On the tenth anniversary of its socially screened stock index, Kinder, Lydenberg, Domini & Co. has much to celebrate. So do social investors.
Ten years ago, social investing as we know it was in its infancy, there were no benchmarks for assessing the performance of socially screened portfolios, and critics charged that social investors could expect inferior returns. The Domini Social Index has played a strong role in silencing such critics and bringing social investing into the 21st century.
Today the Domini Social 400 Index (DSI 400) celebrates ten years as the leading benchmark for socially and environmentally responsible investing. The DSI was launched on May 1, 1990 by Kinder, Lydenberg, Domini & Co., a Boston-based firm that provides social research to financial professionals and institutional investors.
But a decade ago, even the most ardent supporters of social investing could not have predicted the impressive performance of the DSI, not to mention the strong growth in social investments in general. The DSI has led the Standard & Poor’s (S&P) 500, a comparable index of the unscreened companies, for five years in a row, as well as for seven of the last nine years.
"It seems odd to say this now, but we never set out to beat the S&P 500," said Peter Kinder, President of KLD. "Over the years, however, the DSI 400’s consistently strong performance through market ups and downs has become one of the central pieces of evidence rebutting the canard that social investors must sacrifice profits for their principles."
The DSI closed out the calendar year 1999 with a gain of 24.49 percent, while the S&P climbed 20.98 percent in 1999. Over the past three years, the DSI posted nearly 5 percent more than the S&P each year, growing an average of 32.30 percent annually while the S&P had a 27.55 percent average annual return over the same period.
In constructing the DSI, KLD evaluated companies in terms of environmental impact, employee relations, diversity, and any role in alcohol, tobacco, gambling, nuclear power, and military weapons. About half of the S&P 500 companies passed KLD’s screening process, while another 150 companies were added to mirror the cross-section of industries present in the stock market for a total of 400 holdings.
The DSI is market-capitalization-weighted, which means that the composition of the index reflects the relative value of the companies in it, leading to many more shares of some stocks being held than others. The portfolio has a very low turnover, averaging just 6-8 percent per year, merely due to corporate buyouts or new positions on the social issues addressed.
Many of the same critics that had dire predictions for social investments ten years ago have suggested that "overexposure" in semiconductor and technology stocks relative to the S&P has led to DSI’s success. But the 1999 data behind the DSI gain reveals a far more complex picture, including the significant benefit of "underexposure" in the tobacco, drug, defense/aerospace, and utilities industries.
"The real question ought to be why it is that so many companies that get screened out of socially responsible investment portfolios also tend to perform weakly," said Kinder. "The tech firms included in the DSI 400 are noteworthy for having younger management teams, which, in many cases, are prepared to embrace more progressive policies and practices than is the case in old-line ‘smokestack’ industries."
The DSI’s tenth anniversary is a momentous right-of-passage for socially responsible investing, representing ten years of outstanding growth and development in the industry. With KLD’s forward-thinking research and leadership, social investors can hope for ten more.