Corporate Engagements

The Breckinridge corporate bond research team held almost 100 engagement discussions with issuers and SMEs during 2022. 

These meetings were in addition to the numerous interactions the analysts had routinely with issuers and SMEs in the conduct of new security research and ongoing surveillance on the more than $7.9 billion in bonds managed across Breckinridge government/credit and fixed income portfolios as of December 31, 2022.

During the last five years, our research analysts have conducted more than 390 direct engagement discussions with corporate bond issuers.

Utilities and Transition Risk

We spoke with utilities to better understand their Net Zero (NZ) commitments and energy transition pathways to low- or NZ-carbon power while managing rate affordability.

Evan Lassow

Senior Research Analyst

Meet Evan

Why are these issues material considerations?

Overall, companies in the Electric Utilities & Power Generators industry are challenged with the complex mission of providing reliable, accessible, low-cost power while balancing the protection of human life and the environment.1 Energy transition planning protects against physical risks accelerated by climate change, and can result in operational and financial benefits, while addressing regulatory and reputational risks. Per the Environmental Protection Agency (EPA), the industry accounts for 25 percent of GHG emissions in the U.S. Due to the monopolistic nature of utilities in their service territories, emissions can be traced to a concentrated group of firms relative to other corporate sectors. This construct puts the industry under the spotlight.

Key Takeaways from our Discussions

We engaged with power utilities operating a variety of business models, with varying percentages of vertically integrated, “wires-only”, and gas distribution operations. Vertically integrated utilities generate and deliver electricity through a Transmission & Distribution (T&D) network. Wires-only utilities deliver power sourced from a third-party through a T&D system. There was a common denominator: each has a long-term NZ strategy, while the scope of emissions and pace of reductions varied by mix of operations.  

There is no silver bullet to reach NZ, as one utility described. NZ will require plant retirements, renewables, energy efficiency, pipeline and T&D upgrades, and new technology.

For vertically integrated utilities, emissions are primarily Scope 1 emitted from company-owned, fossil-burning assets. Many utilities we spoke with expect emissions to decline 40 to 60 percent over the next decade by replacing coal with renewables. Grid reliability and rate affordability are key drivers for regulatory approval. 

One utility owns a single coal plant that accounts for nearly one-third of all generation that is essential to the grid. Four individual units will be shut down in phases, reducing coal from 45 percent to zero by 2036, while renewables and storage increase to almost 60 percent. The company collaborated with regulators to develop an affordable Integrated Resource Plan (IRP), an assessment that looks at both demand and generation to assess future electric needs and plans to meet them. The NZ goals included input from regulators in a state with a clean energy mandate and factors rising Electric Vehicle demand.

Wire-only utilities are lower Scope 1 and 2 emitters since they do not own fossil fuel assets. Emissions are primarily Scope 3, including power purchases delivered to customers. Scope 1 and 2 includes vehicle fleets and electricity lost during line transfer. 

Utilities have less control over sourced power which is produced by unregulated electric players, where market forces, geography, and individual plant profitability determine the power mix. One T&D utility expects to be carbon neutral by 2030 but goals only cover Scope 1 and 2. Although Scope 3 is not included, it discloses estimated Scope 3 emissions, which account for about 90 percent of emissions. It is working with a consultant and the Carbon Disclosure Project (CDP) to better calculate the figure. The company incentivizes energy efficiency and benefits from state-level clean energy mandates. 

Gas distribution utilities also have primarily Scope 3 profiles, with emissions generated by upstream gas suppliers and downstream customer usage. A 2021 emissions disclosure of one utility set Scope 3 emissions at 90 percent, while another stated end-user combustion was responsible for 89 percent of total emissions. 

Scope 3 is the most challenging to measure and control. A few utilities incorporate Scope 3 emissions from customer gas usage in goal setting. One utility plans a 25 percent reduction by 2030, which will be met with energy efficiency upgrades and replacement of old, cast-iron pipes prone to methane leaks. 

Utilities are also studying emerging technology such as hydrogen blending. Hydrogen represents a long-term but limited opportunity that is in the early stages. Due to the molecule’s gaseous composition, hydrogen is prone to leaks and can embrittle steel pipelines. Therefore, hydrogen can only be blended to a 20 to 25 percent blend ratio in existing modern pipelines. 

