Affirmative Impact - Summer 2016

Posted on Monday, July 18, 2016

Impact in the Public Markets

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All investments have impact. Sometimes positive; sometimes negative; and sometimes it's difficult to tell. Many investors ignore the impact that their investments are having on society, but responsible investors consciously choose investments that are believed to be positively impactful.

The majority of most investment portfolios are in public market securities ( stocks , bonds , mutual funds , ETFs , REITs , etc.). Even if an investment portfolio is large enough to have an allocation to private equity , a smaller percentage of the overall portfolio is generally earmarked for such higher risk and generally illiquid investments.

Some investors define "impact investing" as direct investments in companies having a measurable positive impact on our world (i.e. private equity). However, First Affirmative embraces a broader definition of impact investing.

We specialize in investing in the public markets. But since owning stock in a company is indirect ownership, how do we impact public companies ? Here's how:

·           We vote our proxies.

·           We are central players in a community of responsible investors that dialogue with companies on an ongoing basis.

·           We file and co-file shareholder resolutions on environmental, social, and governance issues (about 15 every year).

·           We partner with other asset managers and mutual fund companies that file proxy resolutions.

We are actively engaged in advocacy efforts aimed at encouraging good companies (or we wouldn't own their stock in the first place) to become even more responsible corporate citizens.

In this issue of Affirmative Impact, we spotlight an issue of global importance: the responsible production of palm oil , which is a substance found in a surprising number of products that most people use or consume every day. We are also taking the opportunity to share the highlights of some personal experiences presenting shareholder resolutions at a few annual company meetings in 2016.

Historically, not all companies have been particularly open to or welcoming of shareowner advocacy initiatives. However, by law, if written correctly, companies cannot prevent a shareholder resolution from appearing on the ballot, and the company is required to allow someone to present the resolution in-person at the annual shareholder meeting.

The Global Significance of Responsible Palm Oil Production

Instant noodles. Laundry detergent. Ice cream. Shampoo.

At first glance, it may appear that these items are unrelated; however, they actually have more in common than you might think. All of these products can be found in your local grocery store, and they all contain palm oil .

Palm oil is the most widely-used type of vegetable oil in the world. In fact, it is so common that if you go to your local supermarket and pick up any packaged product, there is roughly a 50% chance that it contains some amount of palm oil.

With such a high usage of palm oil, there needs to be a large supply chain for production from the fruit of a palm oil tree.

Today, 85% of global palm oil output comes from Malaysia and Indonesia. In Malaysia , the palm oil industry makes up roughly 6% of the country's GDP . The island nation of Indonesia supplied over 50% of all palm oil in the world during the decade from 2000 to 2009.AI- Palm Oil Seeds

Revenue aside, there is a major downside to palm oil production. Since palm oil is produced through farming, palm oil plantation owners must clear forest areas to grow palm oil plants. The result is high levels of deforestation. From 2000 to 2012, Malaysia had the highest rate of deforestation in the world, losing almost 15% of its rainforest. Indonesia lost more than 8% of its total rainforest.

So, how do we prevent deforestation due to palm oil production if palm oil is so essential to many of the items we use on a daily basis? The responsible investing community has made it a goal to find a solution to this dilemma.

It has been relatively easy to secure commitments that companies will change their policies. The big issue has turned out to be in getting companies to walk their talk.

In fall of 2014, First Affirmative and Trillium Asset Management filed a shareholder resolution on behalf of Yum! Brands shareholders , asking for data that shows how the company is actively working to reduce the negative environmental impact of its palm oil supply chain. As a direct result, Yum! Brands made immediate improvements to its corporate palm oil policies and the resolution was withdrawn.

The company's updated Yum! Palm Oil Policy , representing the business's commitment to sourcing only sustainable palm oil going forward, is now available on its corporate website. The policy includes promises to avoid producing palm oil on High Conservation Value Landscapes or High Carbon Stock Forests , as well as to avoid development on peatlands and use best practices for managing plantations that currently exist on peat.

This is just one example of the type of impact the SRI community has been able to make in terms of working toward sustainable palm oil. Unilever, Kellogg, and Nestle are becoming visible leaders in this arena.

There is a positive correlation between beneficial sustainability practices and overall business performance. When companies actively work to minimize environmental impacts, they attract socially-conscious investors, and this helps fuel growth.

Despite the solid logic, making the transition to a sustainable palm oil supply chain is no easy task. Corporate supply chains can be extremely complicated, and making a smooth change within an intricate process can take a lot of time.

Responsible investors will do their part, but ultimately it will be up to government officials to hold companies accountable. Strong legislation regarding the production of palm oil will be necessary in order to enforce the commitments that businesses are making, as it is difficult to ensure that companies are progressing without laying out firm requirements.

Recent action by Indonesia's Environmental Ministry suggests that public policy can be effective in controlling palm oil production. The organization rejected a proposal by dozens of palm oil companies to convert a large portion of the nation's forests into palm oil plantations.

Personal Experiences of Company Annual Meetings

Two Companies, Two Experiences

I had the opportunity to present at two annual meetings, Chipotle and TJX , the parent company for TJ Maxx, Marshalls, and other retailers. Each resolution involved an interesting twist on the issue of executive compensation.

