ESG Newsletter published on April 1, 2022
Latest IPCC report underscores urgency of climate action for investors and businesses
In late February 2022, the Intergovernmental Panel on Climate Change (IPCC), a body of experts convened by the UN, released the most detailed look yet at physical threats posed by global warming. It concludes that nations aren’t doing nearly enough to protect cities, farms, and coastlines from the hazards that climate change has already unleashed, such as record droughts and rising seas. It also speaks to greater disasters in store as the planet keeps heating up. Robert Fernandez, CFA, director ESG Research, and Andrew Teras, director, Municipal Research, discussed the report to highlight Breckinridge’s approach. An edited version of their conversation follows.
Robert Fernandez: The IPCC report was notable in so many respects. Did one or two findings strike you as the most compelling?
Andrew Teras: There were more than a few, but the report confirmed climate risks that we consider every day in our research. Those were the findings I found most pertinent from investment viewpoint. For example, the report says that hundreds of millions of people could struggle against floods while millions more will confront deadly heatwaves and water scarcity from severe drought. The potential economic and financial effects that follow from these disasters are material risks.
How about you?
Rob: The report draws a pretty clear picture that people unable to adapt to enormous environmental shifts will end up suffering unavoidable loss or flee their homes. Most think that this kind of dislocation on a global scale, will further increase tensions between rich nations and poor nations, which are much more exposed to climate risks than rich countries. The report found that between 2010 and 2020, droughts, floods and storms killed 15 times as many people in countries in Africa, Asia, and elsewhere, compared to the wealthiest countries. These are serious concerns from a climate equity perspective.
Andrew: I also believe the report’s assessment of the North American region validates our efforts to integrate climate risk analysis into our municipal ESG research process. It states that cities in the region are being impacted with increasing severity and frequency by storms or other natural event made worse by climate change. The report also warns about the failure of meeting the 1.5 degrees Celsius goal: key risks to North America will intensify by mid-century.
Rob: You are referring to the Paris Agreement of 2015. At that time, world leaders vowed to limit total global warming to no more than 1.5 degrees Celsius by 2100 compared with preindustrial levels.
Achieving the 1.5 degree-goal would require nations to all but eliminate their greenhouse gas (GHG) emissions from fossil fuels by 2050, but most are far off-track and are not making the necessary progress.
Breckinridge stands behind the Paris Agreement goals and the IPCC assessments. As you said, we integrate climate risks into our ESG analysis of municipal bonds. We also do that for corporate bonds and mortgage backed securities too.
Andrew: Right, climate risk analysis is integrated in through bottom-up research consistent with our environmental, social and governance (ESG) frameworks, and our overall investment process.
These efforts help to keep climate risk front and center in our work with clients who share the concerns.
Rob: Our analytics and ESG client reporting helps document our work. Breckinridge reports according to a framework of the Task Force on Climate-Related Financial Disclosure to our stakeholders on climate issues material to our business.
Andrew: Our issuer engagement efforts also contribute to climate risk mitigation.
(See Breckinridge’s 2021 issuer engagement report Addressing the Materiality of Climate Change Risk through Issuer Engagement here).
Rob: Agreed. Direct engagement with bond issuers can be a two-way street for our analysts. We learn more about subject like the issuers’ emissions reduction strategies; their views on the business risks associated with transitioning to a low- or no-carbon economy; and their considerations of climate equity as they mitigate and manage climate risk.
Andrew: And, in turn, issuers get our investment analysis perspective about the financial risks of climate change that they face. And we share our views on why ESG is valuable to us as an investment consideration.
Rob: The opportunity we get to work independently and collaboratively with industry and investor initiatives and policies also advance the goals of the Paris Agreement. I agree with your point that, in many ways, the work we are doing on climate risk from an investment perspective is meaningful.
Andrew: Another way everyone can reduce the contributions their actions make to climate change is to consider new ways to conduct business.
We strive to mitigate climate-related risks in our business operations through sustainable practices and supply chain and risk management planning.
We are working to improve accounting of Scope 1 & 2 GHG emissions and, to the extent possible, material Scope 3 emissions. These are goals a lot of the bond issuers we analyze are working on, too.
Rob: Climate policy is integrated into our governance practices at the board level. The company’s Benefit Director is responsible for including climate risk and other initiatives on the board’s agenda and facilitating climate-related board actions like resolutions.
(See Breckinridge’s 2021 Corporate Sustainability Report Persistence Towards Progress here.)
Andrew: The IPCC report is clear. The report’s conclusions show that climate change is a material investment risk. It reinforces our belief that we must continue to enhance our ability to measure physical as well as transition risks and seek to investment in climate solutions. There is no time to waste.
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 the data provided by unaffiliated third parties to be reliable but investors should conduct their own independent verification prior to use. Some economic and market conditions contained herein have been obtained from published sources and/or prepared by third parties, and in certain cases have not been updated through the date hereof. All information contained herein is subject to revision. 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.