The companies that included Scope 3 in target-setting tended to have better disclosure around hydrogen pilot projects. One company completed a pilot for a 5 percent blend ratio, and plans to roll out two additional pilot projects in other states. It is also testing household appliances for viability. On the electric generation side, early-stage efforts indicate existing gas plants can handle hydrogen with certain upgrades.

Other technologies included renewable natural gas (RNG) and offshore wind. RNG, sourced from solid waste landfills, wastewater plants, livestock farms, food production facilities, and other sources of organic waste, is currently a small fraction of overall usage. Sourcing enough supply is an obstacle. Plans are for a 4 to 5 percent ratio in the future. One gas utility, serving a large population center located near agricultural regions, already has an estimated 5 percent ratio, and believes 20 percent is possible. 

Offshore wind in the U.S., is being developed across the eastern coast.  Projects backed by Power Purchase Agreements are being developed by joint ventures with experienced European players. However, some regulated players are seeking divestment of interests due to rising risks in an unregulated ownership structure.  The projects can still lower Scope 3 emissions. We did speak with a utility that is self-developing a $10 billion project under a lower-risk regulated framework. Ultimately these projects will generate substantial renewable power when completed in the mid-2020s. 

Utilities we spoke with are delaying company-funded carbon offsets decisions until they have more data from current strategies. Multiple utilities have launched voluntary customer programs allowing small businesses and households to offset their carbon footprints by 25 to 100 percent for a monthly fee. (See Carbon Credits: Tools for Offsetting or Removing Emissions).

To address affordability, many utilities pointed to tax credits in the Inflation Reduction Act and use of existing grid connections that can lower renewable development costs. Renewable assets have lower long-term operating and maintenance costs than fossil fuels. One utility mentioned it can spend seven dollars of capex for every dollar of operating and maintenance savings. Capex is a product of IRP planning which factors direct and indirect plant retirement costs, grid reliability, and affordability. Planned phase-outs of coal over several years can alleviate affordability and community justice issues.

Based on our engagement discussions, utilities are well positioned to lead meaningful emissions reductions. Allocating capital towards commercially competitive renewable technology offers lower risk and a regulated return on investments. They are also researching and testing new decarbonization technologies for hard-to-abate emissions. Their investments carry high upfront costs but offer long-term benefits for multiple stakeholders including the utilizes, ratepayers, and the environment.

[1] Sustainability Accounting Standards Board, “Electric Utilities & Power Generators.” The Sustainability Accounting Standards Board (SASB) Standards guide the disclosure of financially material sustainability information by companies to their investors. Available for 77 industries, the Standards identify the subset of environmental, social, and governance issues most relevant to financial performance in each industry.

Pharmaceutical Companies and Healthcare Initiatives

We met with companies in the pharmaceutical sector to learn more about their access-to-healthcare initiatives.

Brian Garcia

Senior Research Analyst

Meet Brian

Why are these issues material considerations?

Access to medicine is a material issue for pharmaceutical companies, as demands grow for better access to medicine for underserved populations, including people living in low- and middle-income countries, as well as lower income populations in developed countries. Risk can be manifest in pricing, reimbursement, and market access; clinical-trial design and drug approval; legal, compliance, and commercial issues; and operations, supply chain, and drug quality. A significant portion of the industry is driven by research and development, a high risk of product failure during clinical trials, and the need to obtain regulatory approval. Concerns over pricing practices and consolidation within the sector have created downward pricing pressures. Demand for the industry’s products is largely driving by population demographics, rates of insurance coverage, disease profiles, and economic conditions.1

Key Takeaways from our Discussions

Access to medicine was a familiar strategic concern among the companies we met with during our engagement effort. Two recurring themes were responsible pricing and reaching patients in need of medicine. There appeared to be broad-based recognition that access to medicine can have material implications for the long-term sustainability of companies within the pharmaceutical industry in addition to being a component of a company’s responsibility to the industry and society, rather than simply driving revenue.

Affordability was a dominant concern during our discussions and is one of the main topics of focus when thinking about access to medicine initiatives in the U.S. One company said that it “believes every player within the healthcare system has a role in bringing costs down, including wholesalers, pharmacy benefit managers (PBMs), and health insurers.” Common strategies to support patient affordability include copay savings programs, discount programs, and donations of medicines to charities. One company we met with saw efforts to bring down costs in its U.S. markets as a means to increase access within its existing and future U.S. market segments.

