- Many investors restrict or limit investments in companies with fossil fuel reserves or municipal utilities with carbon intensive generation assets.
- Reasons may include aligning with a fossil fuel-free mission, easing climate change’s impact, or mitigating transitions risks to a low-carbon economy.
- Breckinridge manages strategies that emphasize securities of issuers that our research judges to be better managers of carbon emissions and other ESG criteria.
Over the years, many investors have decided to restrict or limit their investments in companies with fossil fuel reserves or municipal utilities with carbon intensive generation assets. Their reasons may include wanting to align with a fossil fuel-free mission, to ease the impact of climate change, or to mitigate the risks surrounding companies’ transitions to a low-carbon economy.
Breckinridge manages a wide array of strategies that emphasize securities of issuers that our research judges to be better when it comes to management of carbon emissions, workplace safety, investment in renewable energy and other environmental, social, and governance (ESG) criteria. For investors wishing to be more restrictive and proactively divest holdings based on carbon-related criteria, Breckinridge also manages strategies with customizable carbon screens. The carbon screens utilize our portfolio customization capabilities and data from third-party research providers. Figure 1 illustrates the screening process.
Fossil Fuel Concerns
The persistent rise in global temperatures, approximately 1.0 degree Celsius since pre-industrial levels, has been attributed to the steady increase in greenhouse gas (GHG) emissions. The primary contributor to the GHG emission trend is the human extraction and combustion of fossil fuels (coal, oil, and gas) for energy.1
Scientists have determined, with high confidence, that the rise in global temperatures and its effect on the climate is already impacting natural and human systems.2 Recognizing the risks inherent from a rise in global temperatures, 195 countries came together in late 2015 to establish the Paris Agreement. The countries agreed to be accountable to keeping the increase in the global average temperature to well below 2 degrees Celsius (or about 3.6 degrees Fahrenheit) from pre-industrial levels.
They also decided to pursue the more ambitious goal of limiting the increase to 1.5 degrees Celsius.
Breckinridge and many of our clients have grown increasingly concerned about the changing climate and its effects on investments. A way to mitigate climate risks, and support the Paris Agreement, is to limit exposure to GHG emissions.
Breckinridge’s standard fossil fuel-free mandate excludes investment in companies with significant proven fossil fuel reserves and municipal utilities with carbon intensive generation assets. Through this mandate and with our ability to offer further customizations, we have helped many clients reduce their investments in securities with elevated emissions levels. The reduced investment exposure also helps to manage the risk that more stringent climate policies will negatively impact their investments.
One way to reduce this carbon transition risk is to limit investments in companies with oil, gas, or coal reserves or municipalities with carbon intensive generation assets.
For example, if future progress is made under the terms of Paris Agreement, the demand for fossil fuels will likely fall. As result, companies with reserves may be forced to leave them in the ground rather than mine or pump, leaving behind what is known as “stranded assets.”3
These companies may need to write down these assets, hurting profitability and impeding long-term planning. Restricting these companies from investment would therefore mitigate climate as well as credit risks and reduce the overall carbon footprint of the portfolio.
Awareness of transition risks, mission alignment, and greater disclosures of emission data are prompting a growing trend toward investors evaluating their exposure to the energy sector.
As of February 28, 2022, Breckinridge has applied a fossil fuel-free lens across approximately 250 accounts, with assets of about $1.7 billion in assets.4 We look forward to continuing to work with investors on strategies and portfolio level customizations that consider their exposure to fossil fuel-reserves.
 Stranded assets are oil, gas and coal reserves that are left unburnable without expensive carbon capture technology, which itself alters fossil fuel economics, per speech from Mark Carney, governor of the Bank of England, September 2015.
 Based on multi-sector and tax-efficient assets.
#288906 (Rev 3-30-222)
This material provides general and/or educational information and should not be construed as a solicitation or offer of Breckinridge services or products or as legal, tax or investment advice. The content is current as of the time of writing or as designated within the material. All information, including the opinions and views of Breckinridge, is 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.
