Make a positive impact with your investments

Holly Testa – Director of Shareowner Engagement for First Affirmative Financial Network

In this podcast and video, I interview Holly Testa, AIF, the Director of Shareowner Engagement for First Affirmative Financial Network. First Affirmative is an SEC registered investment advisor. She has been affiliated with First Affirmative for over 20 years in several capacities.

Holly works with several coalitions of institutional investors who engage with companies on environmental, social, and corporate governance issues to positively influence the performance and impact of companies owned in First Affirmative client accounts. She participates in dialogues with companies, files shareholder resolutions, joins multi-stakeholder campaigns to influence related public policies, and directs the firm’s proxy voting activities. In addition, she works with First Affirmative’s network advisors and their clients, providing information and assistance on advocacy issues.

Here is a transcript of our interview:

In this episode I’m going to talk with Holly testa the director of shareholder engagement for first affirmative
Financial network. This is the impact Financial Planners podcast with Bill holiday brought to you by AIO
financial a fee-only financial planning firm
specializing in socially responsible investing at AIO
financial calm
Thank you for joining me on this episode
I’m excited to have an interview with Holly testa of first affirmative
She actually lives on a boat
Which is docked in a harbor on Oahu heard in Oahu, Hawaii
So if you watch the video of our interview, you’ll actually see her move side to side during it
It’s kind of kind of funny so Holly testa
As I said is the director of shareholder engagement for first affirmative first affirmative is an SEC registered investment
advisor
She’s been affiliated with first affirmative for over 20 years in several capacities
Holly works with several coalition’s of institutional investors who engage with companies on environmental social and
corporate governance issues to positively influence the performance and
impact of the companies owned in first affirmative clients accounts
She participates in dialogue with companies filed shareholder resolutions joins
multi-stakeholder campaigns to
influence related public policies and directs the firm’s proxy voting activities
Alright, let’s go to our interview. All right, Holly. Thanks for joining me
Could you briefly tell us about first affirmative and what they provide well, thanks for having me bill
I really appreciate the opportunity to be on your podcast here today
first affirmative is part of the full folio financial family of companies and that offers online investing technology and also,
services to advisors and investors broker-dealers and first affirmative
offers asset management and consulting services but to both individuals and to
Institutions and we have over a hundred billion or hundred billion 1 billion in assets under manage administration
I’m dreaming big
they’re our clients come to us because they’re really seeking to align their investment decision-making with their personal value or mission and
At the same time meeting their financial goals. And so that’s what we help them do and we do that through a network of
investor investment advisors like yourself that help clients assess and define their long-term goals both financially and from a value standpoint and
From there, we develop diversified portfolios that are designed to meet those goals part of our investment in process
it includes environmental social and governance screening, which is also we say ESG and
We also take into consideration issues that are really the most important to the client. So our process is very client focused and
Finally, we’re certified B Corp and what that means is that we’re a for-profit business
but unlike the traditional C corporation
we’re actually legally required to consider the impact of our decisions on our customers the environment the community our employees and
We’re actually pretty proud. We won a B Corp award for one of the best in the world companies this year. Oh, that’s great
I know that that’s good. Yeah, and you have a put on a conference every year which is really nice
Yes, I was going to mention that it’s in our hometown of Colorado Springs this year in at the Broadmoor. Yeah
Looking forward to that at the I guess November 1st. Yes, that’s that
And then why do you engage in shareholder?
advocacy
Our investment strategy using the ESG analysis helps us to manage
Portfolio risks and it allows it our clients to support and profit from better managed companies
But that doesn’t mean that those companies are perfect. In fact sometimes far from that
oftentimes companies will sell in one area of
ESG but lag way behind in others and so as a shareholder
I think we can unpack that corporate behavior by exercising our rights as investors. So really from our viewpoint
Advocacy is really about communicating investor expectations on behalf of our clients and then pressing our companies to meet those expectations
Yeah in that. I mean, I think that advocacy part is really how you make an impact
The screening is not that you’re supporting certain companies
But I mean, this is a big piece the advocacy. So what is your shareholder advocacy?
process
well, there’s numerous methods of engaging with companies and some of those are formal and they’re dictated by rules and regulations that are
Established through legislation and through the Securities and Exchange Commission
Which the SEC which regulates?