It appeared that a majority of companies we met with do not publish price transparency reports, which we view as best practice, although more are considering the idea due to increased attention to the affordability issue and direct requests. Several states have enacted state price transparency legislation to address prescription drug costs and spending. As more states continue to introduce and enact legislation, it will be important for pharmaceutical manufacturers to understand the requirements and the implications for their current and future business.

A focus among all of the companies that we spoke with is the issue of clinical trial diversity. Several companies are reassessing the structure, management, and execution of their clinical trials. In their views, trials that are poorly planned, staffed, and conducted can lead to incomplete or limited trial data. Incomplete or inadequate data contributes to disparities in health outcomes between populations and could lead to delays in the drug approval process.

Steps that several companies are taking to improve clinical trial diversity include sourcing diverse candidates for clinical trial investigators, outreach to universities and physicians in underserved areas, exploring the vulnerabilities of certain communities to life threatening diseases, educating communities on resources that are available, addressing strategies to improve health, and embedding diversity and inclusion parameters into the clinical trial lifecycle. One company appointed new leadership to be in charge of clinical trial diversity as it works to address concerns.

In our discussions of access to healthcare with pharmaceutical companies, we discussed governance of their ESG programs to determine if access to healthcare and clinical trial diversity were components of the broader ESG effort. While all companies have deemed access to healthcare a material issue or key priority, the decision-making process, governance structure, and areas of focus varied across companies. At a number of companies, multiple committees lead ESG efforts. Others work with non-governmental organizations or other external stakeholders to improve access or regional and local healthcare systems.

Companies that did address ESG governance said that the Board of Directors gets involved on ESG topics and regularly discusses them with senior management, including one company that discussed the Board’s involvement on pricing strategy.

[1] Sustainability Accounting Standards Board, “Biotechnology & Pharmaceuticals.”


Access to Medicine Index

Our engagement discussions with several pharmaceutical companies included examining their access to healthcare strategies. One resource incorporated into our call preparations was the Access to Medicine Index (AMI). 

Compiled by the Access to Medicine Foundation, the AMI scores companies for their performance in three access categories: 1) Governance of Access, 2) Research and Development, and 3) Product Delivery. While several companies promote strong AMI rankings, we learned through our engagements that some companies take issue with the AMI. 

Although we believe the AMI provides good insight into pharmaceutical companies’ access to medicine initiatives, it is limited. The AMI focuses on access initiatives in low- to middle-income countries, while not considering strategies in developed countries. For example, we were told by a company with a weaker AMI score that the AMI does not accurately characterize its business model and access to healthcare strategies. Management believes the AMI emphasizes infectious disease treatments, which are not the company’s focus. As a result, the AMI underrepresents the company’s access efforts, which are a key element of its ESG strategy. Management intends to engage with the AMI to ensure a better reflection the company's efforts.

Insurance and Climate Change Transition Risk

We met with insurance companies and brokers to learn more about how they think about climate transition and physical risks in underwriting, investment portfolios, and new business opportunities.

Joshua Stein

Senior Research Analyst

Meet Joshua

Why are these issues material considerations?

The insurance industry is wrestling with catastrophe losses fueled by climate change that regularly exceed $100 billion a year.1 Insured losses from natural disasters hit about $120 billion in 2022, most of which was weather related, according to data compiled by Munich Re Group. Including uninsured losses, the total cost of storms, droughts, earthquakes, and fires last year was $270 billion. Insurers face climate risks in the insurance contracts they underwrite, and the assets owned in their investment portfolios. Those risks can generate underwriting and investment losses. More frequent catastrophic weather events alone could mean certain risks become uninsurable. At the same time, increased demand for new insurance solutions and services could expand industry opportunities. Enhanced disclosure of a company’s approach to incorporating climate risk factors, in addition to quantitative data such as the probable maximum loss and total losses attributable to insurance payouts, will provide investors with the information necessary to assess current and future performance on this issue.2

Key Takeaways from our Discussions

Exposure to environmental risks and related losses is inherent to the property and casualty insurance industry. Insurers are highly attuned to the risks that climate change can present to their insurance and investment operations. GHG emissions are central to risk measurement, management, and mitigation efforts. That data is guiding decisions about risks they choose to underwrite and the investments they choose to make with policyholder premiums.

