As certain federal grants for climate research and infrastructure resilience are put at risk, many state and local governments are expected to step up and bear more of the costs associated with climate change.
At Breckinridge, we believe that the rigorous integration of environmental, social, and governance (ESG) factors deepens our investment research and analysis. Through this enhanced process, we aim to invest in companies with strategic, well-managed sustainability efforts focused on the most material ESG factors.
As discussed in a recent blog post, companies are doing more and more to address important environmental and social issues and to improve their governance practices. It is very encouraging to see this recent rise in corporate leadership, especially with respect to issues such as climate change, diversity and inclusion, gender equality and supply chain management, among others
Despite this progress, our ESG research has revealed a number of challenges. While increasingly committed to ESG, companies are still inconsistent in communicating their ESG efforts. Further, there is limited visibility into the business value of ESG programs. Finally, companies vary greatly in their dialogues with external ESG ratings providers such as MSCI and Sustainalytics.
As a result, investment analysts are often left with more questions than answers when it comes to analyzing ESG, which can result in deprioritizing this work until better data and tools become available. This, in turn, can discourage corporate efforts to align ESG reporting with investors, as demand seems unclear and limited.
But there is a silver lining. We believe that corporate engagement can play a critical role in addressing some of these challenges. To this end, we have designed a corporate engagement process that helps us connect all the disparate “dots” toward greater definition and clarity as we paint the overall picture of a company. Centered on thoughtful dialogue, our engagement goal is to move from a set of scattered insights to a rich, well-defined perspective.
In particular, our engagement discussions with companies point to some interesting insights pertaining to the three core issues outlined above.
First, while most companies agree that it is important to report on their sustainability efforts, many continue to struggle to articulate their ESG approach. This particularly comes into focus in their preparation of annual sustainability reports, which continue to vary greatly in intent, structure and content. Although companies appreciate the importance of alignment with investors on ESG reporting, they have been surprisingly slow to adopt the reporting standards developed by the Sustainability Accounting Standards Board (SASB), which focus on materiality and decision-useful information for investors.
Second, the idea of defining the business value of ESG efforts seems to be in its infancy. While companies are getting better at measuring and quantifying their social and environmental impact, precisely evaluating the financial benefits of these efforts continues to present some challenges. This is not to say that companies don't see the business value of ESG – many of them certainly do. The trouble seems to stem from internal structures and processes in which ESG is managed and evaluated. While financial results are managed from the office of the CFO, sustainability reporting is typically linked to other parts of the business.
Third, although companies are aware that they are being rated by third-party ESG research providers, they have limited insight into these providers and their influence. For instance, ESG ratings by MSCI and Sustainalytics are typically viewed as helpful resources in the investor community, but companies don't seem to be fully versed in how these scores are generated and why they matter. As such, they may not be paying adequate attention to their scores, which can impact the accuracy and relevance of those scores. Further, strong ESG performers can risk getting excluded from important sustainability indices and screens due to limited involvement.
We believe that corporate engagement plays an instrumental role in effective investment research and analysis. By establishing strong dialogue with companies about their ESG efforts, we are able to crystalize our view of their overall business risks and opportunities. In addition, we are able to advocate the importance of clear, consistent sustainability reporting, precise assessment of the financial benefits of ESG and accurate evaluation by others.
As a long-term investor, we are committed to helping mainstream ESG integration. We believe it can strengthen the decision-making across investment strategies and asset classes. To this end, it is our conviction that our corporate engagement can help improve the quality of ESG management and reporting in a way that can benefit the broader community of investors and companies.
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. This document may contain material directly taken from unaffiliated third party sources, including but not limited to federal and various state and 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.