How impact investors can create system-level change through long-term fixed income investments
Investors who wish to address social and environmental issues with their assets are likely to discover a fast-growing range of investment information, resources and solutions. Indeed, we are seeing an unprecedented level of engagement around investing as a “force for good.”
Yet, despite continuing efforts to define key concepts and offer tangible investment solutions, there is still a great deal of confusion within the overall ecosystem. At the most fundamental level, investors are still struggling to understand the difference between investment solutions that focus on the integration of environmental, social and governance (ESG) factors and those that fall under impact investing.
ESG integration focuses on incorporating ESG factors into investment research and analysis, therefore deepening the overall investment process. On the other hand, impact investing seeks to create financial returns alongside a positive social and/or environmental impact that is actively measured. The two defining elements of impact investing are the intentionality of positive impact and the effort to measure and report on this impact.
At Breckinridge, we came to believe that ESG integration was a natural fit for our investment philosophy. As we discussed in our recent piece, “Why ESG Integration Matters,” we embraced ESG integration because we thought it would deepen our investment research and align with our long-term time horizon. Adding ESG factors into our bottom-up credit research and analysis simply made sense, and this approach has greatly influenced our investment process.
While we are steadfast in our ESG integration philosophy, we continue to examine and embrace the evolving market landscape. In particular, two emerging trends have led us to believe that, in some cases, our ESG approach actually aligns with the core elements of impact investing.
First, as we discussed in a recent blog post, “Are Investors Ahead of Companies on ESG, or Vice Versa?,” we increasingly find that high-quality issuers within our universe have transitioned from a defensive mindset regarding sustainability to a much more engaged, proactive mentality, where ESG considerations are viewed as a source of competitive advantage. For example, Unilever has reframed its entire business strategy around “making sustainable living commonplace.” As such, its sustainability efforts are no longer about reacting to stakeholder demands, but rather about driving positive impact.
While our ESG analysis primarily monitors for ESG risks, recognizing this shifting corporate mindset among leading Fortune 500 companies has had important implications. This growing corporate emphasis on positive ESG management offers us, in turn, a platform for targeting positive impact through our investments.
Second, our careful assessment of different issuers indicates that the level of rigor in ESG tracking and reporting has been improving dramatically. Companies are increasingly setting ambitious sustainability goals, and are becoming ever-more diligent about reporting on progress toward those goals. For example, Starbucks rigorously measures its progress across its core sustainability priorities. It also offers transparent commentary in areas where goals are yet to be reached.
This increasing commitment to tracking and reporting of ESG factors, such as environmental footprint, supply chain management and employee diversity, opens up a range of new possibilities for investment analysts. Presented with more reliable impact-oriented data, we are increasingly able to measure impact on both an issuer and aggregate level.
In short, our ESG approach can now help us better target those issuers that intentionally aim to achieve as well as diligently measure and report on positive social and/or environmental impact through their business operations. As such, making investments into such entities can satisfy the key tenets of impact investing.
So what is then the difference between ESG integration and impact investing at Breckinridge? How is it that ESG integration can also “pass” for impact investing? Aren’t these concepts very different?
While the technical definitions of ESG integration and impact investing are different, we think there is an area of overlap where ESG integration and impact investing align. This happens in situations where ESG analysis of an issuer uncovers an issuer’s strategic focus on positive impact, and where the issuer offers rigorous metrics about this impact. In some cases, we are even seeing a growth in green, sustainability-focused investments that are specifically designed to further impact.
In other words, at Breckinridge we see impact investing as ESG integration with a positive slant. It’s about applying our ESG analysis to issuers who are aiming to “do good” and who are strategic and rigorous about their efforts. It’s about looking for sustainability leaders and striving to align our clients’ assets with these leaders’ success in delivering positive impact. It’s about engaging with forward-thinking issuers through constructive dialogue.
At the same time, there will always be issuers who are lagging when it comes to sustainability, who primarily focus on headline risk above all else, who don’t offer clear guidance on their sustainability goals and objectives and who are reluctant to engage with investors. Methodical ESG assessment is a critical tool in our analytical arsenal to help us spot and evaluate these kinds of issuers.
However, we believe that our view is poised to grow in relevance in the impact investing arena. Rather than punishing “bad actors,” we recognize that many investors are eager to align their assets with organizations that are “doing good.” While no company is pristine or perfect, we believe this forward-thinking approach to impact investing could increasingly enable investors to achieve impact in a more scalable way.
At the end of the day, we believe it is our obligation to focus on the long-term performance of the issuers in which we invest, and this long-term time horizon often favors companies with strategic, well-managed ESG efforts that aim to achieve positive impact. By validating such efforts, we hope to motivate a broader range of investors and companies to adopt this mindset, therefore creating a virtuous cycle that directs more and more capital toward sustainable business models.
As such, we think that our ultimate impact as an investment manager resides in our ability to create a favorable environment in which companies that are intelligent and forward-thinking in addressing important social and environmental issues can thrive. We think this broader impact trumps specific definitions. It’s about effecting positive change all around us.
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 & 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.