For insurers we spoke with, mitigating climate risks in insurance operations, at least in part, is about adjusting the geographic mix of their coverage and ensuring appropriate underwriting and profitability. Stress tests, quantitative models, and climate modeling analytics guide efforts to identify risks and actions that might mitigate them, including those related to climate change. Another approach is to reduce coverage or adjust deductibles to reflect regional levels of climate impacts in certain areas, including identifying areas that cannot be priced appropriately. Additionally, insurers are focused on adjusting their exposure to various lines of business to reduce potential catastrophe losses.

Industry efforts related to NZ are tangible. One insurer announced plans in 2021 to assess Scope 3 emissions for owned assets within General Account portfolio, using Partnership for Carbon Accounting Financials (PCAF) standards. One that has not set an NZ goal is an official observer of the UN-convened Net Zero Insurer’s Alliance, as it considers its NZ plans.

NZ initiatives vary among the insurers with which we engaged. While some are still assessing NZ goals before setting plans or making commitments, several indicated that NZ considerations contribute to their efforts to assess GHG emissions. One insurer told us that its current efforts are intended to assure that if and when NZ goals are set, they are practical.

We learned from the insurance companies we spoke with that there are a range of investment risk management strategies for investment portfolios. For example, one company chooses not to invest in companies generating more than 30 percent of revenue from coal mining. Another delivers educational content on ESG and the United Nations Principles for Responsible Investing (PRI) to investment teams in its asset management business. For this company, environmental considerations are a priority, including managing Scope 1 and Scope 2 emissions in investment portfolios.

We spoke with one insurer that conducted carbon footprint and climate change analysis in 2020 of public debt and equity to better understand exposure to transition and physical risk. Another company is conducting qualitative analysis to better understand transition and physical climate risk exposures in corporate sectors with higher risk exposure, including the impact of transition on oil and gas sector and rising sea levels on commercial real estate.

In contrast, another insurer we spoke with chooses not to divest fossil fuel-industry holdings, believing it does not reduce fossil fuel consumption substantially. In addition, the insurer’s view is that denying insurance to the oil and gas sector could lead those companies to find insurance options elsewhere, which might result in inequitable outcomes and a disproportionate cost burden on certain communities.

Insurers we spoke with are helping customers protect against climate-related risks with new products and services, including custom solutions. A number of insurers use climate modeling analytics and expertise to help clients quantify and protect against climate risks. Specifically, one company is seeking to develop more specific data about hurricane wind speeds to better assess property impacts.

Finally, some insurers already offer products or are developing new ones to indemnify climate risks and support a green transition. For example, one provider is making consultants available to help clients prepare reports consistent with the standards of the Task Force on Climate-Related Financial Disclosure (TCFD).

[1] “Insured Losses Hit $120 Billion as Extreme Weather Spreads,” Bloomberg, January 9, 2023.
[2] Sustainability Accounting Standards Board, “Insurance.”

Technology Companies and Data Privacy

We met with technology companies to gain further insight into their data privacy practices, product offerings, and management of proprietary client information.

Abigail Ingalls

Senior Investment Product Strategist

Meet Abigail

Why are these issues material considerations?

Regulatory noncompliance and business failures with regard to data privacy and cybersecurity are material risks ranging across regulatory, litigation, reputational, and financial factors that can result in fines, revenue losses, and loss of consumer confidence. In the context of data security alone, an analysis by IBM and the Ponemon institute found, “In 2022, the average cost of a data breach has reached a record high of $4.35 million.”1 In January 2023, Forbes Councils member Iain Borner wrote, “With the increasing amount of personal information being collected and shared online, it is essential for businesses to have strong safeguards in place to protect this data and ensure it is used ethically and responsibly.”2 Social factors such as privacy protection and employment practices tend to be more material in Technology Software And Services industry.3

Key Takeaways from our Discussions

The range of risks associated with data privacy and cybersecurity reflect the breadth and complexity of technology sector in 2022, with pronounced differences for data processers, controllers, or collectors as well as platform providers, even if the distinction among these business lines is not always clear cut.

As the recognition of data as an asset grows, its value and differences among consumer data privacy regulations across global jurisdictions further complicate compliance and risk management.

To shape our tech sector data privacy and security engagement strategy, we consulted Jared Maslin, Chief Operating Officer and Senior Director, Data Privacy, at Good Research. Data privacy issues span stakeholders including customers, business-to-business contacts, shareholders, employees, and third-party contractors including developers, to name a few. Our in-depth consultations shed further light on the topic.

