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ESG Newsletter published on July 1, 2024

Sustainability Frameworks Shaping Breckinridge Credit Research Enhanced, Newly Launched


  • Sustainability frameworks help to shape the work of Breckinridge security analysts.
  • Breckinridge recently implemented a conduit commercial mortgage-backed securities (CMBS) framework and enhanced its state municipal bond framework.
  • Material sustainability metrics are reflected in the frameworks.

Sustainability frameworks help to shape the work of Breckinridge security analysts as they assess the credit worthiness of corporate and municipal bonds. The analyst teams routinely update and enhance existing frameworks and launch new ones as additional data and new methods of factoring data in security analysis are developed.

Two recent examples: the implementation of its conduit commercial mortgage-backed securities (CMBS) framework and the enhancement of the firm’s state municipal bond framework offer the latest instances of this important credit research work. As with all Breckinridge credit research, material sustainability metrics are integrated in security analysis and are reflected in the frameworks.

CMBS Research Framework Launched

According to Bloomberg data, CMBS was among the top-performing segments of the securitized market during the first quarter of 2024, achieving a total return of 0.85 percent, primarily driven by non-agency CMBS. As Breckinridge increased its efforts to uncover and add value to client portfolios in the non-agency CMBS market, the capacity to assess sustainability risks in the sector increased as well.

A CMBS loan—also known as a conduit loan—is a type of commercial mortgage that is pooled with other similar type commercial loans and offered for investment in the secondary market. Conduit CMBS typically include 50 to 60 underlying commercial real estate loans. There can be high levels of diversification among the underlying loans, even within CMBS from the same issuer. Recently, Breckinridge implemented a research framework that supports sustainability risk assessments for underlying loans comprising a conduit CMBS.

Breckinridge’s CMBS research framework takes a climate-focused approach, considering physical climate risks to the properties securing underlying loans such as hurricane, wildfire, and flooding.

The framework’s regional lens employs collateral mapping to geolocate properties. Third-party climate and loan data are integrated into the model. The framework enables analysis of the average total climate exposure, weighted based on the size of each underlying loan, to generate a comprehensive score at the deal level.

Analysts Enhance State Municipal Bond Framework

Breckinridge municipal bond analysts recently updated the state framework to integrate additional, up-to-date, material risk data. The availability of relevant and material information is continuously expanding and no other sector in the municipal bond market has as much scalable and repeatable data as the State sector.

As with our other frameworks, as analysts integrate newly available or expanded data sets into the firm’s frameworks, they work with the technology team to automate data collection and delivery into the firm’s proprietary information technology platform, The Gateway. We believe that the result is enhanced access for the analysts to a more comprehensive, balanced, and streamlined collection of material municipal bond risk data for the 50 states and Washington DC.

Breckinridge’s updated framework enhances the data relevant to climate risks as well as socio-economic vulnerabilities and strengths. With regard to climate, the framework considers carbon transition risk as well as physical climate risks such as hurricanes, flooding, drought, heat, and wildfire risks. The framework also considers environmental, building codes and health regulations relevant to each state. The enhanced framework also places a greater emphasis on governance. The framework is intended to help analysts develop a clearer picture of a state’s policies and statutes surrounding key governance functions such as budgeting and finances as well as elections and economic development. 

Breckinridge’s ongoing work to integrate current sustainability risk data along with qualitative, research-driven metrics, into municipal bond credit research benefits the firm’s portfolio construction process, as well as its capacity to customize portfolios for clients who seek to selectively invest in municipal issuers with above average and/or improving environmental, social, or governance (ESG) profiles.

Specific to the issue of climate, we think about climate risk in two ways: physical and transition. Although municipals and CMBS are exposed to both types of risks, climate risks that are physical in nature are especially applicable when credit fundamentals are directly tied to the stability of a physical location. As a result, our CMBS and state sustainability research frameworks reflect this view through their regional lens.

In summary, the core of our investment process is the in-depth, independent research integrating material sustainability analysis that Breckinridge research teams conduct as we seek to strike a balance between managing risk and pursuing return. The continued enhancement of our research frameworks is a central element of that ongoing effort.


BCAI-06212024-ljqxo16o (6/24/2024)


This material provides general and/or educational information and should not be construed as legal, tax or investment advice. It does not include all of the information necessary to make a decision to invest with Breckinridge. 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.

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. There is no assurance that the customization or the approach will meet their objectives.

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.

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