Investment Advisers and then others are more informal and I’d argue that some of the informal ones are actually probably more impactful
But I’ll start with proxy voting because I think most people know about proxy voting anybody who’s an investor in a company
often gets those big nasty
Mailings with with lots of information and requests to vote. So public companies are required to hold annual meetings
And this is where shareholders have an opportunity to vote on issues that are raised by both management and by shareholders
So investors don’t generally attend these meetings, although it can be very interesting
But they can vote by proxy. The common items on the ballot would include voting purported director elections
Approving executive compensation packages or not as the case may be and then qualifying shareholders can also present
Resolutions that are voted on as well talk more about that later because that’s a big part of what we do most of our clients
Delegate that proxy vote voting authority to us and they do that because we can vote easily and electronically on
behalf of clients and we do that according to
proxy voting guidelines that comprehensively address ESG issues
So hopefully we’re addressing those those issues that they want to in voting
Quite a bit differently probably than the standard investment management firm on some of these issues
yeah, no one I think it’s good to pass that off because some of the wording of I
guess proxy initiatives or a lot of times voting isn’t
It’s not clear exactly what you’re doing as a layman. So it’s nice having someone look at those carefully. Yeah
Well, that’s hard enough. I think sometimes for professionals to figure out exactly what approximations
Of it yes, so how what’s your process for developing resolutions when it comes to resolutions
I I think that most of them are developed in partnership with
organized and informal coalition’s of institutional investors
That have similar goals and concerns extensive research needs to be done on an issue in general
and then also how it might impact a specific industry or company and the goal of
Resolutions is not just to move a single company to act but to actually promote systemic change
Action on climate probably being the prime example
So by getting a few companies to lead on an issue their peers will often follow
and that’s really what we’re looking for a systemic change and I’ll give you an example since 2009 85 companies have agreed to
Sustainability reporting as a result of shareholder resolutions
Well, that sounds big and we’re very proud of that
but even more importantly over 80% of the S&P 500 companies publish sustainability reports in
2015 compare that to just under 20% in 2011. So if you move enough companies
It becomes standard practice, right? They don’t want to be left behind and thought of as though cursory works at any age. Yeah
And so a lot of this happens not so much through resolutions
I do want the stress that resolutions are part of a process but really what’s more important is the dialogue
That we have with companies
because the ideal
Really the ideal outcome of a resolution is to withdraw after you’ve talked with the company sure and
oftentimes those kinds of discussions will lead to ongoing
discussions with that company on a broad array of issues and that’s really the ideal situation because
In some cases you become a partner with that company
One of the things that I think is really important about shareholder engagement
Is that we really advocate for long term
performance and
That involves doing long environmental social and governance issues
And I think we can serve as a counterbalance because there’s an awful lot of investors out there that are very engaged in short term
They want short term quarterly performance and we could serve as a counterbalance to the company saying hey, we’re an investor too
And we want you to focus on long term issues
And I think that that gives them a little bit more leeway
To maybe sacrifice some short-term gain in order to do better over the long term
Got you. Yeah in so when you have an issue like climate change
You’re identifying companies that you want to target and then reaching out to them. So shareholder the
Shareholder resolutions aren’t tool number one
Not usually now there are some companies that have a history of not responding to investors
And if that’s the case, they might get a resolution more upfront
but generally speaking we would rather open the door first and
Oftentimes we’ll do that through a letter and I’ll give you an example of that a successful campaign that we had last year
is
We took a look at all of the companies and who we had voted against
On the nominating committee of boards because the company lacked diversity
And we have a pretty high bar for that
But we noticed when we were looking at our portfolio companies that quite a number of our smaller
Companies had no women on their board and often times. There was no racial diversity either. So we said ten companies
Fortunately, most of our companies have taken action on diversity and they are improving but these laggards extremely laggards
I’ll call them
We sent them a letter expressing our concern and then asking some pretty pointed questions about their process
Well in that in the letter-writing campaign
we got quite a number of responses back which led to really helpful dialogues with those companies and as a result we have
Over half of those companies have either had improved standard
improve their standards and practices on their selection process and many of them have
Put their first woman on the board
So to us that’s a real concrete answer, but the works not done yet
There’s some companies we wrote letters to no response. And so we’ll be filing a resolution with one of those companies
Actually, we already have this year kind of elevating the heat of that issue
So that if they don’t respond this time, it’s going to go to a vote at the annual meeting. Great. Oh, that’s great
That’s um, I mean, it almost seems overwhelming the number of companies out there and the number of issues to address
I mean, how do you
Is there a group that you’re kind of picking?