Past performance is not a guarantee of future results. Breckinridge makes no assurances, warranties or representations that any strategies described herein will meet their investment objectives or incur any profits. Any index results shown are for illustrative purposes and do not represent the performance of any specific investment. Indices are unmanaged and investors cannot directly invest in them. They do not reflect any management, custody, transaction or other expenses, and generally assume reinvestment of dividends, income and capital gains. Performance of indices may be more or less volatile than any investment strategy.
Performance results for Breckinridge’s investment strategies include the reinvestment of interest and any other earnings, but do not reflect any brokerage or trading costs a client would have paid. Results may not reflect the impact that any material market or economic factors would have had on the accounts during the time period. Due to differences in client restrictions, objectives, cash flows, and other such factors, individual client account performance may differ substantially from the performance presented.
All investments involve risk, including loss of principal. Diversification cannot assure a profit or protect against loss. Fixed income investments have varying degrees of credit risk, interest rate risk, default risk, and prepayment and extension risk. In general, bond prices rise when interest rates fall and vice versa. This effect is usually more pronounced for longer-term securities. Income from municipal bonds can be declared taxable because of unfavorable changes in tax laws, adverse interpretations by the IRS or state tax authorities, or noncompliant conduct of a bond issuer.
Breckinridge believes that the assessment of ESG risks, including those associated with climate change, can improve overall risk analysis. When integrating ESG analysis with traditional financial analysis, Breckinridge’s investment team will consider ESG factors but may conclude that other attributes outweigh the ESG considerations when making investment decisions.
There is no guarantee that integrating ESG analysis will improve risk-adjusted returns, lower portfolio volatility over any specific time period, or outperform the broader market or other strategies that do not utilize ESG analysis when selecting investments. The consideration of ESG factors may limit investment opportunities available to a portfolio. In addition, ESG data often lacks standardization, consistency and transparency and for certain companies such data may not be available, complete or accurate.
Breckinridge’s ESG analysis is based on third party data and Breckinridge analysts’ internal analysis. Analysts will review a variety of sources such as corporate sustainability reports, data subscriptions, and research reports to obtain available metrics for internally developed ESG frameworks. Qualitative ESG information is obtained from corporate sustainability reports, engagement discussion with corporate management teams, among others. A high sustainability rating does not mean it will be included in a portfolio, nor does it mean that a bond will provide profits or avoid losses.
Net Zero alignment and classifications are defined by Breckinridge and are subjective in nature. Although our classification methodology is informed by the Net Zero Investment Framework Implementation Guide as outlined by the Institutional Investors Group on Climate Change, it may not align with the methodology or definition used by other companies or advisors. Breckinridge is a member of the Partnership for Carbon Accounting Financials and uses the financed emissions methodology to track, monitor and allocate emissions. These differences should be considered when comparing Net Zero application and strategies.
Targets and goals for Net Zero can change over time and could differ from individual client portfolios. Breckinridge will continue to invest in companies with exposure to fossil fuels; however, we may adjust our exposure to these types of investments based on net zero alignment and classifications over time.
Any specific securities mentioned are for illustrative and example only. They do not necessarily represent actual investments in any client portfolio.
The effectiveness of any tax management strategy is largely dependent on each client’s entire tax and investment profile, including investments made outside of Breckinridge’s advisory services. As such, there is a risk that the strategy used to reduce the tax liability of the client is not the most effective for every client. Breckinridge is not a tax advisor and does not provide personal tax advice. Investors should consult with their tax professionals regarding tax strategies and associated consequences.
Federal and local tax laws can change at any time. These changes can impact tax consequences for investors, who should consult with a tax professional before making any decisions.
The content may contain information taken from unaffiliated third-party sources. Breckinridge believes such information is reliable but does not guarantee its accuracy or completeness. Any third-party websites included in the content has been provided for reference only. Please see the Terms & Conditions page for third party licensing disclaimers.