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ESG Newsletter published on September 18, 2023

Using Muni SMAs to Assist Climate-Vulnerable Communities


  • Breckinridge continues to expand its suite of customization options in response to client demand and is now offering a Tax-Efficient Climate Vulnerability Customization.
  • “Climate Vulnerability” is grounded in the reality that some communities are more vulnerable than others when facing the intersection of heightened climate exposure, weaker fiscal capacity, and outdated infrastructure.
  • The Climate Vulnerability customization offers investors an opportunity to target issuers in areas that exhibit high climate risk and high fiscal need.

For over a decade, Breckinridge has met the needs of sustainable municipal investors by integrating environmental, social and governance (ESG) factors in our investment process and customizing thematic accounts.

Recently, we have enhanced our customization platform to allow for client-driven preferences based on geographic and service area characteristics. Our new Climate Vulnerability customization takes advantage of this approach. It directs capital to jurisdictions that we view as having high climate risk and high fiscal need.

“Climate Vulnerability” as a Concept

We define the concept of “Climate Vulnerability” as the combination of high exposure to climate hazards and high fiscal needs.

Climate hazards pose serious long-term challenges for municipal issuers across the U.S. Based on our analysis of climate risks exposures throughout the U.S. and third-party data, high-climate-risk areas, including some coastal environments and flood zones, are at heightened risk of infrastructure damage, negative social and migration impacts, and higher capital spending needs for recovery and resiliency.1

Generally, climate-exposed communities with high fiscal need come in two forms. First, some communities exhibit lower wealth profiles, which makes them less able to combat the financial burdens of climate hazards.2,3 These communities are more likely to face tax- or rate-base stress to fund climate-related infrastructure repairs or upgrades. Second, other communities are “physically old” — with aging housing stock, roads, bridges, water systems, etc. that are more likely to experience stress from climate impacts.4,5 For example, many locations in the Great Lakes and Northeast must manage combined sewer overflows. These events result from antiquated stormwater infrastructure that was not built for modern-day hydrologic and flood events6. Some communities face both challenges: low wealth and aging infrastructure.

“Climate Vulnerability” is grounded in the reality that some communities are more vulnerable than others when it comes to addressing the impacts of climate change. It recognizes the intersection of climate exposure, fiscal capacity, and infrastructure status.

Our Approach

Our Climate Vulnerability customization uses service-area climate and socioeconomic metrics to classify municipal issuers as “climate-vulnerable” or not. At least 80 percent of the bonds in Climate Vulnerability portfolios meet the following criteria:

  • Exhibit high climate hazard exposure to at least one of five climate hazards: hurricane, flood, wildfire, drought, and heat7.
  • Serve a “high fiscal need” community, as defined by area median income and/or the age of the local housing stock.

All of the metrics used to establish bond eligibility are derived from a third-party data provider. Data is typically updated annually. Climate hazard metrics are updated whenever underlying climate models or data changes (e.g., a region of the U.S. gets significantly hotter). Socioeconomic metrics typically come from the Census.

How does it relate to our Sustainable Tax Efficient Product Line?

ESG integration underpins our flagship sustainable municipal strategy, which allocates capital to municipal issuers with stronger relative sustainability profiles. Customization allows for client driven investment preferences by screening out unappealing financings at the bond series level (like those for prisons) or by overweighting preferred sectors (e.g., hospitals). Breckinridge currently manages approximately $5 billion in its sustainable municipal strategy, and over $300 million in customized portfolios with specific screens or sector-based biases, as of July 31, 2023.

Unlike our sustainable strategy, the Climate Vulnerability customization is agnostic as to an issuer’s ESG characteristics or bond series level information like use-of-proceeds. Rather, it biases client investments to issuers and communities that may need capital to address climate risk. It targets areas with higher climate risk that have either older infrastructure and/or less ability-to-pay than peers. Bond and portfolio characteristics can be reported against a benchmark.

A Breckinridge Impact Strategy?

Our Climate Vulnerability customization is not quite an impact strategy. “Impact” means different things to different investors. The Climate Vulnerability customization does not seek to guarantee that investor capital will materially reduce an issuer’s climate risk exposure. Moreover, data scarcity in the muni market precludes the ability to reliably measure such reductions.

We view the Climate Vulnerability customization’s transparency as an advantage. Capital is allocated to climate-vulnerable communities based on a set of easily understood metrics. Eligible securities are defined by public and third-party data sources. Breckinridge can demonstrate that client capital is being directed to places with more climate risk and more fiscal need relative to a benchmark. Lastly, because use-of-proceeds does not determine inclusion, capital is never allocated to low-climate-risk areas solely because a bond or project is labeled as green or sustainable. Instead, the service-area approach allows investors to allocate capital to climate-vulnerable communities in a data-driven manner.

[1]Last year, the United States experienced 22 weather and climate disasters with losses exceeding $1 billion each, a new record (NOAA National Centers for Environmental Information (NCEI)) U.S. Billion-Dollar Weather and Climate Disasters, 2023, Combined costs reached $95 billion.

[2]Many disadvantaged communities currently bear the brunt of climate-induced health risks from extreme heat, poor air quality, flooding, extreme weather events, and vector borne diseases (USGCRP, 2018. Impacts, Risks, and Adaptation in the United States: Fourth National Climate Assessment, Volume II.

[3]USEPA, 2022. Climate Change Impacts on the Built Environment.

[4]No person or place is entirely immune to climate risks, which aging infrastructure magnifies (Chester et al., 2018. Rethinking Infrastructure in an Era of Unprecedented Weather Events. Issues in Science and Technology 34, no. 2.

[5]ORNL, 2012. Climate Change and Infrastructure, Urban Systems, and Vulnerabilities. Technical Report for the U.S. Department of Energy in Support of the National Climate Assessment.

[6]USEPA, 2004. Report to Congress: Impacts and Control of CSOs and SSOs.

[7] Analysis of climate hazard exposure uses data derived by third-party sources.



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.

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 investmen 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.

Any specific securities mentioned are for illustrative and example only. They do not necessarily represent actual investments in any client portfolio.

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.