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Perspective published on November 22, 2016

The Sustainability Imperative in an Uncertain World

As we contemplate the growing global uncertainly triggered by Brexit and the recent U.S. presidential election, we might start to question some of the more forward-thinking ideas such as sustainability. Is sustainability at risk of being viewed as a higher-order construct that will fade in relevance as we turn our attention to more pressing issues?

In its early days the sustainability movement was often perceived as relatively soft and idealistic, which significantly delayed its transition into the cultural mainstream. Issues such as climate change, gender equality and business ethics were often considered costly and inexpedient ― and out of alignment with capitalism. In this early period, there was an implicit conflict between economic prosperity and core pillars of sustainability.

But times have changed, and sustainability has taken on a smart, pragmatic tone. Decades of academic research and practical, real-world experience have provided us with mounting evidence that economic prosperity and sustainability principles actually go hand-in-hand, creating a virtuous cycle over the long term. A thoughtful assessment of environmental, social and governance (ESG) factors across companies and sectors continues to provide ever more rigorous and conclusive proof that sustainability should be a core business priority.

Today, many leading Fortune 500 companies fully integrate sustainability into their strategic planning. Rather than pursuing sustainability as a defensive measure, these companies see sustainability as instrumental in their business success. Some of the frequently cited business benefits of sustainability include greater ability to attract top talent, improved efficiency of operations and a more stable and reliable supply chain, among others.

At the same time, a failure to implement sound sustainability practices can lead to significant risks, and even jeopardize a company’s license to operate. As we saw during the financial crisis and more recently in cases such as Volkswagen and Wells Fargo, a failure to adhere to sound environmental, social and/or governance practices can lead not only to public outcry, but also to significant competitive disadvantage and lowered credit ratings.

This has important implications for investors as they think about their approach to sustainability in the face of increasing uncertainty. Rather than setting ESG considerations aside until stability returns, investors should embrace ESG as a way to effectively address present and future challenges.

First, it is important to remember that while climate change may seem a bit theoretical to some, the growing environmental issues are very immediate and real. Historic storms such as Superstorm Sandy, extended droughts such as those in California and wildfires such as those in the southern Appalachians affect our lives, destroy valuable property and slow down economic activity. This is the time when investors can play an instrumental role in directing their investments toward addressing a range of environmental issues. The good news is that innovative and efficient climate solutions are more accessible than ever, further strengthening the investment case for sustainable investments for companies and investors alike.

Second, Brexit and this month's U.S. presidential election offer powerful evidence that the societal issues we face run deep, reach far and can be profoundly destabilizing. Fortunately, our ESG analysis suggests that companies are more committed to addressing key societal issues now than at any other point in recent history. Whether it is through fair employee wages and benefits, selection of U.S.-based suppliers or commitment to attracting talent from all corners of society, many companies have played an important role in driving inclusive growth. As investors, we have a real opportunity to support these corporate efforts and reward companies that are focused on addressing important societal issues in a way that also strengthens their bottom line and mitigates long-term risk.

Third, the growing anxiety about economic prosperity points to the importance of sound corporate governance that aims to create value for all over the long term. As we discuss in a recent article Incentivizing Corporate Long-Termism, sound corporate governance is important not only because it strengthens companies, but also because it bolsters their relationship with employees and other stakeholders. We believe that prioritizing clearly articulated long-term strategic goals, attracting thoughtful and engaged board members and establishing ongoing dialogue with intelligent long-term investors enables companies to create value for all their stakeholders. A careful examination of governance issues enables investors to align their investment strategies with this value-creation mechanism.

Ultimately, we believe that sustainability becomes even more critical in uncertain times because it helps address important environmental, social and governance issues through market-based solutions. In our analysis of companies across industries, we see a real, strategic commitment to core sustainability principles. By creating win-win opportunities to make our world better and more stable, while simultaneously increasing their own potential for success, companies are uniquely positioned to be the pragmatic force in turbulent times.

As investors, we would be remiss not to pay attention to this important opportunity. But we have to be thoughtful, diligent and patient. Our sights might get blurred and we might get distracted by daily volatility, but the value proposition of sound ESG practices remains clear especially over the long term.


DISCLAIMER:This material has been prepared for our clients and other interested parties and contains the opinions of Breckinridge Capital Advisors, Inc. Information and opinions are current as of the date(s) indicated and are subject to change without notice. Any specific securities or portfolio characteristics are for illustrative purposes and example only. They may not reflect historical, current or future investments in any client portfolio. Nothing in this document should be construed or relied upon as tax, legal or financial advice. All investments involve risk including loss of principal. An investor should consult with an investment professional before making any investment decisions. This document may include projections or other forward-looking statements, which are based on Breckinridge's research, analysis, and assumptions. There can be no assurances that such projections will occur and the actual results may differ materially. Other events that were not taken into account in formulating such projections may occur and may significantly affect the returns or performance of any account. Past performance is not indicative of future results. This document includes information from companies not affiliated with Breckinridge (third party content). Breckinridge reasonably believes the third party content is reliable but cannot guarantee its accuracy or completeness.