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ESG Newsletter published on January 3, 2018

Can Investors Drive System-Level Impact?

Impact investing continues to gain traction, with a great deal of focus on the inspiring stories of impact across a range of important issues such as climate change, women’s empowerment and inequality. But the field has struggled to prove its worth beyond the rarefied enclaves of private investments.

While the private investment model delivers a depth of impact that motivates investors, it is quite difficult to achieve significant scale through this approach alone. Scope of impact is also a challenge, as many early-stage organizations often have a very specific focus at first even if their ultimate goals are vastly greater.

In our discussions with clients, peers and thought leaders, we are starting to notice clear hunger for system-level impact – the kind of transformational change that can only be achieved through scale. Indeed, the most-ambitious investors hope to change entire regions, industries or institutions through their investments.

At the same time, in our engagement calls with issuers we increasingly hear that they, too, are looking to create system-level impact through their sustainability efforts. Our recent discussion with a large retailer, for example, centered around their desire to use their scale and reach to make a lasting impact on their supply chain.

This notion of system-level impact has also been adopted by an emerging cohort of field-building organizations, most notably The Investment Integration Project (TIIP). TIIP’s goal is to “help institutional investors understand the big picture, or ‘systems-level,’ context of their portfolio-level decisions.”

We see an important convergence of interest in system-level impact that aligns well with our own investment philosophy. In particular, our mission is to provide the highest caliber of fixed income management, thereby facilitating a sustainable flow of capital from long-term investors to responsible corporate and municipal borrowers. This mission has pushed us to continuously intensify the rigor of our analysis and our approach to integrating material environmental, social and governance (ESG) factors into our investment process.

So how can impact investors achieve system-level impact through long-term fixed income investments? We believe that thoughtful selection of corporate and municipal bonds offers an ideal avenue.

First, by prioritizing large companies with highly strategic sustainability initiatives, impact investors can drive impact at scale through their implicit support of those companies’ system-level focus. For example, if one buys a bond issued by the aforementioned retailer, he or she could be taking part in the retailer’s journey to make its entire supply chain more sustainable, touching millions of lives, while also reducing environmental impact.

Second, by investing in municipal issuers with leading sustainability initiatives, impact investors can direct their assets toward efforts that affect entire communities. For example, if one buys local transportation sustainability bonds, he or she will be supporting an innovative municipal issuer that prioritizes more-sustainable transportation practices while driving inclusion by offering mobility for all.

One might question the ultimate “power” of an individual security such as a bond, given the scale of some of these issuers. “How does my investment really move the needle?” one might ask.

But there lies the power of system-level impact: It is for the system and of the system.

In other words, it is only through the collective influence of many investors and, ultimately, the capital markets that the desired system-level impact can take shape. It requires all of us, not just a select few, to commit. It may feel less “direct” and “logical” than some of the more-traditional impact investments, but it holds far greater power.

We believe that the idea of system-level impact is in its early innings and that there is tremendous amount of work ahead of us. While we know that making the case for this type of impact won’t be straightforward or easy, we believe that it is our best chance to create truly lasting and meaningful change over the long term.



DISCLAIMER: The opinions and views expressed are those of Breckinridge Capital Advisors, Inc. They are current as of the date(s) indicated but are subject to change without notice. Any estimates, targets, and projections are based on Breckinridge research, analysis and assumptions. No assurances can be made that any such estimate, target or projection will be accurate; actual results may differ substantially.

Nothing contained herein should be construed or relied upon as financial, legal or tax advice. All investments involve risks, including the loss of principal. An investor should consult with their financial professional before making any investment decisions.

Some information has been taken directly from unaffiliated third party sources. Breckinridge believes such information is reliable, but does not guarantee its accuracy or completeness.

Any specific securities mentioned are for illustrative and example only. They do not necessarily represent actual investments in any client portfolio.