February 28, 2024 • 42 mins
Asset Managers can find it difficult to navigate through all the noise related to the climate transition as the lack of standard data and quality of disclosures affects aspirations of reaching net-zero targets. In this episode of ESG Currents, BI analysts Shaheen Contractor and Chris Ratti are joined by Rob Fernandez and Tim Coffin from Breckinridge Capital Advisors. The two guests provide views into what the asset-management industry is looking at when it comes to the climate shift, with valuable insights into assessing the credibility of net-zero goals and more.
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Episode Transcript
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Speaker 1 (00:09):
ESG has become established as a key business theme as
companies and investors seek to navigate the climate crisis, energy transition,
social mega trends, mauting, regulatory attention, and pressures from other stakeholders.
The rapidly evolving landscape has become innundated with acronyms, buzzwords,
and lingo, and we aim to break these down with
industry experts. Welcome to ESG Currents, brought to you by
(00:32):
Bloomberg Intelligence, your guide to navigating the evolving ESG landscape,
one topic at a time. I'm Chris Rady, senior ESG
credit Analyst.
Speaker 2 (00:42):
And i am Shahin Contractor, senior ESG strategists, and we
are your hosts for today's episode. Today we'll be speaking
with Rob Fernandez, the director of ESG Research at Breckenridge
Capital Advisors, and Tim Coffin, director of Sustainability. We're going
to dig in what the acid management industry is looking
(01:02):
at when it comes to the climate transition net zero
goes and also dig a little deeper into a topic
that I find fascinating but probably the hardest, which is
the physical risk of climate change. Thank you for joining us.
Speaker 3 (01:17):
You're welcome it's a pleasure to be here.
Speaker 4 (01:18):
That's great to be here, thank you.
Speaker 2 (01:20):
So my first question either one if you can take
but as asset managers who are controlling the dollars, can
you give me one climate trend or theme that you
think is tough of mind? And I apologize for the
one because I know there are so many. Either if
you can start to go.
Speaker 4 (01:37):
First run, oh sure, all right, thanks to a key
climate risk, just one, just one, It will be tough.
But a key one that we're paying attention to is
transition risk, especially for companies. So Breckenridge signed on to
the net zero Asset Manager's Pledge a little over two
years ago, and by signing on, we committed to managing
(02:01):
and understanding that transition risks in corporate corporate bond, corporate securities.
We did a lot of work to you know, in
anticipation and preparation of signing onto that pledge, and then
have just done so much work since then, and our
research team has been really a big part of that.
Speaker 2 (02:17):
Interesting.
Speaker 3 (02:20):
So I think my answer to that would be disclosure.
So I think disclosure for investors is an increasingly important theme. Obviously,
there have been great strides in standardizing disclosure and reporting.
But that's something that investors are clearly focused on.
Speaker 1 (02:38):
Okay, so maybe i'll just jump in with and what
kind of tools or what are you using to try
to manage this transition risk and how are you combating
the kind of vagueness of disclosure right now?
Speaker 3 (02:53):
So well, just for a point of clarity, Breckenridge is
a fixed income manager, so we manage bond portfolios and
I think we're we can speak to answer that question
is kind of twofold one on the municipal side, which is,
I think it's fair to say the municipal market is
very much on the front lines of climate change from
a capital market standpoint, and then maybe also on the
corporate side. So Rob, do you want to start since
(03:14):
you've already touched on that zero on the corporate side,
and I can follow up on the municipal side.
Speaker 2 (03:19):
Yeah.
Speaker 4 (03:19):
Absolutely, And you know, so as far as data and tools,
there's just been a proliferation of data sets startup firms
looking at providing ESG and climate data to asset managers
and to other interested parties, and so it's something that
we've been paying attention to quite a good deal. As
(03:42):
far as tools that we're actually using today. There's a
few of them. We have subscribed to an outside data
vendor for emissions information and other related climate related analysis,
such as a term called implied temperature rise projected pathways
for companies, So that's been a really useful tool for us.
(04:05):
Another one that we looked to is the organization Climate
one hundred plus or Climate Action one hundred plusa one
hundred plus global initiative around encouraging companies to take action
on managing transition risk. They have a benchmark that brings
in outside information from firms such as carbon Tracker that
(04:29):
assesses a company's climate transition kind of progress and preparedness,
and that's been a really great tool. It's helpful from
an analytical standpoint and also from an engagement standpoint, which
I know we're going to get into more later. And
one last organization I just wanted to kind of give
a shout out to is Planet Tracker, based in London.
