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ESG

Perspective published on April 16, 2020

Fossil-Fuel-Free Investing: Process and Perspective

Over the years, many investors have decided to restrict or limit their investments in companies with fossil free reserves. 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 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 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. 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.1 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 companies 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. 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.”2 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 growing availability of disclosures are prompting a growing trend toward investors evaluating their exposure to the energy sector.

As of March 31, 2020, Breckinridge has over $765 million in assets3 that are managed to restrict exposure to fossil fuels. We look forward to continuing to work with investors on strategies and portfolio level customizations that consider their exposure to fossil fuel-reserves.

 

[1] IPCC, 2018: Summary for Policy Makers.

[2] 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.

[3] Based on multi-sector and tax-efficient assets.

 

This article was originally published on November 3, 2017.

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.