Hey this year, let’s focus on this or I mean there’s a lot of balls in the air there
Yeah, we’re actually going through that process right now
Because there’s a proxy season we defiling resolutions tends to happen in the fall
And so we’re gearing up for figuring out. Where do we escalate?
And that can be very difficult
Some long-standing issues. The reality is they’re always on the agenda
So climate Human Rights diversity
And oftentimes what we will do is we will focus on a subset of issues within that broader issue
but these issues or commonalities that our advisors find
As far as a value as amongst most of our clients
So we try to focus on issues that really resonate with our client base in general
We also carefully consider the business case for corporate action because that’s important too as an investor. We need to make a strong business case
Any many in many cases we can on these issues?
So right now we’re considering what we’re going to do, you know, we of course have to make choices
This year we’re going to be focusing on following up on our diversity campaign
And then also we were focusing a lot on financing climate change. So talking with banks about how they can
Support green energy and renewables. Well at the same time
de-emphasizing fossil fuels
okay, so we’re gonna be talking to them a lot about renewable energy energy efficiency and
How they can look for that in their client and their banking lending portfolios
and then we also want to focus on renewable energy and
energy
efficiency
with big energy users
Another thing we’re doing this year is focusing on what I’ll call extreme laggards
Last year, we did it with diversity and this year
I think we’re going to do it with sustainability reporting because it’s getting to the point where if you don’t have a student sustainability report
Of some sort you’re really behind the game. You’re an outlier. That makes sense
And
and when you come up with these campaigns
Do you try to get more pressure than just dialog with the company?
Is there a campaign to get other to communicate with other big shareholders? Yes, actually there is and I’ll give you an example
When we file a resolution as a lead filer
So you can lead file or profile resolutions and on lead files. You have more
Responsibility because you’re basically in charge of the dialogue and you’re the one that has the authority to make the decision whether to withdraw
To go to the vote
So when you’re the lead filer, it’s always helpful to have a strong level of support from other shareholders
so education over time is really important and so
What we do is we if we lead file a resolution that’s going to go to a vote
We write a detailed supporting memo and that can be used to make our case with other investors
And so we make sure that those are received by proxy voting firms and selected money managers in an effort to build the case
Another thing I want to mention is that often times, especially with new issues
If there’s an education process that goes on so often time there’s an issue that comes up that might be really important
But it’s not recognized yet as a material issue too many investors
And so sometimes you have to file a resolution two or three times and as the investors get to see it
Especially the the major institutional investors it takes time
basically to convince them that yes, this is an important issue the company should address and
It increases the vote over time, and I also want to stress that getting a majority vote
it’s not necessary for a resolution to
I won’t say when ever you know, there’s the ology here about you win if you get over 50%
The reality is we often win if we get a recurring percent, for example
Because that’s enough to bring the company to the table because that’s a significant number of investors that is concerned. Yeah, that’s a good point
and assume resolutions letters, all of these things are really
To get to the company to the table. Yeah, and what percent of
Voters are actually voting on these I mean because when you say thirty percent, that’s that’s a lot
Even if a hundred percent are voting, but I imagine
It’s even a smaller percentage that bother. Yeah, it is the place where there’s a real
Lack of voting is amongst
retail investors
And as of course
You can imagine if you’re an investor that holds fifteen or twenty companies and you’re getting all of this information
It can be difficult to vote
to tional investors generally vote
Unfortunately a lot of institutional investors up until fairly recently
Have voted in lockstep with management, right? So whatever management recommends they would vote that way that is changing
There’s been some big changes in that area. There’s some major
Institutional money managers like Blackrock like State Street several others, and they are starting
to talk a lot more vocally about ESG issues and
talking about how they’re using that screening process and
they’re having higher expectations of their companies and they are starting to selectively vote in favor of shareholder proposals and I think
Catches a company’s attention. So there is an evolution going on. It’s slow but it is definitely
Changing and I think the vote counts will go up. That’s exciting
