Chief Investment Officer Anne Mette de Place Filippini tackles the evolving topic of ESG (environmental, social, and governance). In this overview, Anne Mette explores how Burgundy’s integrated approach compares to the ambiguity seen in the industry, reflects on the investment team’s journey over the past year, and highlights the continuous learning required in this space.
Explore our 2021 ESG Report to learn more on how we integrate ESG factors into our investment process. In the report, you will find regional case studies that showcase our commitment to research, our relationships with management, and our attention to current trends.
ESG Today: Ambiguity & Integration
A year and a half ago, COVID-19 uprooted our lives, altering how we socialized, how we shopped, how we worked, and how we thought about the future. Environmental, social, and governance (ESG) issues were top of mind as the pandemic accelerated change, exacerbated issues of social injustice and inequality, and gave rise to mounting concerns about climate-related risks. ESG issues have become increasingly important to society, individuals, and investors globally.
Investors face a lot of ambiguity when considering these ESG factors. Undefined terms are prevalent, and the same data gets interpreted differently. With the largest ESG rating houses commonly applying different scores to the same companies, even among experts, considerations around ESG factors are far from straightforward.
There is also a spectrum of approaches, with ESG integration on one side and impact investing on the other. Integration attempts to incorporate ESG factors into risk-return analysis, while impact investing attempts to invest in companies for their environmental or social externalities. Socially responsible investing (SRI) sits in the middle and excludes socially sensitive sectors such as tobacco, alcohol, and gambling.
At Burgundy, while we do offer SRI and Foundation funds, which exclude companies involved in sensitive sectors, our primary approach is one of ESG integration. We believe that integrating ESG factors into our investment process improves our ability to manage risk, allows us to make better investment decisions, and ideally enhances our returns over the long term. This framework usually involves identifying ESG risks but will occasionally recognize ESG opportunities as well. Rather than limiting our investment universe based on predetermined criteria or forcing us to exclude certain companies or industries, integration allows us to weigh return potential against risks.
We have always thought about ESG as part of our investment due diligence; however, as ESG risks have become increasingly prevalent, we have taken steps to ensure these risk factors are more explicit in our research. We are also focused on reporting these risks back to clients through annual reports as well as through our submissions to the United Nations-supported Principles for Responsible Investment (UN PRI). Featuring a network of investors, the UN PRI promotes the incorporation of ESG factors into investment decision-making.
ESG investing continues to evolve. While most of us are familiar with climate risk, other ESG risks, such as cyber security and privacy, are relatively new. Each of our investment teams take ownership for learning about emerging ESG issues and integrating them into their research processes in a way that best suits their strategy. While my Director of Research and I plan the calendar of ESG educational events, ESG integration lives with our regional teams. The approach our regional teams take to integrating ESG aligns with our investment philosophy, which emphasizes holding quality businesses for the long term and establishing a true understanding of how these businesses operate.
The more we know about how a company is run, the better equipped we are to assess these matters, which is why Burgundy places such credence on travelling to the businesses we invest in, walking the factory floors, and attending in-person meetings with the management teams. These meetings are a useful way for us to avoid unscrupulous executives and the unethical cultures they can engender. While COVID-19 has temporarily forced us to conduct these meetings virtually, we are eager to get back on the road once we can meet with management safely.
We think about engagement in much the same way. Like any thoughtful business owner, when we see a holding exposed to an ESG risk, we express our concerns to management. Over the last year, our team had over 200 ESG engagements, mostly in meetings but occasionally by letter, email, or proxy vote. Because we approach investing as long-term business owners and spend years cultivating relationships with executives, management teams are willing to listen when we raise ESG concerns.
Learning & Growing
As long-term investors in quality businesses, we believe ESG integration fits well within our overall investment approach. With that said, ESG is an evolving area. Company disclosure can improve and there is a real lack of comparability and consistency across reporting. We appreciate the continuous learning required in this space, and we recognize that improved disclosure and ongoing education will help us fulfill our intention of better protecting and growing your capital.
This post is presented for illustrative and discussion purposes only. It is not intended to provide investment advice and does not consider unique objectives, constraints or financial needs. Under no circumstances does this post suggest that you should time the market in any way or make investment decisions based on the content. Select securities may be used as examples to illustrate Burgundy’s investment philosophy. Burgundy funds or portfolios may or may not hold such securities for the whole demonstrated period. Investors are advised that their investments are not guaranteed, their values change frequently and past performance may not be repeated. This post is not intended as an offer to invest in any investment strategy presented by Burgundy. The information contained in this post is the opinion of Burgundy Asset Management and/or its employees as of the date of the post and is subject to change without notice. Please refer to the Legal section of this website for additional information.