I think they're doing really excellent analysis across a variety
(04:53):
of themes, but one of them is climate transition and
they do really great and in depth analysis on specific
company which that's another really great tool as well.
Speaker 3 (05:03):
So just to speak briefly on the municipal side. I mean,
I don't think it is a giant leap to understand
how climate is so material to the municipal bond market
and to investors and to local governments, but it's you know,
one of the things that has always been both a
challenge and an opportunity in the MEUNI market is how
fragmented it is. You know, there's close to forty thousand issuers,
(05:25):
it's a four trillion dollar market, and so where do
you find kind of disclosure and tools that can help
you navigate physical and adaptation and transition risks across public finance?
And you know, I would say that the important thing
to emphasize is how sector specific it needs to be,
(05:45):
right because heat stress will matter in one community, sea
level rise or drove vulnerability may matter in another community.
And I would just make the point that our credit
analysts who follow these terms would tell you that they
really look at climate as a risk multiplier or risk
accelerator in the UNI market, and that it's not necessarily
(06:07):
an affluent seaside community that's suffering from sea level rise
that becomes a credit concern. That community for the time
being has plenty of access for capital to do the
type of infrastructure improvements they need. It's really communities that
are already showing some sorts of kind of credit vulnerability,
where if you have a singular economy where people can't
(06:29):
work out for several can't work outside for several days
a year because it's too hot, or if companies are
moving away because there's not enough water. Those are the
types of things where our analysts are trying to find outliers,
both on the positive side and the negative side, and
a lot of that is finding communities that are forward
looking and transparent and really building that kind of resilience. So,
(06:51):
you know, I think that's there's a lot you could
unpack there because it is such a fragmented market. But
I also think it's it's also very much a part
of where we will solve a lot of climate issues
because we do finance so much infrastructure at the local level,
and to the point about different communities, climate is local.
Speaker 2 (07:10):
Right when a photo open something you mentioned you said,
you know so many startups with climate data. I personally
think there's information overload. But do you have a case
study or you know example where some kind of useful
data has actually pointed to either a climate risk or
an opportunity for a bond or if not today, what
(07:33):
do you expect this done govern in the future.
Speaker 4 (07:36):
I guess, oh, yeah, that's that's a great question. So
as far as a specific case study, so, like I mentioned,
we are subscribing to a kind of a climate data
package and we using that data, we created what we
call a Corporate Transition Risk Framework, okay, and it's a
(08:00):
model that consists of about ten different indicators that we're
using to measure a company's transition preparedness. And some of
the indicators that we're looking at would be whether the
company has an approved science based target from the Science
Based Targets initiative, are they reporting to CDP or preferably
(08:24):
or in addition, doing a TCFD report. So we're scoring
companies based on these metrics, and so what we're seeing
is that, Oh and then the last piece is that
we have that score, and then the analysts are also
doing kind of qualitative analysis looking at a company's Corporate
Sustainability Reporting TCFD reporting to see, okay, have they set
(08:48):
additional GHG reduction targets, how are they progressing on those targets.
All that comes together into an analysis of a company's
transition alignment, and we're using the IGCC Implementation Guide for
those alignment categories. So the best would be if a
company's achieving net zero and currently there aren't any companies
(09:10):
in our investable universe.
Speaker 2 (09:11):
Who are When you say achieving, you mean today.
Speaker 5 (09:14):
Or today, Okay, today, okay, yeah, so yeah, so that's
really that's really difficult to achieve of you know, using
that term again all the way down to you know,
not aligned.
Speaker 4 (09:25):
And so the companies that we're following are more kind
of in the middle that some are our aligning, meaning
they're on a net zero pathway. So I think that
analysis has been really helpful to really focus in. Okay,
this company, based on our scorecard, based on our analysis
also looking at that C one hundred benchmark, is has
has aligned, so meaning they have set a net zero target,
(09:50):
they have means to achieve it, they have a science
based target set. I mean, there's certainly lots of companies
who have set a net zero target and we're gonna
I know, we're gonna to this later. But then when
you talk to them and they'll say, well, we know
how to get there by twenty thirty, but after that
the technology's not there. We're hoping it comes. We're doing
(10:11):
some investment to get there. But so this net zero
target is more aspirational. So hopefully that provides a little
bit of that detail that you're asking for.
Speaker 5 (10:21):
Sheen and may I.
