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ESG Newsletter published on January 3, 2018

ESG Integration and Investment Excellence

Once a novel concept, the integration of environmental, social and governance (ESG) factors into the investment process has become a more-broadly accepted idea in the investment world. In fact, according to the Forum for Sustainable and Responsible Investment (US SIF), as of 2016 sustainable, responsible and impact investments represented one-fifth of all assets under professional management in the United States.

There are multiple drivers of this growth, which we discussed in a recent blog post, Materiality Imperative in ESG Integration. In particular, the growing interest among asset owners has been crucial in this evolution because it has created a clear demand for innovative sustainable and impact investment solutions. Even investment managers who may have had their own doubts about the merits of sustainable and impact investing have started to develop ESG-focused investment solutions in response to the growing client demand.

Indeed, the popularity of sustainable and impact investing has been greater than many investment managers expected. As one of the pioneers in sustainable fixed income investing, we find ourselves at the heart of a field that is highly dynamic and full of potential – so much so that it would be tempting to take part in the growing enthusiasm without pausing to examine how different ESG concepts and innovations align with our investment philosophy.

On the contrary, at Breckinridge, our interest in sustainable investing and ESG integration stems from our focus on investment excellence and long-termism, both of which are core to our investment approach. We believe that close consideration of ESG factors makes our investment research and analysis more thorough. Additionally, the long-term view that is so inherent in our asset class tends to naturally encompass important sustainability issues. Our approach to sustainable investing was detailed in one of our very first ESG Newsletter pieces.

To the extent that interest in sustainable and impact investing is nearing a tipping point, we plan to stay disciplined by focusing on the merits of ESG integration from an investment standpoint. More than ever, we think this is our chance to show that sustainability plays a critical role in assessing the underlying fundamentals of any company or municipality, and that it has direct relevance to investment analysis.

Ultimately, we believe that once you look at sustainability through the strategic lens and prioritize material ESG factors, ESG assessment takes on much greater analytical significance and, as such, gains indisputable investment merit. In other words, those factors that truly matter from a strategic and operational standpoint should also impact an issuer’s underlying value and our overall investment results. This matters because only in proving that there is a clear investment merit in ESG analysis can we make this analysis truly meaningful and worthwhile.

Based on our municipal credit research, we believe ESG is increasingly material in that it informs our risk analysis around climate change and inclusion. Homeowners, insurers, lawmakers and taxpayers are becoming more aware of the credit implications of an increase in intense storms, coastal flooding and wildfires. Similarly, while diversity and inclusion can be seen as primarily social issues, inclusive growth and social progress may also strengthen the credit fundamentals of a city, county or state by preventing inequality-induced instability and other problems.

Our corporate credit research also suggests that ESG factors play an important role in assessing the overall quality of management, as well as its ability to set sound long-term strategy and effectively execute on it. On the environmental side, in sectors such as energy and utilities, we find that thoughtful management of environmental risks has direct impact on the creditworthiness of an issuer. We also find that leading global companies in sectors such as food and beverage stand to gain from actively addressing important societal issues across their operations and supply chains.

Properly understood and executed, sustainability is an ethos that helps create value for all stakeholders, particularly over the long term. And yet, it seems to us that this value-centric argument for sustainability is not heard often enough today; that this perspective is still relatively rare within the broader investor ecosystem despite the field’s increasing popularity and growth.

In our view, this presents us with an important opportunity to drive change and elevate the profile of sustainability.

Our goal for 2018 is to lead in the collective industry efforts to turn ESG analysis into a critical element of investment excellence. This philosophy will be reflected not only in our internal investment process but also in our external dialogue with issuers, clients, peers and thought leaders. We hope you will join us on this journey.


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.