Looking Back on the Last Decade

In 2011, with the intention of better understanding corporate and municipal bond risks, Breckinridge developed a formal sustainability modeling framework that integrated fundamental financial measures with environmental, social and governance (ESG) metrics. It is worth recalling the investment environment at the time. The world was only a year or so removed from the Great Financial Crisis, with its so-called black swans and tail risks.

As an investment team, we believed the extraordinary market dislocation was largely the consequence of investors overlooking long-term risks in pursuit of short-term thinking and near-term profits. We saw that integrating ESG analysis with traditional fundamental analysis could offer a more holistic and forward-looking way to identify, analyze, and understand risks.

We launched two investment strategies in 2011 to explore the validity of our ideas about integrating ESG analysis to avoid exposure to underpriced or unpriced risks before they are recognized and reflected in the broader market.

Looking back on the last decade, I am struck by how our exploration of ESG, and broader sustainability concepts, grew beyond our initial intention of enhancing our investment process. Today, ESG concepts also are essential to our daily operations and corporate culture.

Tracing the Roots of ESG Investing

We take pride in being among the early practitioners of the discipline, particularly in fixed income markets. It is now heartening for us to see the growing recognition of the investment case for ESG by investors and managers.

It is fair to say that ESG can be traced to socially responsible investing (SRI), which dates to the colonial era in the U.S. Religious groups refused to invest endowment funds in the slave trade.¹ Similar expressions of investment views through the allocation or withholding of investment capital on issues central to what is called ESG today can be found in the many decades that followed.

“The story of ESG investing began in January 2004,” wrote George Kell in Forbes in 2018.² That is when former UN Secretary General Kofi Annan invited chief executive officers of major financial institutions to participate in an initiative to find ways to integrate ESG into capital markets. In 2006, the United Nations Principles for Responsible Investment (PRI) encouraged investors to consider ESG factors that are material risks and opportunities when making an investment, rather than precluding investments.

Independence Accommodated Our ESG Exploration

ESG analysis continues to evolve with investors’ understanding of material risks. New insights are emerging into the non-financial risks inherent in a security issuer’s response to climate change, natural resources management, or policies and practices around health and safety, or management of its supply chain, its people (human capital management), or diversity, equity, and inclusion.

Many of the largest asset managers in the world today are helping to advance ESG insights. A decade ago, as ESG was developing, ESG was being pursued by a more limited set of investors. At the time, our independent status proved to be an advantage to our efforts.

As ESG initiatives at other organizations competed for development resources, our full embrace of the science and art of ESG meant that we could dedicate the resources—financial and human—to our effort. In addition, our focus on investment grade fixed income allowed us to target our work to a single market segment, while others spread efforts across a wider spectrum.

Contributing to a Growing Field

Over the years, we further developed our ESG approach. We added new municipal bond frameworks, updated our corporate bond sector and industry comparability sheets, and we refined our capacity to identify and analyze emerging issues. We adapted policies, practices, and security ratings to recognize changes in material ESG risks.

We also built and maintain a robust issuer engagement program. In 2020, members of our research teams met with with more than 100 corporate and municipal bond and industry subject matter experts to discuss key ESG issues. (See: Municipal Engagement Yield Municipal Insights and Engaging with the Tech Sector Re: Diversity, Equity and Inclusion). We advocate for best practices in ESG and sustainability reporting.

We collaborate with peers, non-government organizations, academics and thought leaders to contribute what we learn to advance ESG analysis and the interest of sustainability. We share our knowledge and experience through reports and articles, often in cooperation with other thought leaders.

Changing Our Corporate Culture

Integrating ESG in our investment process inspired our work to integrate sustainability across our operations. As we asked bond issuers to share more information about their ESG practices, we decided we should ask ourselves the same questions and hold ourselves to the same standards we sought in bond issuers. This effort transformed our corporate culture.

In 2013, we became a Certified B Corporation and, subsequently, a Massachusetts Benefit Corporation. B Corp certification structures benchmarking of our own ESG performance and challenges our team to fully understand and improve our ESG impacts on all our stakeholders.

We published our inaugural corporate sustainability report (CSR) in 2013. Our 2020 CSR tracks continued progress on our efforts to improve our own operational sustainability and to create positive, long-term impact for our stakeholders including clients, employees, suppliers, and communities.

A decade ago, we began integrating ESG into our investment research process with the intention of knowing bond issuers better. The effort is consistent with our founding mission to provide the highest caliber of investment grade fixed income management, thereby facilitating a sustainable flow of capital from long-term investors to responsible bond issuers. A decade of progress in ESG integration reflects our commitment to that mission and our relentless pursuit to push our investment research forward. As we have continued to enhance our understanding of ESG principles, we have come to know ourselves, our investors, and our key stakeholders better as well.

[1] Caplan, Lauren; Griswold, John; Jarvis, William. From SRI to ESG: The Changing World of Responsible Investing, Commonfund, September 2013.

[2] https://www.forbes.com/sites/georgkell/2018/07/11/the-remarkable-rise-of-esg/?sh=279d376a1695

DISCLAIMER

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 such information is reliable but does not guarantee its accuracy or completeness. 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.