Speaker 3 (10:23):
Just follow up with a point on the materiality of
that alignment that Rob is talking about. So if you
think about it, I mean, it's really our analysts who
cover the highest emitting sectors, right so energy and utilities
and the basics, because that's where the transition will actually
be most material. And similar to my comments about municipal finance,
we're really looking for outliers, both on the positive and
(10:44):
the negative side. And you can see why you really
would want to lean into those high emitters that are
going to be aligning or aligned or better, particularly as
you approach those interroom target dates. So the investment thesis
there really is that that's where you'll find resilience and
be able to build portfolios that provide kind of the predictable,
(11:05):
reliable cash flows that long term investors, particularly long term
investors such as pension schemes and things like that, are
really relying on their fixed income to provide.
Speaker 2 (11:14):
Okay, thank you.
Speaker 1 (11:16):
I think you hit you know, he kind of hit
it on the head in terms of, you know, the
aspirations to get to a certain level, especially from the
from the corporate side, and I think, you know, net
zero goals are definitely you know, top of mind and
a lot of people's investment thesis when they're when they're
looking at you know, some of these companies. But what
is maybe one over the longer term, do you think
(11:39):
there's other technologies that might be incorporated into you know,
what we're doing for net zero or do you have
any thoughts on future technologies that could be out there,
because as you mentioned it, we're not quite there, but
you know, like you know, kind of some of this
carbon capture is big right now that you know, one
of these top of my top of my mind anyway
where I've read recently about these huge carbon capture projects.
(12:01):
But are there any other technologies that you're considering or
thinking about in terms of a way to meet this
net zero.
Speaker 4 (12:07):
Gol Yeah, that's that's certainly something that we're paying attention to,
is you know, new technologies that might be coming and
it's something that we talk to talk with companies about
too when we engage with them. So, for example, one
sector that we engaged with last year was the utility sector,
and especially utilities that have a business in distribution of
(12:29):
natural gas. And so in terms of Scope three UH,
the natural gas that they're distributing to residential customers or
commercial customers, that's a big source of Scope three emissions,
the emissions from the use of that product. So in
terms of technology that these utilities are considering, which is
really interesting, is blending hydrogen, maybe hydrogen that's been produced,
(12:55):
you know, so called blue hydrogen, which is produced using
natural gas with the emission from the natural gas that's
captured and stored, or green hydrogen that's produced using renewable energy.
A lot of utilities are testing how to blend hydrogen
with natural gas because hydrogen being you know, a zero
(13:16):
carbon source of energy, with natural gas that is carbon intensive,
maybe they can reduce the emissions from from that natural
gas being delivered to resident denttrial customers by mixing and hydrogen.
But there's a lot of concerns about that. There's a
lot of UH. There's a lot of utilities or number
(13:36):
of utilities are doing pilots to see. Okay, you know,
how does you know can we blend hydrogen up to
you know, five percent, ten percent, twenty percent with natural
gas and safely deliver it to customers because it can
be combustible, and you know, how is it going to
how will it? You know, how will the homeowner's oven
that base uses natural gas? How will that deal with hydrogen?
(13:58):
So that's a really interesting kind of test case or
technology that we're paying attention to, is the use of hydrogen.
Speaker 3 (14:05):
Can I ask Rob a follow up question? So how
you and your previous answer you talked about you know,
how our analysts are looking at the alignment of companies
towards the pathway to Paris or net zero. Can you
talk a little bit about how the solutions that you
just described would fit in to that assessment of alignment
from perhaps a qualitative standpoint. Oh and you touched on engagement.
(14:28):
Does that a helpful follow up question?
Speaker 4 (14:30):
That's a good point.
Speaker 1 (14:31):
That's good to go here?
Speaker 4 (14:36):
This is too tough. Can you make it a little
easier so I get you know, part of what we're
looking at is a company's progress and reducing its scope one,
two and three emissions scope three in a lot of
cases can be the overwhelming majority of a company's emissions footprint.
So if a company, if utility is making really good
(14:57):
progress and you know, innovating and finding safe ways to
blend hydrogen with natural gas, their scope three emissions are
going to fall and maybe a lot, and so an
analyst is going to be paying attention to that and
will document, Okay, this is really great, this is going
to This says a lot about about that utilities emissions trajectory.
(15:18):
You know, maybe that utility has set a net zero
goal and this is going to show that. Okay, yeah,
there's real a meaningful way that they can achieve it.
So I think it helps support the analyst's you know alignment,
right kind of alignments.
Speaker 3 (15:31):
It makes the point about qualitative assessment. And again, we're
bond investors, so what we're really doing is trying to
raise our site lines on the horizon and try and
understand those factors that are going to be material, particularly
beyond kind of maybe the next business cycle or credit cycle,
because that's what our clients are hiring us to do, right,
to build portfolios that they can match liabilities where or
(15:51):
rely on for cash flows.