Companies that develop privacy policies guided by a customer-first philosophy (during one interview, privacy was termed a “fundamental human right”) commonly conduct enterprise-wide training and certification programs with responsible parties, ranging from new hires to third-party contractors, with continuous oversight.

Most companies espouse a commitment to privacy as a core value, but practices among peers range in depth. A first step is often committing to involving the Board of Directors and assigning C-suite responsibility, followed by integrating privacy and security efforts with human capital efforts of ESG programs, and aspiring to lead among peers.

Many also acknowledge data privacy risks are growing more material with time, ratcheting up the privacy risks assessments in mergers and acquisition due diligence and capital allocation considerations, although few currently disclose “revenue at risk” from data privacy or security risks.

Most companies we engaged with emphatically stated an intention of avoiding data arbitrage, the practice of transferring data to less restrictive regulatory jurisdictions to reduce legal risk exposure. Another stated that choosing not to pursue profit from customer data simplified compliance efforts by prioritizing customer trust.

Company managements commonly referenced three components in our privacy risk discussions: regulatory compliance, consumer privacy expectations, and market leadership.

Regulatory compliance ranged from implementing a global common-baseline approach built with the most stringent regulations from among all business jurisdictions to creating a common baseline for all operations to tailoring policies to each region based on varying local regulations.

Further complicating data privacy considerations, is a changing regulatory landscape, which requires ongoing surveillance and adaptation. In one conversation, a representative described the approach as a continuous privacy compliance operating model.

We observed during our engagement meetings that data privacy is moving from being a compliance function to be centered in consumer trust and transparency. Many of companies we spoke to discussed data privacy and security risk management effort within a consumer-driven context. They develop products with privacy-centric approach and respond to consumers’ expectations by developing policies that exceed legal requirements. Most companies tend to allow consumers to access, manage, and restrict their data; however, there is a range of applications used by companies to enable or disable ease-of-use of these tools.

These companies also consistently seek data privacy industry leadership, often discussing with regulators the importance of breaking down nationalistic barriers to free international data flows. They tend to seek a role in the global data privacy and security environment as a leader. Our sense from the conversations with the aspiring leaders is that they believe that if they are perceived as leaders, they will have influence in helping to shape data privacy regulations going forward.

[1] Cost of a Data Breach Report 2022, IBM Security, July 2022.
[2] “Creating A Culture Of Privacy: The Importance Of Developing A Privacy Program For Your Business,” Forbes, January 25, 2023.
[3] ESG Materiality Map, Technology Software And Services, S&P Global Ratings, October 19, 2022.

Semiconductor Fabricators and Water Usage

We met with companies that manufacture semiconductor or related equipment to learn how they consider water management in business practices.

Abigail Ingalls

Senior Investment Product Strategist

Meet Abigail

Why is this issue a material consideration?

Semiconductor fabricators (fabs) are estimated to use 264 billion gallons of water per year.1 By some estimates, a large chip fab can use up to 10 million gallons of water a day, which is equivalent to the water consumption of roughly 300,000 households.2 Water is likely to become scarcer, in certain regions, in a changing climate. Drought conditions emphasize the risk presented by a lack of resource planning and water conservation for the semiconductor sector, and business risks increase in water-stressed regions. Primary direct water use beyond manufacturing includes employee use, industrial use, including air conditioning, and irrigation. Business trends, including the transition to 5G technology, sales growth, product development, research and development (R&D), and M&A can contribute to increases in demand for water. Semiconductor companies that are able to increase the efficiency of water use during manufacturing will maintain a lower risk profile and face lower regulatory risks as local, regional, and national environmental laws place increasing emphasis on resource conservation.3

Key Takeaways from our Discussions

Comparing water management strategies among semiconductor companies means considering whether the business limits its work to designing chips, running a fabrication foundry to manufacture chips, or both. Water consumption stems from the process in chip manufacturing that requires semiconductor wafers be cleaned by ultrapure deionized water (UPW). The companies we met with to discuss water risks shape their relative approaches to water risk management by their role in the industry.

Companies considering water use policies also address global corporate citizenship and decreasing their environmental footprints, which includes net positive water goals that return more water to local aquifers than they consume. Positive community relationships may ease permitting, while companies with poor relations may have more difficulty. In addition, it is considered best practice to include pay policies that tie executive performance bonuses with water conservation to encourage stewardship.

Significant water use management strategies discussed during our engagement meetings included: reducing water use, conservation, and reclamation; shifting manufacturing approaches; supplier oversight for chip companies that outsource fabrication; as well as integrating water considerations into the M&A due diligence process.

