Why targeting material ESG factors matters for thoughtful investment decision-making.
At Breckinridge, we recognize that industry practices have a direct impact on the markets we rely on. In the interest of our clients, best practices to steward those markets demand a collaborative commitment to the financial markets community. We believe that partnering with ESG subject-matter experts and furthering transparency in ESG reporting from bond issuers can help advance sustainable fixed income investing.
Since 2011, Breckinridge has been committed to integrating ESG analysis into our investment process. We believed from the start that ESG integration would provide a more comprehensive view of the credits we invest in, and we have found this to be true.
We continuously seek to improve our ability to use material ESG data to mitigate risks in our investments. One way we enhance our capabilities is to collaborate with experts in various facets of the ESG community. By learning from these experts, we can gain more-detailed, up-to-date insights from thought leaders dedicated to certain ESG risks. For example:
- In 2017, we participated in CERES’ buildout of an Investor Water Toolkit. CERES, a nonprofit with a mission to make the economy more sustainable, is an expert on water-related risks. We worked alongside other institutional investors to contribute to this resource for evaluating water risks in investment portfolios.
- In 2017, we partnered with Climate Central to develop a new quantitative comparative tool that will help our analysts assess coastal flood risk. Climate Central is composed of scientists and journalists researching climate change, with the mission to relay climate change information to the public.
- In September 2018, we put forth ideas in discussions with MSCI, a leading provider of ESG ratings for global securities, about a potential ESG municipal ratings product.
Figure 1 gives other examples of collaboration:
We see significant value in collaborating with other thought leaders to advance the sustainable-investment industry and to improve the quality of ESG data. To that end, we continue to join ESG working groups, exchange ideas and contribute to papers on ESG research.
Importantly, these partnerships are not superficial “rubber stamps” of participation in ESG research; rather, they are meaningful work streams and exchanges of information with a broad spectrum of ESG issue experts. We receive valuable data, tools and understanding from their expertise. In return, we bring our practical perspective as an active fixed income manager with deep market knowledge. We can offer our expertise on how we use ESG analysis to guide our investment decisions and to implement values-based customizations for clients. Our experience as investors allows us to help ensure that the needs and challenges of sustainable investors are appropriately conveyed. In addition, we believe that meaningful collaboration can drive overall market acceptance of ESG as a prudent part of the investment process.
For example, Breckinridge recently wrote a case study on ESG integration for Guidance and Case Studies for ESG Integration: Equities and Fixed Income, a report released by the United Nations Principles for Responsible Investment (UN PRI) and the CFA Institute. Breckinridge was included due to our longstanding commitment to the integration of ESG into credit analysis. Breckinridge has been a PRI signatory since May 2012.
In addition, Breckinridge President Peter Coffin is a founding member of the Investor Advisory Group for the Sustainable Accounting Standards Board (SASB). SASB’s focus is on the reporting of material ESG factors by companies and, as we discuss in the next section, we think transparent reporting is crucial to ESG analysis. By providing an investor perspective, the Investor Advisory Group helps advance SASB’s mission of greater standardization and company disclosure of ESG metrics.
Our Push Toward Increased Transparency
Like many of our peers, we strive to help move the needle toward greater transparency of ESG performance metrics from corporate and municipal issuers. We believe that more disclosure from borrowers allows more-acute market awareness of potential credit issues. Greater disclosure helps investors make better decision-useful comparisons of bond issuers on material ESG criteria and find long-term risks and opportunities for credits.
We support organizations like SASB that seek to create consistent guidelines for companies to disclose ESG metrics. For example, Breckinridge held a panel discussion with SASB for the investor community in 2017, and Breckinridge frequently lends its investment knowledge to SASB’s work.
Also, Breckinridge signed on this year as a supporter for the Task Force on Climate-Related Financial Disclosures, a privately led task force that aims to boost standardization of reporting for climate-related metrics. As we discuss in Fossil-Fuel-Free Investing: Process and Perspective, many issuers must manage “carbon transition risks” as they are asked to lower greenhouse gas emissions, which could lead to asset writedowns or reputational risks.
In addition, as discussed in The Short-Termism Debate Heats Up, we support the Committee Encouraging Corporate Philanthropy (CECP) Strategic Investor Initiative. Among other goals, the CEO-led group seeks to improve corporate disclosure of long-term planning.
These organizations help bring awareness to the importance of ESG disclosure by bond issuers and the ways it can help to alleviate risks. By fostering market demand for increased disclosure, we can help promote more standardized reporting on ESG issues and more leadership from bond issuers on improving their transparency (for example, see How Nonprofit Hospital ESG Disclosures Can Help Investors). We believe that a landscape of responsible and informed investors creates the best “soil” for the generation of after-tax fixed income returns.
More broadly, our work with thought leaders in the ESG community is a part of our efforts to further ESG integration into investment analysis, and more specifically, investment risk analysis. While these efforts support the ESG community, we believe they also improve the ability for our credit analysts to uncover risks and opportunities.
DISCLAIMER: The opinions and views expressed are those of Breckinridge Capital Advisors, Inc. They are current as of the date(s) indicated but are subject to change without notice. Any estimates, targets, and projections are based on Breckinridge research, analysis and assumptions. No assurances can be made that any such estimate, target or projection will be accurate; actual results may differ substantially.
Nothing contained herein should be construed or relied upon as financial, legal or tax advice. All investments involve risks, including the loss of principal. An investor should consult with their financial professional before making any investment decisions.
Some information has been taken directly from unaffiliated third party sources. Breckinridge believes such information is reliable, but does not guarantee its accuracy or completeness.
Any specific securities mentioned are for illustrative and example only. They do not necessarily represent actual investments in any client portfolio.
BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively “Bloomberg”). BARCLAYS® is a trademark and service mark of Barclays Bank Plc (collectively with its affiliates, “Barclays”), used under license. Bloomberg or Bloomberg’s licensors, including Barclays, own all proprietary rights in the Bloomberg Barclays Indices.
Neither Bloomberg nor Barclays approves or endorses this material, or guarantees the accuracy or completeness of any information herein, or makes any warranty, express or implied, as to the results to be obtained therefrom and, to the maximum extent allowed by law, neither shall have any liability or responsibility for injury or damages arising in connection therewith.