Speaker 4 (15:53):
And you might if I mention one other technology that
we're trying to pay attention to as well. Just to
elaborate briefly, you had mentioned carbon capture, sure, you know,
related to that as carbon removal. Carbon dioxide removal certainly
has been growing and there's been a lot of attention
being paid to that that sector, but it's something that
we're also thinking a lot about. You know, a company
(16:16):
like Microsoft, for example, has a really detailed carbon dioxide
removal strategy where they're investing in early stage companies such
as director capture and other approaches to removing carbon dioxide.
But we think in the coming years that's going to
become increasingly popular and an important way for companies to
(16:36):
manage their emissions footprint. You know, Decarbonization is the number
one priority they have to roll out. These companies have
to roll out solar wind find ways to reduce their emissions,
but there's going to be hard to abate areas where
it's going to be very challenging, and so we're looking
to see how companies are going to invest in the
carbon dioxide removal industry.
Speaker 2 (16:58):
Interesting to get back to, you know, the nets you
mentioned alignment, You mentioned a lot of these goals are aspirational.
How does one analyze preparedness? Gobbon ambition is I think
an easier piece of that puzzle. You just you know,
you focus their emissions out, but how do you actually
(17:19):
dig into preparedness whether they're going to meet those goals
or not? Any any tipsod tricks? You know.
Speaker 4 (17:25):
We think when we think of preparedness, we are looking
at like I guess I mentioned already are Corporate Climate
Transition Risk Framework, and we're looking at a number of
data points, the quality of the targets that have been set.
Speaker 2 (17:40):
The quality like can you describe, give.
Speaker 4 (17:42):
Me examples, Oh, yeah, you know, has has the company
just set a net zero target? So there, you know,
are they going to be net zero by twenty fifteen?
Maybe that's all they said? Oh so like an interim Yeah,
what is there an interim target? Has an interim target
been approved by the Science Based Targets Initiative for example?
(18:03):
We feel like that's like a good housekeeping seal of
approval for their target. And then we're really paying attention
to capital spending, capital expenditures related to the transition. You know,
if a company has pledged to reduce emissions, but then
they're not investing much to get there, then you know
(18:24):
that would be concerning from a preparedness standpoint. So I
guess it's just trying to cut through, you know, maybe
some stated aspirations and stated goals to see if is
there really substance behind it.
Speaker 3 (18:36):
Rob touched on IGCC earlier in the conversation, and I
think they really break it into kind of channels of
what kind of exposure, what sort of track record do
they have, what kind of targets are they setting, and
then what sort of governance is in place? So those
are kind of the high level categories, and then Robs
kind of discussing the kind of the more granular quantitative elements.
(18:58):
And then you add the qualitative ass which is where
you're really trying to make that quality assessment but also
looking at investments and opportunity and cap backs and things
like that.
Speaker 2 (19:08):
And when you say governance in place, do you mean
who's overseeing that something?
Speaker 3 (19:15):
Yes, I mean you know who's is there. I mean,
I'll let Rob details if necessary, but you know, is
executive compensation tied to these these goals?
Speaker 2 (19:25):
Right?
Speaker 3 (19:25):
Is there somebody on the board who is taking ownership
and responsibility? This from a stewardship standpoint, would you add anything.
Speaker 4 (19:32):
Yeah, that's a great example about the board. That's something
that the Climate Action one hundred benchmark calls out as
one of their criteria. Excuse me, has a particular board
member been designated as the climate expert?
Speaker 2 (19:45):
You know?
Speaker 4 (19:45):
So we're looking for that. Some companies will say that,
you know, the whole board is experienced in climate, but
you know that's maybe questionable, so to Tim's point that
we're looking for that as well.
Speaker 1 (19:56):
Right, And then Tim kind of touched on, you know,
some of the municipal work that you know, you guys
have engaged in. But how about a similar question there,
how do you know, think about governance when it comes
to municipalities and their preparedness for some of these future
climate or THEIRS transition events.
Speaker 3 (20:11):
Well, go right back to disclosure, I guess, right. So
that's one aspect that you could look at. But I
know our team also has a number of, you know,
factors that they will look at in terms of what
sort of sustainability plans do communities have. So remember there's
a lot of different types of issuers, so it's going
to be so specific, right, So I mean airports and hospitals,
(20:32):
which kind of are on the balancing, you know, between
corporate finance and municipal finance, but they're big, huge municipal
bond issuers, and so what's a lot of the attributes
that Rob might be talking about in the corporate bond
market may be very material there for healthcare for a
hospital system, and I think for local communities you just
have to look at from them, you know, you have
(20:53):
to look so locally, and obviously quantitative data is going
to play an important role there as well, but just
have forward looking assessments, transparency, sustainability officers, sustainability plans, all
of those factors can help really give the analyst a
sense to understand the character of the town management and
how forward looking they are.