Reduction, conservation, and reclamation: These strategies can reduce costs, protect water quality, and preserve long-term supplies. Water use can be integral to new facility design and construction. One company representative described a water reclamation facility that treats water on site and returns it to the local aquifer or is reused in certain industrial or agricultural applications. Another company plans to recycle 50 percent of its water use by 2025.

Companies we spoke with acknowledged acquisitions that increase production and sales will further complicate water use and can lower recycling rates.

To contextualize water usage, companies look for outside guidance. We spoke with companies that are consulting on water risks with the Carbon Disclosure Project (CDP), the World Resources Institute (WRI), which offers an Aqueduct Tool helpful in mapping water risks, the Responsible Business Alliance (RBA) Environmental Reporting Initiative, and TCFD.

Manufacturing approaches: Shifting manufacturing processes to use larger wafers can require less water in production. A larger wafer can yield significantly more chips, while decreasing water consumption per wafer, according to one company team. However, buildout of manufacturing facilities for new technologies requires long lead times and significant capital investment for companies with fabrication lines  Additionally, semiconductor capital equipment companies are beginning to integrate the principles of water reduction into their own design engineering, with the intention of passing along these technological improvements to the semiconductor manufacturers. This structural shift likely will have implications for company capital planning and allocations among chip fabricators.

Supplier Oversight: When a company outsources fabrication risks, use of UPW simply shifts to suppliers with implications for the outsourcing company. Ongoing supplier audits help to track water use among suppliers while addressing social and environmental indicators within a broader ESG plan. Depending on the volume of business a company conducts with a supplier, it can leverage the importance of its supplier relationship to encourage water-use risk management and mitigation.

Water risks extend across sectors of business and society as water is an essential natural resource and, thus, a pervasive ESG concern. The water risk management programs of semiconductor companies often are intertwined with overall corporate sustainability programs because of a need for “social license to operate”. Leaders in this area consider water as a key input in their direct impact on their communities and their business operations. Important strategic considerations include the industry’s impact and that of its customers and suppliers on water resources, and technology that can be used to advance sustainability on a global scale.

[1] “Water Supply Challenges for the Semiconductor Industry,” Semiconductor Digest, October 24, 2022.
[2] “Water Scarcity Concerns Drive Semiconductor Industry to Adopt New Technologies,” Gradient, January 26, 2022.
[3] Sustainability Accounting Standards Board, “Semiconductors.”

Chemical Companies and Climate Change Risks

We engaged with companies in the chemicals sector to better understand the relative risks posed by climate change and how companies are responding to mitigate the risks.

Joshua Perez

Portfolio Manager and Director, Corporate Research

Meet Joshua

Why are these issues material considerations?

The chemical industry is vulnerable to operational, financial, legal, and regulatory risks related to climate change with implications for businesses and communities. For example, chemical plants located in low‐lying coastal areas are exposed to damage from extreme weather events. Weather events and related conditions can trigger industrial disasters affecting workers and nearby communities. In addition, the sector generates high levels of GHG emissions which brings increased regulatory risks. Companies that cost-effectively manage GHG emissions through greater energy efficiency, the use of alternative fuels, or manufacturing process advances may benefit from improved operating efficiency and reduced regulatory risk, among other financial benefits.1

Key Takeaways from our Discussions

During our engagement on climate risks in the chemical sector, we spoke with companies that are monitoring and seeking to manage both transition and physical climate risks. Major themes included GHG emission reductions, clean energy generation, production innovations for more sustainable chemical products, reputational risks, and the effects of climate change on supply chain sustainability.

Chemical companies seeking to address GHG emissions face multi-dimensional challenges. One petrochemical company has relatively modest near-term GHG Scope 1 and 2 reduction goals and a 2050 net neutrality goal. Its strategy to reach the goals includes $1 billion in capital expenditures annually. A fertilizer producer, on the other hand, estimates 70 percent of its GHG emissions stem from customers' agricultural activities. Its strategy includes transforming 75 million acres globally to sustainable farming and climate-smart agriculture practices, including maximizing carbon sequestration potential of soil and helping growers access the carbon credit markets. (Please see here for a brief explanation of carbon credits.)

Several of the companies are seeking to adapt current or expand developing technologies to address their goals for reducing GHG emissions, including carbon capture and storage as well as low- and zero-carbon hydrogen power generation.

