide variety of statistics relating to the environment, employee health and safety, labor relations, human rights, community relations, product quality, corporate governance, and other matters of vital concern to various stakeholders in the corporation. What gets measured gets managed. It is only when corporations are measuring and reporting on their policies and practices that managers can develop strategies to invest in and improve these areas. 7

10 ADVISOR ADVICE ON RI IS SOUGHT BY INVESTORS Where Investors Turn to Learn About Opportunities: FINANCIAL ADVISOR ONLINE RESEARCH WEBSITE FOR CHARITIES ORGANIZATION S WEBSITE PEOPLE AT THE ORGANIZATION PEOPLE IN THE INVESTMENT WORLD ACCOUNTANT PEOPLE IN THE NON-PROFIT WORLD FRIENDS AND FAMILY WEBSITE FOR INVESTMENTS MY RELIGIOUS COMMUNITY Chart Source: Hope Consulting, % 5% 10% 15% 20% 25% 30% Financial advisors can be a preferred and trusted source of information when it comes to RI. For example, Hope Consulting found that investors often turn to their financial advisors and brokers when pursuing information and opportunities in the impact investing space. 1 Mutual fund companies can expect SR [socially responsible] investors to be more loyal than investors in ordinary funds. - NICHOLAS P.B. BOLLEN, ASSOCIATE PROFESSOR OF FINANCE, VANDERBILT UNIVERSITY 2 1 Money for Good: Impact Investing Overview. Hope Consulting, pg Bollen, N.P. Mutual fund attributes and investor behavior. Journal of Financial and Quantitative Analysis 42, pg

11 YOU CAN START SMALL INTERNATIONAL LARGE-CAP CASH BONDS SMALL CAP * Lighter slices represent RI Allocation. You can start with a small RI allocation slice for each asset class. Those coming to RI for the first time are often reluctant to plunge in all at once. RI does not need to be an all-or-nothing decision. Opportunities exist in each asset class to make small initial investments that can later either be built upon or withdrawn relatively easily usually by using mutual funds or pooled accounts as an option. A recent report, based on a nationwide survey of 1,065 financial advisors, finds that U.S. advisors are willing to place 2.5% of AUM in RI products. Of advisors surveyed, 72% expressed interest in offering RI products to clients 38% expressed strong interest. Source: Gateways to Impact. 9

12 UNDERSTANDING YOUR CLIENT SAFETY FIRST I want to know I ll get my money back and maybe some upside. Any social benefits are secondary. QUALITY ORGANIZATION Show me a strong business model and a good track record and I ll invest. PERSONALLY RECOMMENDED A business school classmate is a social entrepreneur. I m happy to invest in his venture. SOCIALLY FOCUSED This is a great way to support the causes that are important to me. HASSLE FREE If I don t have to look too hard and it s a pretty liquid investment, I m willing to try. SKEPTIC I keep my charitable giving and financial investments separate. I m not at all interested. Source: Money for Good: Impact Investing Overview. Hope Consulting, pg.15. In a survey of impact investors, Hope Consulting found six distinct types of investor attitudes toward RI, each with their own primary motives. Safety First: These are investors who are primarily concerned with the safety of their investments and worried that an RI tilt will increase the riskiness of their investments. They should be aware that all investments can be risky, conventional as much so as RI. Whichever approach they take, they should monitor carefully and understand fully these risks. Risks in RI accounts can be monitored and managed, just as in any other account. 10

13 Socially Focused: These are investors who want to hear the social and environmental stories that go with RI investments. Special efforts need to be made with these investors to present fully and honestly the social stories involved. There are many positive stories, but no RI investment is without some controversy. Socially Focused Investors may well be aware of these controversies and related challenges. The RI investment manager can help provide understanding and insight into how these issues are being addressed. Quality Organization: A common theme among responsible investors is that firms with quality management are likely to be forward looking on social and environmental issues. Stories that demonstrate the foresightedness and business acumen of corporate managers when it comes to products as well as stakeholders are often appreciated by this type of responsible investor. Hassle Free: Many investors coming to RI are either not particularly financially or socially sophisticated or simply don t want to be bothered with extensive details. Just as they are often willing to trust you on the financial side, these investors will be willing to trust you on the social and environmental side as well. Personally Recommended: Some RI investors will come to you with particular ideas companies, or other investment opportunities that they have heard are either particularly attractive or perhaps questionable from an RI perspective. Treat these inputs with respect. Sometimes they will represent valuable new insights that can be helpful. Skeptic: A position often taken by those not interested in RI is that they want to make as much money as they can in the market and then give to charity, not mix the two approaches. You can point out a couple of things. First, there is no guarantee that their non-ri investments will produce higher returns than other possible opportunities. Second, if they are concerned, for example, about the environment or human rights, it is a clearly inefficient approach to invest in companies that are creating these problems and then take their profits and give it to NGOs that are trying to solve the same problems. 11

14 INDICATORS OF RESPONSIBLE INVESTMENT PRACTICE One of the biggest challenges in responsible investing is for the investor to understand and evaluate the credibility and details of the investment manager s social and environmental approach. The following provides a list of best practices to help in the evaluation process. Investment Manager provides: A clear statement of the incorporation of social and environmental principles into the investment process Detailed documentation and explanation on the policies and practices used to implement these principles A clear accounting of communications and dialogue with corporations on social and environmental issues Domini Social Investments A Case Study Domini Social Investments publishes its Global Investment Standards which outline all the social and environmental issues considered and the reasons for identifying these particular issues, as well as how these issues are implemented in the investment decision-making process. This detailed brochure is easily accessible in a downloadable format on its website, as well as in print. Domini publishes its proxy voting guidelines and actual votes on its website. Domini communicates with its investors on the results of its dialogues with corporations and efforts to promote responsible policies and practices. 12

15 INVESTING FOR GOOD sm Bringing investments into alignment with the goal of ecological sustainability and universal human dignity makes sense to a lot of people. Around the world, more and more investors are realizing that the way they invest does matter, and that they can make money and make a difference at the same time. In the U.S. alone, well over $500 billion is already invested in socially responsible funds, and that number is growing at a rapid pace. As the field of responsible investing continues to grow around the world, financial advisors are going to be the go-to source for information on RI products. In this global economy, investors have the opportunity and the responsibility to ensure that their investment dollars are having a positive impact on our planet and its people. By discussing socially responsible investing with your clients, you are giving them the opportunity to invest, not just for profit, but to invest for good. Investment professional use only. Not for distribution to clients. Past performance is no guarantee of future results. The Domini Funds are subject to market risks and are not insured. Investment return, principal value, and yield will fluctuate so that an investor s shares, when redeemed, may be worth more or less than their original cost. For performance information current to the most recent month-end, visit or call Each Domini Fund charges a 2.00% redemption fee on sales or exchanges of shares made less than 30 days after the settlement of purchase or acquisition through exchange, with certain exceptions. See the applicable prospectus for further information. Please consider the Domini Funds investment objectives, risks, charges, and expenses carefully before investing. Visit or call for a copy of the Funds current prospectus for more complete information on these and other topics. Please read the prospectus carefully before investing or sending money. DSIL Investment Services LLC, Distributor. 10/12 13

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