Speaker 1 (21:14):
And if you had situations where you've actively been like
this isn't going to cut it, and you've addressed it
with some of these.
Speaker 3 (21:22):
You know, I think it's important to understand that we're
looking at materiality of any kind of ESG factors, sustainability issues,
sustainable business practices, and for the most part that just
largely informs our overall credit assessment. So there's no binary
by cell type of scenario that I know of you know,
we follow over three thousand, close to thirty five hundred
(21:44):
municipal credits. But I'm sure an analyst would probably say
that a lack of disclosure, or a lack of plans,
or maybe just drought vulnerability at no fault of their own,
may have informed a credit decision to be instead of
maybe an A plus a single A, or instead of
a single A A minus. But I don't have a
specific example besides that, just kind of the scenario that
(22:05):
I can share with you. Do you have anything you.
Speaker 4 (22:07):
Would add, Yeah, that's certainly happened exactly what you're saying,
Or we may we have passed on a new municipal
bond deal a transaction because the analysts determine that the
climate risk and the lack of preparedness kind of outweighs
all other credit, you know, investment attributes.
Speaker 3 (22:27):
I mean one of the most I mean, just the
obvious factor about municipalities is they can't move right. So
if they have a heat issue, they've got to come
up with long term solutions, whether it's you know, trying
to create a tree canopy in their downtown areas or
heat you know, address heat islands within historically kind of
underserved communities within their districts and factors like that. So
(22:49):
it's just a it's not that it's more complicated, but
it's a lot different than kind of the way we
approach transition risk and corporate in the corporate bond market.
But incredibly, you know, certainly material from a credit assessment standpoint.
Speaker 2 (23:05):
I want to get into physical risk, and I know
that's at least for me, that's a challenging topic. But
maybe we'll start with corporate. So, Rob, how do you
evaluate physical risks when it comes to climate change? And
you know, my next question is going to be can
you give you an example of for financial impact?
Speaker 4 (23:26):
So in terms of physical risk, it is something that
we consider for companies in our investable universe, but we
don't view it as the key, you know, going back
to that initial theme. For US, it's uh, it's transition
and it kind of speaks to where we invest on
a corporate side. We generally invest in medium to large
capitalization companies in the United States, you know, essentially the
(23:49):
S and P five hundred, but we will invest in
US dollar denominated bond issuance from non US based companies,
but generally.
Speaker 2 (23:56):
Physical risk you think like diversified.
Speaker 4 (23:59):
It's more diverse. Yeah, that Jen. These companies are big operations,
lots of facilities. They're sourcing you know, from suppliers that
in many geographies, many locations, and if they're having troubles
sourcing from one spot, generally they can source from you know,
the same what they need from a different supplier. So
that physical risk, yeah, to your point, is generally diversified.
(24:23):
But we do pay attention, you know, just in terms
of one kind of case study. We do pay attention
to it in our engagement when it when you know,
may be kind of material for a specific sector. So
we talked to a number of rates real estate investment
trusts last year based in the US. You know, maybe
they manage and own commercial property or apartments. So we
(24:46):
are talking to them about how they're thinking about physical risk,
and we did that last year. So by and large,
across our amessable universe, it's not a priority, but we
will dive in in certain sectors. And so one particular
rate that we talked to did a whole physic coal
risk analysis across all their properties. They own, big apartment complexes,
(25:06):
develop and own across the US, and you know, they
highlighted how some of these properties were at risk, but
they felt like generally it was well maintained, so that
that was certainly a positive.
Speaker 2 (25:17):
And is that analysis common or it's far and in
between where a company is doing.
Speaker 4 (25:22):
This, Oh, it's far and in between. There would certainly
be a leader others I think they're just getting started,
but realize that it's an issue.
Speaker 1 (25:31):
And there are are there in your research certain sectors
that you inherently just aren't that interested in because of
their lack of maybe a transition plan. Or are there
certain sectors that you're really leading towards because of how
well they're you know, what's kind of the thought process there?
Do you have certain sectors that you're really just not
(25:51):
worried about as much?
Speaker 5 (25:52):
Oh?