Companies with which we engaged acknowledged certain of their efforts are underway in anticipation of further regulations around carbon, as jurisdictions advance NZ aspirations. Others attributed at least some of their efforts to countering reputational risk associated with changing customer or community perceptions of a company’s contribution to or detraction from a transition to a lower-carbon economy. 

The physical and operational risks associated with climate change also remain prominent concerns for companies in the chemical sector. An unprecedented freeze in the U.S. in 2022 that caused supply chains to fail prompted one company that we engaged with to acquire an upstream raw material provider to bring greater resilience to its operations. 

Some of the largest near-term emissions reductions that companies within the sector expect to realize stem from the use of virtual power purchase arrangements (VPPAs), contracts that help energy users hedge against price volatility, reduce Scope 2 emissions, and contribute to growth of renewable power generating capacity. (See Lowering emissions through Virtual Power Purchase Agreements below

Hydrogen also factors into plans for generating carbon-free energy. Blue and green hydrogen are still emerging energy production technologies, but the companies we spoke with are making strides in commercializing it for applications ranging from their own power supplies to products in other sectors such as transportation.

For several companies we met with, the mitigation of risks posed by climate change includes changing the products they manufacture and the way they are created. One company involved in plastics is investing in molecular plastic recycling. The technology breaks down waste plastic to molecular components to create feedstock for new plastic products, including at food-grade quality. A pricing premium on plastics made with recycled feedstock due to strong customer demand prompted one company to set a goal to increase the amount of plastic waste recycled into new products by 2030 by nearly 40 times above 2021 levels.

The pursuit of more sustainable chemical products extends across industries in the chemicals sector. A fertilizer manufacturer is planning a clean ammonia plant built using autothermal technology with the ability to capture 90 percent of emissions. A coatings manufacturer found that sustainably-advantaged products in its portfolio offer superior life cycle emissions footprints when compared to other coatings.

One manufacturer acknowledged, “Demand for sustainable products from multiple end markets” is increasing, demonstrating that both risks and opportunities can emerge from climate change mitigation and adaptation for companies that are focusing on the challenges and developing innovative strategies to overcome them.

[1] Sustainability Accounting Standards Board, “Chemicals.”


Lowering GHG Emissions through Virtual Power Purchase Agreements

Virtual power purchase agreements (VPPAs) are low hanging fruit for chemical companies seeking to reduce GHG emissions. VPPAs cost-effectively lower emissions reduction measurements, while providing a net positive environmental benefit to society, demonstrating the concept of additionality.

A form of virtual offtake agreement, VPPAs are long-term fixed-cost agreements, whereby a company agrees to purchase a certain amount of electricity generation capacity from a renewable energy project for a fixed fee. In return, the renewable energy developer provides the company with renewable energy certificates (RECs) that enable the virtual offtaking company to green its electricity generation by retiring the RECs and offsetting its physical electricity generation (Scope 2 emissions) footprint. These agreements can also serve as a hedge against volatile floating-rate electricity prices, though this seemed to be a secondary consideration for the companies that we engaged with during our effort.

Banks, Financial Inclusion and Climate Accounting

We spoke with several large banking institutions about climate accounting and financial inclusion.

Nicholas Elfner

Co-Head of Research

Meet Nicholas

Why are these issues material considerations?

  • Climate accounting: Climate transition is the most material environmental factor for banks for both stakeholders and credit.1 The quality of bank accounting practices with regard to financed GHG emissions is material because accounting discipline may bring into sharper focus risks that climate transition presents with implications for lending portfolios and capital risk weights, as well as market, credit, and reputational risks for business and lending operations and financing opportunities to support transition.
  • Financial inclusion: Access and affordability is the most material social factor for banks from a stakeholder point of view and one of the four most important from a credit perspective.2 Components of financial inclusion are material because they can be a business opportunity and risk. Expanding services to historically underserved markets may offer top- and bottom-line benefits. In contrast, failing to address them may cause regulatory scrutiny, fines, and reputational risks.

Key Takeaways from our Discussions

Climate Accounting

Management representatives that we spoke with are addressing a number of climate risk issues. Several are integrating physical and transition climate risk strategies across their enterprises through initiatives with clearly stated objectives. Reducing GHG emissions often is primary among these goals, with interim, measurable reduction targets set for 2030, and 2050 NZ emissions goals.

