Engaging the ambiguity
Environmental, social, and governance (ESG) issues have been top of mind as the pandemic has accelerated change, exacerbated issues of social injustice and inequality, and given rise to mounting concerns about climate-related risks. As the world continues to evolve, ESG issues have become increasingly important to society, individuals, and investors globally.
Investors face a lot of ambiguity when considering these ESG factors. We see the prevalence of undefined terms and varying interpretations being taken in this space. With the largest ESG rating houses commonly applying different scores to the same companies, even among experts, considerations around ESG factors can fluctuate greatly.
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, our primary approach is one of ESG integration, which identifies ESG risks and occasionally recognizes ESG opportunities. 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.