- It is logical to manage endowment assets through the same sustainability lens as capital assets.
- Qualitative and quantitative assessments of issuers’ net zero approaches may become an integral part of the security selection process.
- A net zero approach also may seek to identify issuers that may benefit during a global transition to a low- or no-carbon economic future.
As colleges and universities announce commitments to carbon neutrality, how should we consider the connection between capital assets and financial assets? Simply put, if managing capital assets, such as building and equipment, through a sustainability lens is considered prudent investing, why wouldn’t managing endowment and foundation (E&F) investment assets be viewed the same way. Assets are assets, and sustainability seems particularly material to endowments managed for the long term.
Higher education E&F transitions to environmental, social and governance (ESG) approaches often started with divestment of fossil fuel investments (See College and University E&Fs incorporate ESG approached in Response to Stakeholders), and many of those decisions were grounded in mission alignment rather than an investment thesis.
On the other hand, there is a clear investment case for setting E&F emissions reduction targets that align with an institution’s broader carbon neutral commitments. Over the long-term, climate risk and how it is priced in securities valuation models will become more meaningful, particularly among the large-emitting sectors. Absolute greenhouse gas (GHG) reduction requirements will likely transform economies and sectors over the longer-term and have credit implications for various sectors and asset classes. Companies and issuers that are unwilling or unable to transition may face difficulties.
What is the net zero trend?
A net zero commitment means transitioning investment portfolios to net-zero GHG emissions over time. That level considers findings of the International Panel on Climate Change (IPCC) consistent with limiting global temperature rise to 1.5°C above pre-industrial temperatures by 2050. Net zero requires establishing intermediate emissions reduction targets every five years in line with Paris Agreement and regular progress reports.
GHG emissions are gases in the atmosphere that absorb and re-emit heat, helping to keep the planet's atmosphere warmer than it otherwise would be. The New York Times reported1 that the IPCC report finds that, “The dangers of climate change are mounting so rapidly that they could soon overwhelm the ability of both nature and humanity to adapt, creating a harrowing future in which floods, fires and famine displace millions, species disappear, and the planet is irreversibly damaged.”
The pursuit of net zero by higher education E&Fs may be a logical parallel to efforts on other fronts. Across Industry sectors, businesses are addressing GHG emissions associated with their own operations and those of suppliers and customers; often in response to regulations or self-imposed ESG commitments. At the same time, the asset management industry launched its own net zero campaign through the Net Zero Asset Management initiative (NZAMi). NZAMi signatories commit to transition investment portfolios to net zero emissions by 2050. Breckinridge Capital Advisors is a NZAMi signatory and has offered a fossil-fuel free investment strategy since 2014.
The trend to net zero among E&Fs is particularly strong. According to a May 6, 2021, Businesswire report,2 a group of 17 leaders from higher education E&Fs, investment consultants, asset managers, and nonprofit partners joined together as a steering committee to guide a new Net Zero Endowments initiative hosted by the Intentional Endowments Network (IEN). Groundbreaking commitments from institutions like Harvard, Stanford, Michigan, and the University of Pennsylvania, led IEN’s initiative.
In October 2021, the Times Higher Education (THE) Climate Impact Forum, reported3 1,050 universities from 68 countries made commitments to reach net-zero emissions by 2050 and transform their impact on nature, including a new initiative on nature-positive universities. The UN’s Race to Zero campaign, the Environmental Association for Universities and Colleges, and Second Nature with support from the UN Environment Programme (UNEP) are supporting the effort.
The why is clear. What about the how?
A net zero approach typically employs frameworks for identifying and assessing the plans of security issuers to pursue pathways to net zero GHG emissions, and monitors progress. Qualitative and quantitative assessments of issuers on this basis and more become an integral part of the security selection process for portfolios following a net zero pathway.
Jane Dietze, chief investment officer of Brown University’s $4.7 billion portfolio told CIO magazine4 in March 2021, “The reality is that, collectively, we need to achieve substantial improvements in measurement and disclosure of a wide array of climate-related data. Companies, managers, institutions all need to demonstrate strides in the production and sharing of uniform data related to climate impact and sharing of uniform data related to climate impact.”
Tom Joy, CIO of the Church Commissioners of England’s $11.87 billion portfolio, told CIO magazine4 that the commissioner’s own analysis revealed, “that it is crucial to have a better line-by-line understanding of climate risks within the portfolio.” He noted that his team increased engagement efforts with issuers to better understand their decarbonization approaches and targets.
In addition to identifying the strongest issuers on a net zero basis and winnowing out those that still have progress to achieve, a net zero approach seeks to identify issuers that may benefit during a global transition to a low- or no-carbon economic future.
Opportunities emerging from efforts to confront and reduce global warming may reveal new investment opportunities. “Climate solution investments have a key role in providing both investment returns and contributing to our climate targets,” Tom Joy told CIO.
 “Time Is Running Out to Avert a Harrowing Future, Climate Panel Warns,” The New York Times, February 28, 2022.
 “Leading Higher-Education Institutional Investors to Guide New Initiative for Net Zero Endowments, Targeting 50 Endowments Over Two Years,” Businesswire, May 6, 2021.
 “Over 1,000 universities and colleges make net-zero pledges as new nature initiative is unveiled,” UN Environmente Programme, October 28, 2021.
 “Endowments Embrace Net-Zero Portfolios: Is It the Future of Investment Management?” CIO Magazine, March 11, 2021.
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.