Working with organizations including the Net Zero Banking Alliance (NZBA), the Partnership for Carbon Accounting Financials (PCAF), the TCFD, these banks are making progress on reduction targets for Scope 1 and 2 GHG emissions, which are direct emissions they own or control.

These banks seek to address Scope 3 GHG emissions, which they admit is challenging. Scope 3 emissions result from assets and activities the bank doesn’t own or control. For example, Scope 3 emissions often are financed by a bank through its lending and investment portfolios, for example, often called financed emissions.

Measuring Scope 3 GHG emissions is difficult because the banks depend on the emitter to accurately measure and report emissions. Data aggregation and quality is difficult to manage.

Banks we spoke with are working with clients to enhance Scope 3 reporting. One issuer established a sustainable finance program, with a goal of $1.5 trillion in loans and financing for clients to help reach the bank’s 2030 Scope 3 emissions reduction goal. Several banks we had conversations with are working closely with clients in the energy and transportation sectors to address Scope 3 GHG emission because these sectors are vulnerable to transition risk, in their view.

A third bank we spoke with developed an approach for its clients that includes, among other strategies, aligning selected loan portfolios with NZ objectives that incorporate the International Energy Agency Sustainable Development Scenario, which is designed to meet climate, energy access, and air quality goals and is fully compliant with the Paris Agreement, while maintaining a strong focus on energy reliability and affordability for a growing global population.

Financial Inclusion

In our discussions, we found most of the banks we held engagement meetings with were already addressing key diversity, equity, and inclusion (DEI) goals through their efforts to respond to the Community Reinvestment Act (CRA). Through the CRA, enacted in 1977, the Federal Reserve (Fed) and other federal banking regulators encourage financial institutions to help meet the credit needs of the communities in which they do business, including low- and moderate-income neighborhoods. Our discussions revealed that banks typically seek to distinguish financial inclusion and CRA efforts, although the goals are similar.

One bank already has loaned $450 million of a targeted $1.25 billion commitment focused on advancing racial equality and opportunity. The effort includes $350 million in investments in Black, Indigenous, and People of Color (BIPOC)-businesses. Another initiative created a $30 billion racial equity lending goal, with $13 billion of the goal disbursed already, largely through affordable housing loans.

A third bank committed $30 billion in new financing by 2025 for single family and affordable homes for Black and Latino households in rural and urban areas. The pledge also targets assisting one million people to access low-fee checking and savings accounts and $2 billion in philanthropy for Black and Latino nonprofit organizations.

We discussed participation in Project REACh (Roundtable for Economic Access and Change) sponsored by the Office of the Comptroller of the Currency (OCC) during one engagement session. The initiative brings together leaders from the banking industry, national civil rights organizations, business, and technology to identify and reduce barriers that keep underserved and minority communities from full, equal, and fair participation in the economy. Project REACh is an important adjunct to the DEI efforts for the bank we spoke with during the meeting.

Consistently, the banks we spoke with had staff and conduct programs to attract and retain a diverse workforce and set goals related to diversity and inclusion. While financial inclusion is a focus of their investors, as we heard from one bank, efforts to date suggest that for most of the banks we spoke with, DEI processes were in place before shareholders focused on it.

[1] ESG Materiality Map, Banks, S&P Global Ratings, July 20, 2022.
[2] ESG Materiality Map, Banks, S&P Global Ratings, July 20, 2022.


Breckinridge Joins PCAF Standard-Setting Effort

We highlighted the Partnership for Carbon Accounting Financials (PCAF) in our 2021 Issuer Engagement report. PCAF enables financial institutions to assess and disclose GHG emissions of loans and investments. 

We noted at that time that banks were in the early stages of measuring this major source of Scope 3 emissions largely due to the lack of a globally recognized reporting framework. We learned this year that many of the banks we spoke with are now signatories to PCAF, believing its methodology has become a credible industry standard. Joining PCAF enables banks to collaborate with peers and contribute to development of PCAF’s standard for various financial asset classes.

Breckinridge became a PCAF member in 2022. We joined because it supports our work in the Net Zero Asset Managers Initiative (NZAM). It also reflects insights gained from our engagement discussions with banks over the past two years. 

We are using the PCAF standard to account for financed emissions stemming from our corporate bond assets under management. Our financed emissions calculations are utilized in two ways: 1) incorporated into our model that assesses a company’s climate transition risk, and 2) disclosed to clients who are seeing to achieve a NZ emissions pathway.