Speaker 4 (25:53):
Yeah, I mean, like Tim mentioned earlier, you know, in
certain corporate sectors are much more exposed to that transition risk,
you know, than others such as energy utilities, like I mentioned,
autos chemicals, basics. You know, generally, from a firm's philosophical standpoint,
our investment philosophy has been that we have never looked
(26:14):
to divest or avoid any particular sector. You know, we
manage approximately ten billion in sustainable bond strategies and we've
never we have it hasn't been our focus to avoid
any particular sector for maybe more elevated ESG risk. You know,
we will we will manage that and something the analysts
(26:35):
are focused on. If a client wants to screen out
a particular company or sector, we can do that and
we've done that on a number of occasions and Tim
can speak to that better than me. But in terms of,
you know, specific sectors that we're overweighthing or watching for
transition risk. It was interesting in the in the energy sector,
(26:59):
the integrate the ones that the large oil and gas
companies that you know do exploit exploration, production, marketing. They
have gas stations. We're seeing that they're doing more investing
for the future, you know, investing in ev charging stations
for example, solar, wind, hydrogen, biofuels, more of that's going on.
(27:24):
Certainly they need to be doing a lot more, you know, personally,
the you can't compare the integrateds to just the exploration
and production companies, you know, bigger ones like in the US,
and that we see them as really falling behind. You know,
they're they're not looking to it to invest in other
potential future technologies.
Speaker 2 (27:46):
And I don't know if you have any comments on
the physical rece aspect, maybe.
Speaker 3 (27:51):
For mutis well in either case in municipals or corporates.
I mean, I can't underscore the notion of materiality enough, right,
I mean, it's really the foundation for everything we're talking
about here. Again, we're really trying to improve risk adjuster
returns over the medium to long term. I think on
the municipal side, you know, it just becomes again. And
(28:17):
going back to my opening comments was that the UNI
market really is very much on the front lines, but
also that notion of climate really being a risk accelerator.
But it's going to be so local, right, and so
sect or specific.
Speaker 2 (28:30):
Right.
Speaker 3 (28:30):
What is material to a water and sewer authority is
going to be very different than what's material to a
school district or a library district. But it doesn't take
a lot of reach to kind of unpack how those
can be affected both by the nature of the sector,
like where their source of revenue comes from. Is it
property taxes, right? And what's happening to the value of
(28:51):
property taxes if you can't get insurance for those properties, right?
Or is it a rate payer base, you know, and
what is the what happens if there's not enough water
for a water authority and they're just running around drilling
drilling wells like whack a mole. Right, that's just not
a sustainable model, right. And public transportation, you know what
(29:12):
if you start running into situations where rapid transit or
light rail is running into physical damages to the point
where people can't use it, and so, I mean it
just takes a logical approach to kind of going down
how all of those revenue sources can be interrupted. But
when you think about like the breadth of the MUNI market,
(29:32):
so much of it is local general obligation bonds which
are backed by property taxes for things like schools and libraries,
things that don't have their own source of revenue. And
you know what is that a lot of these projects
are financed over twenty or thirty years, right, and yet
the properties are carrying you know, property and casualty insurance
(29:54):
that renews every year. So what are the long term
implications to those types of property values? And I think
that's what our an US are trying to stay ahead of. Right,
the MUNI market is inherently a very safe market. As
you know, you know, multiple multi notched downgrades are incredibly rare.
You know, there's and you really do have an ability
both from a willingness and ability to pay, to see
(30:16):
far out into the future. But this climate is material
in some sectors and in some regions more than others.
But it would be we would be tying one hand
behind our analysts back if they weren't able to do
this type of work. They really need to be able
to look out beyond further on the horizon.
Speaker 1 (30:35):
Okay, And I mean you mentioned the MEUNI market again
with the general obligations, but what about with actual labeled
green social sustainability bonds. Have you done a lot with those?
And do you give those a higher weight in the
portfolio if it's an actual labeled bond then just a
general you know, a conventional bond from the same company,
or do you do anything along those lines.
Speaker 4 (30:57):
Do you want to start, tim and then I'll touch
and a little bit.
Speaker 3 (31:00):
I'll just say briefly, we certainly have clients who love
to see green bonds in.
Speaker 1 (31:05):
Their portfolios, and the municipal market in.
Speaker 3 (31:09):
The UNI market as well. In fact, I'm pretty sure
Massachusetts issued the first green bond in the MUNI market,
so it's over ten years hometown plug there for Massachusetts.
But I would say, you know, I'm not an analyst,
so I get a little nervous speaking on behalf of
our analysts. But I suspect that our analysts would rather
see robust climate disclosure in an offering document than a
(31:33):
green bond label on the front of that offering document,
because that's really what matters, and I think that's what
should matter to investors too, including those investors who'd like
to see green bonds. That's what I would say.