What could you just run over what the process is to even be able to file? We’re going to be able to engage
Engaging sometimes it can be as simple as just writing to the company filing a resolution
There is a process that you have to go through that’s very formal in order to file at all
You had to be what’s called the qualifying shareholder and what that means is that you have to own at least
through the resolution and what that means is that you have to hold those shares in total resolutions withdrawn or
It goes to a vote at the annual meeting and then there’s also rules to follow as far as there’s deadlines to meet there’s length
requirements the
Resolution has to address an issue that is
Not conservative the ordinary business
or something that would be
interfering with the day-to-day running of the company and
Companies actually have a and they do so fairly. Regularly. I think it’s about 20% of all resolutions are challenged at the SEC and
It can do so by citing certain issues ordinary businesses one
Personal grievance if they can prove that it’s a personal grievance that’s driving the resolution
Also, it has to be something that is material that materially impacts the company and if they can convince the SEC it falls into one
Of these categories they can omit it from the ballot. So the SEC decides that
Otherwise, it has to go on the ballot
Otherwise, it has to go on the ballot and if that’s the case oftentimes even companies that might not want to
Will come and discuss it with shareholders and try to get it withdrawn because they prefer not to see it on the ballot. Sure
Sure. No, that makes sense
And is there is there any advantage of having a lot of backing instead of just having?
Yeah, we tend to do that, but it can be very effective. Just you know one person filing
There’s some individual filers out there that file on a lot of governance issues. For example
And they regularly get very high votes because what they’re what they’re asking for makes sense
So if you have a good argument, you can stand up there with $2,000 worth of shares and make your case
But it’s also true that
Having many more filers can also have an impact and that’s why we often code file with partners
So we’re not lead filing Rico filings. So we’re supporting them
So you might have some resolutions that are filed with with 10 or 20?
investors and
For some companies that can catch their attention
Especially if there are larger pension plans and investment managers that are following these resolutions it can help
Into your coal file is the ones you’re working with. Are they there changing?
What company you’re going or what issue you’re addressing or is it generally the same group of?
Yes, absolutely
That that it changes yeah, it can’t change but we do have some regular partners
for example
First affirmative retains the services of other money managers who have strong advocacy programs and we will partner with them
Because we use their services in our client portfolios. So in a way we have multiple
people
Investment managers advocating on our clients behalf. So we often partner with Boston Common Trillium Asset Management, domine
Calvert seven asset management to name a few since these investment managers
Often specialize in certain areas. We will partner with them on certain campaigns
Some examples of that is Green century a mutual fund that does primarily environmental advocacy
We partner with them on deforestation issues Boston Common asset management has a climate campaign with the banks
And so for some companies in that campaign
We will lead and for others we are support so we’ll attend dialogues and support them. So that’s really important
I think is is we do support each other
There are also quite a number of coalition’s that we work with that are formal coalition’s like series of suits our climate campaigns
Investors environmental health network is a specialist in toxins and chemicals and so they help
investors organize around those issues
There’s also a lobbying campaign that we work with they help us with research and with targets
Selecting targets that make sense to you know, people who are laggards or corporations that are laggards
They help us target who might be the best people to contact when you say lobbying
Does that mean in the political arena in the political arena?
We found resolutions of many companies do not disclose their lobbying
Especially when they’re doing it through third parties like trade associations
Okay, and there’s a lot of money that gets funneled through corporations
They get spent on lobbying and you don’t know where that money is from and so we think it’s very important that companies disclose
Not only how they’re choosing to lobby or spend any money on political spending on election campaigns as well. But
Who they’re supporting how they’re doing it why they’re doing it? What’s the business case and we think that’s very important. So
That’s another issue. We work on that’s super. Yeah, you’re touching on a lot of issues I guess
What are your thoughts about it? Sounds like shareholder?
Advocacy is actually getting some momentum and changing in a good way
I have heard of legislation and other issues that don’t sound as promising
What’s the latest I guess the legislative side?
