Diversity, Equity and Inclusion (DEI) is integrated into the research process at Breckinridge in varying ways based on the sector, the availability and materiality of specific metrics. Across several corporate bond sectors, human capital management (HCM) is considered a key social issue and DEI practices are an important aspect of HCM. For municipal bonds, DEI metrics are woven into a number of our sector specific ESG frameworks, most notably within our city, county and state frameworks as well as within our frameworks covering education sectors. Our selection of agency mortgage-backed securities within our sustainable strategies emphasizes inclusivity.
DEI factors are likely to become more relevant to credit analysis in both the near- and long-term as the U.S.’s demographic and socioeconomic profile changes. We expect reporting on social metrics related to DEI to continue to improve, allowing us to leverage new and more robust datasets in the future. The following provide a high-level view of some considerations during our investment process relative to DEI.
The Sustainable Accounting Standards Board (SASB) notes that HCM and DEI are considered particularly material for a company with a large workforce or where intellectual capital represents a key competitive advantage. In addition to reviewing quantitative scores, in sectors where HCM and DEI are deemed most material from a credit perspective, analysts engage with companies on these issues to review disclosures and performance. Human capital is an important asset for the Financials sector, for example. Managing DEI effectively allows banks to expand their candidate pool and provide for enhanced diversity of background, perspective and experience. ESG analysis for the financial sector includes quantitative metrics related to DEI such as representation of women and minorities among executives, managers and employees and on the board of directors; as well as the percentage of female executives and/or CEOs.
In another example, for a consumer-facing industry like Retail, quality customer interactions on the floor are a key sales driver. An employee who reflects a retailer’s customers or has a personal understanding of the customer experience may foster strong customer relationships or provide valued feedback to management about key product trends. Similar factors may enhance development of an omnichannel presence. A diverse workforce also reflects positively on a retailer’s public image. ESG analysis for retailers may include measurements of gender equality in leadership, the workforce and compensation practices, as well as the promotion of equality internally.
In the municipal space, DEI factors are emphasized on a sector-specific basis, as well. In the city, county, and state sectors, the concepts of “inclusivity” and “equality” drive the analysis. Among other things, we measure the degree of income inequality, wage gaps, and segregation in an area. In the k-12 education and community college sectors, the themes of “access” and “opportunity” are key. We measure student achievement relative to family socioeconomic status; we assess whether a community college’s student body reflects local demographics and whether course offerings match local employers’ needs. In our higher education framework, we focus on “affordability”, “access”, and “support” which are likely correlated with student success.
Within the securitized sector our assessment of agency mortgage-backed securities leverages metrics to measure the overall housing need within an area. In areas where the housing market is less affordable and the need for housing is higher, we believe that government-sponsored enterprise programs to provide access to a lending source are essential and access to mortgage financing in these areas will aid in fostering more diverse communities.
DEI factor into all aspects of our world, however consistent financial reporting in these areas is still fraught with gaps. We hope and believe that increasing emphasis and pressure from both the public and investment community on issues related to social justice will lead to the disclosure of more relevant metrics and data. We look forward to future enhancements to our frameworks and process as these new datasets are developed.
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.
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While Breckinridge believes the assessment of ESG criteria can improve overall credit risk analysis, there is no guarantee that integrating ESG analysis will provide improved risk-adjusted returns over any specific time period.
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