Speaker 4 (31:44):
In the I think that's true, definitely true for our
corporate analysts. They want to see that really strong disclosure.
But it's certainly a market that we've been paying attention
to for a long time. We invested in as a
company and as in the first green bond in twenty thirteen,
it was the International Finance Corp issued a billion dollar
(32:06):
green bond over ten years ago. And so we will
allocate green social sustainability bond, sustainability link bonds to our
sustainable portfolios because like ten men mentioned, clients love to
see them there. They're great from a so called ESG
storytelling standpoint, you know, you can get some information from
(32:26):
the impact report, assuming companies have published those, and generally
they do if they're adhering to the EKMA Green Social
Sustainability principles.
Speaker 1 (32:39):
Right, Yeah, because sometimes just the disclosure is better if
they have that label. Yeah, they're putting out that allocation report,
that impact report. You just get a little bit more
disclosure on what the actual impact of that those proceeds were.
Speaker 4 (32:51):
Yeah, and clients like it. We like it as well,
that transparency. And it's also a form of climate solutions
potentially too that would fit within the net zero strategy
as long as that bond is financing you know, clean
renewable energy. I think that could be a real opportunity
as well.
Speaker 2 (33:07):
And maybe to touch on engagement with companies, So Robbie
mentioned you engage on physical risk to some extent, maybe
probably transition risk. I guess what is the reaction you
get from companies Do they want to talk to do
they want nothing to do with you? And maybe what
(33:27):
is a measure of success in an engagement.
Speaker 4 (33:31):
That Yeah, that's a really good question. So we've been
engaging with companies and municipalities for a number of years now,
and how we determine the themes or the topics that
we want to talk to companies about, or cities and municipalities.
It's a kind of a discussion with the analysts, the
(33:52):
coverage analysts. So if there's a particular theme that they
feel like it's really important to talk to, you know,
companies in their sector about, then that's something that we
would it will pursue, will dive into, and our number
one objective when engaging and having these conversations is to
supplement our ESG research where generally our focus is not
(34:15):
on pushing for corporate behavior change. It's really about having
kind of meaningful, in depth, depth discussions with company management
teams or municipal issuers about their ESG practices and sustainability
initiatives and how they're looking to embed sustainability into their
(34:35):
corporate operating strategy as an example. But to your question,
one area where we have been involved in pushing for
action is in the CA one hundred. Breckenridge has been
co lead investors on three US companies in the C
one hundred list. So that means that's three companies out
of the one hundred and sixty six lists that are
(34:56):
you know, the largest one hundred and sixty six corporate
meters greenhouse gases globally. So they're big companies, big emitters,
and you know, so we're looking for them to make
progress in the three objectives within the C one hundred
around climate governance, emissions reduction, and reporting. And so to
(35:17):
your question, an area where we've seen some progress in
one of those companies is there's one that was kind
of dragging its feet in terms of measuring and disclosing
their Scope three emissions. They finally did this year, which
was which was really great and we applaud there's a
lot more progress. This company needs to make a lot
more progress, but we were certainly excited to see that,
(35:38):
and just by publishing that information, it really shed light
on their emissions profile. Like I mentioned earlier, and as
I'm sure listeners are well aware that Scope three emissions
can be like a big, big part of a company's
emissions profile, and it was very clear that when they
when the company published this report, it turns out it's
(35:59):
ninety five percent their emissions or from the use of
their products, and that wasn't clear before, so it really
helps from a transparency standpoint. So that was we felt
was a good win and companies happy to do no
not always.
Speaker 3 (36:13):
Does that put you in a different position as a
bond investor with companies like does that change the tenor.
Speaker 4 (36:17):
Oh yeah, versus an equity holder who can file a
shareholder proposal if they want to. You know, I haven't
necessarily seen any real difference. I think buy and large
companies are willing and open to speaking to bondholders because
we're another important stakeholder, right, just like equity holders or
anyone else. So we overall we feel that the conversations
(36:38):
are very productive.
Speaker 1 (36:40):
I think, you know, for us, a lot of the
conversations we have sometimes with clients is just about educating
them on as we've gone through, you know, all the
different data sets, all the different things that are going on.
But you know, there has been some pushback. I wonder
if you guys get some of the same pushback, and
maybe how do you overcome it or address it with
(37:02):
some of the people that you know you're trying to
educate them on what you're doing.