Yes, the the latest is always changing these days
And yes
It is bad news that there are quite a few pressures out there
On our work right now trying to constrict our rights as shareholders to have contact with companies
I like to look at the good side and think that that means that
We’re making a difference and we’re having a change because we are gaining traction
nevertheless
Is taking a lot of bandwidth to actually try to fight back some of these issues
So what you’re referring to I think probably first and foremost is some legislation that actually passed the house
it’s called the financial choice act and
This act and a lot of other efforts underway are heavily supported by the US Chamber of Commerce and the National
Association of Manufacturers, and it’s kind of interesting because many of the corporate
Members of these trade groups actually have really good
Climate programs and yet their trade association may be using their money to lobby
against those very friction point that we have with companies is that if you’re doing this on one side
You can’t under the table put money someplace else, but at any rate the legislation that has passed the house
But hopefully won’t pass the Senate I’ll just give you a couple examples because a lot of its arcane
But this one’s probably the most powerful they want to restrict who can file a shareholder resolution
Anyway, I told you about you need two thousand dollars in shares for one year and that sounds pretty minimal
But you know, there’s still
resolutions
It’s been constant the number of resolutions for the past. I don’t know probably four or five years the resolutions haven’t grown
I don’t think that they’re a big hassle for the companies to deal with in spite of what they might say
But the financial choice Act would change that holding
to
Having to hold a 1% stake in a company for 3 years
now
you think oh
Very much, but let’s put some context on that only 8 shareholders would have qualified in
2017 to file an apple
Yeah 7 that is a huge restriction. Only the very largest
Institutional investors will be able to file a resolution and the reality is they don’t file resolutions
Because we have an open door to these companies
That’s one of the things that we’re fighting amongst various other legislative action
And then also at the SEC there’s a lot of pressure on CC right now to use the no action process
for example to make it harder or make it easier for companies to
omit
Resolutions from the ballot. Well, that’s another front that we’re working on. But again despite these challenges
Interest in ESG principles is skyrocketing
yeah, and
There’s all kinds of recent activity at a lot of the largest
Institutional money managers that indicates that this is not going to go away. So we
Will keep fighting we actually are a founding member of the shareholder rights group
which is an organization of smaller institutional investors and also some individual investors that are
organized to put out facts about the shareholder process to counter some of the
Hyperbole that’s going on on the other side
so
Agree on challenges, but also a lot of encouraging science as well
Well listeners want to get more information about this contact you or get information about first affirmative
What’s the best way to?
To connect. Well, probably the best place to start for me is just to pop me an email
Holly testa at first affirmative comm gran you can look at me on Twitter and that’s at sign H
Testa and the numeral 2 and then if you to get any information on first affirmative than our investment management services, you can go to
WWE
deformative comm and it also has an advocacy page with current information about our shareholder initiatives and also a lot of
There’s a document there called advocacy in action and you can get more detail about the process in general and that’s a very helpful document
For advisors and for clients to take a look at that
We also have a twitter handle at first – a firm and you can also find us on facebook
Perfect. I will put links to all those
Well, the other one you might want to put on there you mentioned the ESRI conference we have a conference website
that has the agenda and all of the details and that’s at
Www.osr.wa.gov.au/payrollenquiry
Making an impact
Thank you for listening to the impact financial planners podcast
This has been brought to you by AIO financial
If you need help with any part of your finances
Please contact a IO financial for free meeting a IO financial calm
their fiduciary
Comprehensive fee only Advisors as always. I appreciate any feedback. You have good bad
suggestions recommendations
Questions, you can contact me through Twitter Facebook email
Bill at a IO financial calm and if you like these podcasts
Please give a brief reviewer rating
Or those videos please subscribe to our channel. All right. Thanks a lot together

Email: htesta@firstaffirmative.com
Twitter: @htesta2
First Affirmative website: firstaffirmative.com
First Affirmative advocacy page: firstaffirmative.com/responsible-investing/shareowner-advocacy
Twitter: @first-affirm
Facebook: facebook.com/FirstAffirmative/
SRI Conference: https://www.sriconference.com/

e: asyousow.org