Five key drivers that will define sustainable and impact investing in 2017.
Traditional social and economic theory tends to link social stability to economic success, arguing that more economically prosperous societies are more socially stable. The argument goes that national wealth generates security and satisfaction, enabling citizens to move beyond basic needs to contribute to higher-order goals such as supporting their communities, helping develop and strengthen key institutions and generally driving humanity forward.
But this line of thinking is being brought into question today. While most would agree the United States and many other developed countries have largely recovered from the global financial crisis, post-crisis economic improvements haven’t always translated into broader societal wellbeing because prosperity has not been sufficiently inclusive. This lack of inclusiveness presents broader challenges that can in turn undermine economic prosperity as well.
By integrating traditional and environmental, social and governance (ESG) analysis, our municipal credit research of cities and counties has made this growing decoupling of economic progress and social progress increasingly apparent. While the integration of ESG factors into our investment analysis has offered useful insights into the sustainability profiles of the cities and counties in which we invest, we nonetheless recognized that a more robust, forward-thinking framework was needed. This led us to a comprehensive framework redesign.
In developing our new municipal city/county framework, we formulated three central hypotheses. First, a community that is inclusive and offers opportunities for all is more likely to attract talented and diverse citizens, who will enhance its vibrancy, social structures and economic success. Second, this type of community would also likely attract successful, forward-thinking companies – such as Apple, GE and Unilever – that care about the same principles. Third, this confluence of social dynamism and economic health should create long-term stability, which will then drive economic as well as social progress in a virtuous cycle that benefits all.
The more we examined and tested our hypotheses by digging into the different examples we encountered, the more we started to see inclusiveness as an important driver of long-term economic prosperity. This pushed us to depart from our traditional ESG methodology and instead anchor our framework in the analysis of social progress. In doing so, our goal is to identify cities and counties that are thriving both economically and socially.
A broad review of the thought leadership on inclusiveness and social progress exposed us to a wealth of information, including the Social Progress Index (SPI). The SPI is a globally recognized framework that aims to guide policymakers, nonprofit leaders and businesses in driving greater prosperity. We felt that the SPI was especially well-aligned with our perspectives, and it helped inform the structure of our framework.
Our new city/county framework represents a first-of-its-kind attempt to combine measures of economic success and social progress. This innovative approach enables us to reach beyond more-widely accepted, sustainability-focused investment analyses and emphasize inclusiveness as a potential key determinant of long-term investment performance.
The two main components of the framework are Economic Metrics and Inclusiveness Metrics. Within the Economic category, we consider a range of traditional economic indicators for cities and counties. Within the Inclusiveness category, we follow the SPI by evaluating cities and counties on three key dimensions: (1) Basic Human Needs, (2) Foundations of Wellbeing and (3) Opportunity.
Basic Human Needs metrics focus on fundamental necessities such as medical care and safety; Foundations of Wellbeing metrics focus on more-advanced areas such as health and wellness and access to knowledge; and Opportunity metrics focus on broader goals such as diversity and tolerance.
Fundamentally, our framework looks to reward cities and counties that have achieved inclusive growth. This means they are not only thriving economically but also embracing a broader set of priorities such as diversity and tolerance. These are often communities with greater opportunities for women, who are seen as a major untapped driver of economic growth in the U.S. and abroad. Our framework also emphasizes strong environmental performance as a determinant of wellbeing. These are just some of the key elements informing the 40 indicators in our new framework.
This analytical process enables us to identify cities and counties that are likely to exhibit stronger long-term creditworthiness, offering greater opportunity and lower risk for investors. We believe that our new city/county framework represents a natural progression in our ongoing efforts to understand what makes communities thrive over the long term, within the context of a dynamic and continuously changing world.
DISCLAIMER: The material in this document is prepared for our clients and other interested parties and contains the opinions of Breckinridge Capital Advisors. Nothing in this document should be construed or relied upon as legal or financial advice. Any specific securities or portfolio characteristics listed above are for illustrative purposes and example only. They may not reflect actual investments in a client portfolio. All investments involve risk – including loss of principal. An investor should consult with an investment professional before making any investment decisions. Companies mentioned are provided as illustrative examples and do not necessarily represent past, current or future portfolio holdings. This document may contain material directly taken from unaffiliated third party sources, including but not limited to federal and various state & local government documents, official financial reports, academic articles, and other public materials. If third party material is included, it is believed to be accurate, and reliable. However, none of the third party information should be relied upon without independent verification. All information contained in this document is current as of the date(s) indicated, and is subject to change without notice. No assurance can be given that any forward looking statements or estimates will prove accurate or profitable.