While ESG is increasingly in demand, its true merit rests in investment excellence
At Breckinridge, we believe that integrating environmental, social and governance (ESG) factors into our investment process is instrumental to our mission and strategy.
As discussed in our article Why ESG Integration Matters, we incorporate ESG factors into our investment research and analysis because we believe that these extra-financial factors deepen our insights. Additionally, as fixed income investors we are focused on the long term, and ESG integration is well-aligned with this perspective.
Our ESG integration process is thorough, composed of quantitative as well as qualitative assessments. Over time, we believe that considering ESG factors as part of our investment approach has helped us become better at identifying risks and opportunities across sectors and at the issuer level. We continue to refine our ESG frameworks to reflect our current investment thinking and to address emerging issues.
As we dove deeper into our ESG research and analysis, we started to see an increasing need to discuss sustainability directly with issuers. This ultimately led us to develop and launch a rigorous issuer engagement process aimed at addressing a range of questions we deem most significant from the credit investor standpoint.
We believe that a collaborative tone and clear focus on cutting-edge issues currently being explored among ESG experts are two notable features of our engagement process. As a fixed income manager, we are not using proxy votes to exert pressure on issuers regarding specific actions but instead are attempting to establish a positive dialogue with them. Additionally, rather than cherry-pick specific questions, we are interested in the strategic considerations behind sustainability initiatives as we believe they are most relevant for investors across asset classes.
To this end, our primary engagement objective is to understand how issuers are integrating ESG considerations into their strategy and most-important business decisions. Second, we focus on the effectiveness of ESG efforts and their implications for issuers’ financial performance. Third, we discuss the ways that issuers can best communicate their ESG efforts to investors, including different approaches to integrated reporting. Fourth, we look to get greater clarity on what we believe to be issuers’ material ESG factors, as determined through our own internal analysis. Finally, we emphasize key credit drivers and their impact on issuer long-term creditworthiness.
So, what is the overall impact of our engagement efforts? We believe our engagement process enables us to expand our impact through three key levers.
First, it deepens our insights regarding individual issuers as well as their sectors. By enabling us to ask the clarifying questions that are especially relevant from the credit investment standpoint, our engagement discussions with issuers inform our sustainability assessment. At Breckinridge, this is a collaborative process that reflects both the cross-cutting perspective of our director of engagement and the sector and issuer-specific perspective of our respective credit analysts. These insights, in turn, help inform portfolio management and trading decisions, depending on circumstances.
Second, our engagement discussions with issuers enable us to provide feedback. For example, quality of issuer-level ESG/impact reporting is a key topic during our engagement calls and meetings with issuers. We typically ask them how they are thinking about reporting, whether they are considering integrated reporting and what they prefer for a reporting framework. We also offer our perspective as to what type of reporting is most useful to us as investors, and to our clients. Many issuers have expressed strong interest in this type of feedback, as ESG/impact reporting tends to be a hotly debated subject among issuers and investors alike.
Third, we believe that our engagement process can ultimately elevate the overall standards for the entire sustainability ecosystem. This kind of systems-level impact is meaningful because it may help accelerate the allocation of capital toward sustainably managed companies and local governments. By asking the more probing questions, we are hoping to clear the path for higher-quality overall dialogue between issuers and investors. For instance, some of the issuers we’ve spoken with have noted that we are among the first to ask them about the financial implications of their sustainability efforts, which is ultimately critical for investment decisions.
In addition to the positive feedback we have received from the issuers, we are pleased that our engagement process has been recognized by experts and thought leaders. To that end, we are happy to report that our innovative engagement process was recently featured by Harvard Business School associate professor George Serafeim and the High Meadows Institute as an example of active stakeholder engagement through private dialogue. Additionally, our engagement effort was highlighted by the Stanford Social Innovation Review, which emphasized how private engagement helps take ESG integration to the next level by deepening its impact. We are also profiled by the United Nations Principles for Responsible Investment in its upcoming bondholder engagement materials.
At bottom, our engagement process is about dialogue and understanding. It’s about bringing issuers and investors together to grapple with some of today’s most complex, nuanced questions regarding sustainability and ESG integration. We recognize that as a fixed income manager we are an innovator and a pioneer in this area, and this gives us a motivating sense of purpose and responsibility. We see our engagement effort as a critical component of our investment philosophy and our best chance at contributing to meaningful change that benefits our clients, the broader markets, and our world.
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.