By Jem Hudson
As ESG integration goes mainstream, issuer engagement expands impact.
The idea of integrating environmental, social and governance (ESG) factors into the investment process has been the subject of much debate in recent years. Some market participants believe that ESG integration is simply about screening investment opportunities based on a set of values, such as concerns about climate change or global health. Others think of ESG integration as a tool to screen out “bad industries” altogether. And then there are those who still question the merits of the entire exercise, due to fears that it could cripple investment returns.
At Breckinridge, we believe that taking into account extra-financial considerations, including ESG factors, is simply smart investment research. Through this additional lens, we gain a deeper understanding of the underlying value and risk profile of each investment opportunity over the long term.
Put another way, our interest in ESG factors is about extraordinary thoroughness and effort in evaluating an investment. It is akin to looking at that last footnote on the very last page of a lengthy financial report: We don’t want to miss anything that could potentially be relevant to our investment analysis.
But it is also about our time horizon. Unlike many others, we are willing and able to be patient. Our investment approach is rooted in the idea that understanding the long-term risk-return profile of an investment requires an expanded, more forward-thinking type of analysis. To us, market volatilities are weaved into a broader narrative.
These are the key principles behind our ESG integration framework, which we’ve been refining over the past four years. Through careful assessment of the material ESG considerations within each investment opportunity, we have been able to learn more about companies and municipalities whose bonds we buy.
As part of this process, we often ask ourselves questions such as: What is the underlying risk of a company’s governance practices? What are the potential benefits that can be derived from a company’s reduced environmental footprint? Why is a municipality issuing debt and how will this additional project capital benefit its residents?
Once we gather information through careful research, our analysis of financial and extra-financial factors enables us to determine our relative value for any given bond we consider. And what we discover and believe about each bond available to us may be different from the way other market participants see the same opportunity.
Where others may see a typical industrial company, we see a leader in employee safety with superb employee retention and a strong risk profile. Where others may see unnecessary R&D expenses, we see an innovative company looking to reposition itself for the future by developing more sustainable products.
We believe that our detailed, long-term-oriented investment research and analysis makes us better informed than the capital markets and, as a result, better able to allocate our clients’ assets, not only in terms of portfolio construction but also in terms of security selection. This can have important implications over the life of a bond, and, more importantly, over the life of a client portfolio.
We recognize that ESG integration is an evolving concept, and that there continue to be more questions than answers. But we believe that a keen focus on critical investment fundamentals – detailed research and a long-term investment horizon – has timeless relevance.
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.