AI- MeetingThe Chipotle resolution asked the company to link executive pay to sustainability metrics. My colleague, Renee Morgan, presented another resolution asking that Chipotle actually report on their sustainability initiatives, rather than just tout them for marketing purposes! We received a polite albeit lukewarm reception during the meeting. The executive pay resolution was supported by 23% of the shares voted. The sustainability reporting resolution garnered 43% of the vote! That's huge considering the fact that management was opposed and that most institutional shareholders automatically vote with management or abstain.

The TJX resolution asked the board to report on the contrast between executive compensation and the earnings of the median employee, acknowledging that in some companies in the retail sector employees in the lower ranks may be eligible for food stamps or other public welfare benefits. Here, we found the reception warmer. A senior HR manager approached me after the meeting and she acknowledged that associates in their stores, who are paid a minimum of $10 an hour, often do not earn a " living wage ."

This resolution got 5.23% of the shareholder vote, but lead to a lengthy follow-up discussion. TJX has not (yet) agreed to focus further study the wage issue, so it is likely this resolution will be re-filed to keep the pressure on.

An Intimate Gathering with $50 Billion

I presented a resolution at the TJX annual meeting. The shareholder resolution was filed by NorthStar Asset Management (a socially responsible investment firm based in Boston) asking for the CEO's compensation to be connected with progress on diversity metrics, including gender, racial, and ethnic diversity. This was my first experience at a company annual meeting. I had heard that annual company meetings are often very formal, with locked doors, and considerable time constraints for presenters.

AI- Hand ShakeFortunately, this meeting felt very welcoming. TJX's General Counsel greeted me upon arrival and took me to a room with refreshments where she explained the meeting procedure and her background, and where I was able to share more about why I thought this resolution was important.

The meeting was highly structured: CEO remarks, company update, and management resolutions, followed by shareholder resolutions. Board members appeared engaged, as I presented my resolution; however, the CEO spent the entire time looking down at his papers. Interestingly, immediately after my presentation, Carol Meyrowitz, the former CEO, and a Forbes Top 100 Most Powerful Woman, emphasized the importance of diversity within the company and said that they were very proud of their efforts thus far.

Overall the TJX annual meeting lasted maybe 30 minutes. Most people left immediately afterward, but two members of the board approached me, thanked me for the resolution, and echoed Carol Meyrowitz's comments about the importance of diversity for the sustainability of the company.

However, while I heard that diversity is a priority for the company, the board did not support the resolution. With a 4.85% shareholder vote for the resolution, NorthStar is able to file again in 2017; an action they are currently considering.

Straight Shooting with Financial Firms

I presented at Wells Fargo on behalf of Trillium Asset Management . This resolution asked the company to provide a report on its state and federal lobbying expenditures, including indirect funding of lobbying through trade associations, and support for other tax-exempt organizations.

When I arrived, I was escorted into the meeting. Another shareholder proposal presenter and I were seated in a specific place, and an undercover policeman sat down next to us-just in case, I suppose. The CEO shook my hand before the meeting; I wondered if he knew that I would be presenting a challenging resolution…

The start of the meeting came across as somewhat congratulatory-a "We are great!" pep rally. The business meeting was quick, with few insights about what is really happening inside of the company shared with meeting participants. I was given three minutes to present my resolution.

The CEO refuted the issues I presented, as well as those presented by the other resolution reader. Then, the CEO asked attendees if there were any questions relating to the resolutions. There was silence. Both proposals brought up important issues and so the lack of curiosity from other shareowners seemed strange to me.

The vote in favor of the resolution was 11%. The meeting lasted about an hour. It felt very "pro-forma." Trillium is currently re-evaluating its priorities with the company to determine if re-filing or focusing on another topic is of greater importance.

A Minor Force for Impact Investing

I had an interesting and educational experience presenting a shareholder resolution at The Travelers Companies annual shareholder meeting. On behalf of clients who own shares in this company, First Affirmative was asking the company to disclose lobbying expenditures directed through memberships in associations, mainly through the U.S. Chamber of Commerce .

Based on other's experiences, I approached this annual meeting expecting that the company's animosity toward me would be as large as the meeting was small. Instead, I walked into a packed ballroom, with over 500 people, plus a high quality video simulcast to thousands of others; I assume Travelers employees. It felt like a celebratory event. When I approached the registration desk, they were expecting me and a senior shareholder relations person escorted me to my reserved seat.

When it was my time to present, I was given a microphone and I read the resolution which, of course, had already been presented to Travelers, the board, and all of the other shareholders of the company. After my reading and a reading of a somewhat similar proposal from a large state pension plan, the CEO, Alan Schnitzer, spent a good ten minutes addressing our resolutions.

He thanked us for filing our resolutions, and emphasized how much respect Travelers has for the shareholder resolution process. The CEO's efforts were clearly designed to offset being viewed in a negative way for recommending against this resolution. In spite of the official opposition, this resolution got 43.9% of the vote which gives us considerable leverage to engage the company in further dialogue.  

Affirmative Impact is a publication of First Affirmative Financial Network, LLC (Registered Investment Advisor, SEC File #801-56587). The opinions and concepts presented are based on data believed to be reliable; however, no assurance can be made as to their accuracy. Mention of a specific company or security is not a recommendation to buy or sell that security. Past performance is never a guarantee of future results. For information regarding the suitability of any investment for your portfolio, please contact your financial advisor.

The views expressed herein are those of First Affirmative and may not be consistent with the views of individual investment advisors or Broker-Dealers or RIA firms doing business with First Affirmative. Network Advisors may offer securities through various Broker-Dealers and Registered Investment Advisory firms. These affiliations, and all fees charged to clients, are clearly disclosed.