As ESG integration goes mainstream, issuer engagement expands impact.
For a variety of reasons, investors may decide to restrict investment in companies with fossil fuel reserves. Clients may want to align with a fossil-fuel-free mission, ease the investment impacts of climate change or mitigate the risks surrounding companies’ transition to a low-carbon economy. Breckinridge manages a wide array of strategies that emphasize companies that are “best-in-class” in management of carbon emissions, workplace safety, investment in renewable energy and other environmental, social and governance criteria. For investors wishing to be more restrictive than a “best-in-class” approach and proactively divest companies based on carbon-related criteria, Breckinridge also manages strategies with customizable carbon screens. The carbon screens rely on our core strength of portfolio customization as well as our subscriptions with third party research providers. Potentially, portfolios can screen companies with reported reserves or with other carbon-related criteria. Figure 1 illustrates the screening process.
The Breckinridge investment team constructs portfolios with industry targets that align with our Investment Committee’s views and each client’s investment policy statement. If client screens cause the industry target to fall short of Investment Committee targets, the investment team uses the excess capital to invest in companies from the most closely correlated industry. This process allows us to minimize dispersion and, historically, returns in our fossil-fuel-free mandate have been comparable with the returns in our traditional government/credit strategies.1
Fossil Fuel Concerns
Excluding companies with fossil fuel reserves is especially on clients’ minds following the Cancun agreement made at the 2010 Cancun Climate Change Conference by the United Nations Framework on Climate Change. The agreement captured an international commitment to limit global warming to 2 degrees Celsius above pre-industrial levels. In addition, in the Paris agreement of 2015, 195 countries agreed to be accountable to keeping the increase in the global average temperature to well below 2 C. The global movement to reduce global emissions has translated into the concept of a global carbon budget, defined as a tolerable quantity of greenhouse gas emissions over a specified period.2 Global awareness of the budget could cause acceleration of the transition to a low carbon economy by slowing consumer demand or through carbon taxes or other regulation, which would force companies to make changes to lower their carbon emissions and prompt risks known as “carbon transition risks.”
In particular, if companies with oil, gas or coal reserves must leave the reserves in the ground rather than mine or pump (leaving behind what’s known as “stranded assets”3), these companies may need to write down these assets, hurting profitability and impeding long-term planning. Transition risks, mission alignment and growing availability of disclosures are prompting a growing trend toward investors evaluating their exposure to the energy sector. The strategy to divest based on fossil fuel reserves has advantages, outlined in our recent ESG newsletter article, The “How” of Divest/Invest.
Breckinridge currently has over $330 million in assets4 that are managed to restrict exposure to fossil fuels. We look forward to continuing to work with clients on strategies that take into account client preferences.
 Based on annualized returns for 1-year and 3-year periods, as of September 30, 2017. Annualized based on calendar monthly composite performance. Performance results are gross of fees. Due to differences in specific client investment restrictions, performance for individual client accounts can differ substantially from composite results.
 “Unburnable Carbon – Are the world’s financial markets carrying a carbon bubble?” Carbon Tracker, 2011.
 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.
 As of October 31, 2017 based on government credit assets.
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.