Speaker 3 (37:06):
You're talking about the ESG backlash as it's kind of
been coined that way. So I would say a few
things I think the I think as an industry perhaps
we walked into a little bit of that criticism. I mean,
so many products kind of got rushed out so quickly
that there were a lot of there's a lot of dispersion,
(37:26):
I guess to use an investment term between kind of
definitions of what sustainability and responsible investing and in ESG
investing means. But I would take a step back, and
you know, one thing that I think is important to
understand is that in the rest of the world, in
the UK and Europe and Asia, I mean, the sustainable
investing has really been driven by the kind of the
(37:47):
fiduciary responsibility, right, and that these are pension schemes and
sovereign wealth funds who really are trying to do as
much rigorous due diligence on making sure that they're properly
building kind of lia about liability matching tools that will
serve the beneficiaries over the long term. And so obviously
integrating sustainability, whether it's climate or even some social factors
(38:10):
into research is all about kind of fiduciary and here
in the States, I think I'm speaking obviously and kind
of sweeping generalizations here, but I think a lot of
the kind of the ESG movement and sustainability movement has
been driven by mission driven investors. So certainly faith based
organizations like ICCR, who has been doing this long before anybody,
(38:30):
you know, going back to the nineteen seventies, but foundations
and endowments they really looked at ESG almost through a
mission alignment standpoint, and I expect that will certainly continue.
But I also believe that the fiduciary lens is going
to become more and more prevalent. If you're sitting on
(38:50):
an investment committee for an endowment or a pension fund,
and this is exactly the type of topic you're supposed
to be thinking about, right Like you have managers and
consultants and advisors who are helping you kind of allocate
assets and things like that, and so you really, from
a government standpoint, are the are the stakeholder who is
(39:11):
supposed to be taking the higher level longer tooking, longer
term looking view. And I think that actually is getting
some traction specific to the backlash quote unquote over the
last year. I think it has been effective in terms
of kind of hushing some of the narrative, but I
don't think it's actually have any sub having any substantive
(39:32):
impact on where capital is going or will go. Capital
doesn't change like that. People may stop talking about it,
but capital is going to go where capital thinks it
should be and where it's going to be safest and
where it's going to get those best risk adjusted returns,
regardless of kind of the banter at the political.
Speaker 4 (39:49):
Level, I guess I would echo what Tim said as
far as I would. I think the industry brought this
a little bit on ourselves because of all the differ
different terminology that was used to market different ESG funds,
sustainable funds and what does it mean in the end
if this fund is ESG and this one sustainable and
(40:10):
so being able to really describe it well is important,
and I think that has been a challenge for the industry.
But there's certainly initiatives that are in place to try
to improve that, like the SEC with their fund manager
Disclosure kind of guidance, which I'm not sure when that
will be officially published, and then the CFA Institute, the
(40:32):
ESG Technical Working Group has their own guidance that they
put out to help asset managers describe their ESG process
and communicate that externally. So overall, we feel like this
is probably unfortunate but maybe important scrutiny.
Speaker 2 (40:47):
You mean that the sort of the bedrock has been
laid regardless of some of this, I guess noise.
Speaker 4 (40:55):
Yeah, I think so. Yeah, certainly, And you have all
these managers, including ourselves, whoill build up you know, exg
ESG expertise and knowledge that that's not going anything for
many years. Yeah, for many years.
Speaker 2 (41:06):
Yeah. I don't have any other questions, Chris, any butting
thoughts or questions.
Speaker 1 (41:11):
No. I thought that was a great discussion a lot
of the risks that we're seeing and and some of
the ways to address them. So thanks guys.
Speaker 3 (41:19):
First of all, it's a great podcast. You know, we
really appreciate the content that you guys have been producing,
and we're certainly flattered to be included in the discussion.
So thank you for including Breckrage.
Speaker 2 (41:27):
Yeah.
Speaker 4 (41:27):
I echo what Tim said. You know, it's a podcast
that I listened to on the weekends while watching the
Walking the Dog around the neighborhood. So it's uh, it's
great to listen to and really appreciate being here.
Speaker 2 (41:38):
Thank you, and maybe some botting thoughts on you know,
is there anything you think we missed any gaps that
you know, we think we should have addressed. There's just
research analysts. This is just food for thought for us.
Speaker 4 (41:51):
Well, one I was wondering about was just the charm.
Well maybe the net zero pledge.
Speaker 2 (41:56):
Okay, yep, I think the must will do interesting questions
that are we missed, right.
Speaker 4 (42:01):
I know that was good? This is great? Yeah, this
is this is awesome.
Speaker 2 (42:06):
Yeah okay, well maybe to sum it up, you can
find more information on climate investments, net zero and a
hola ray of other topics by going to b I
E s G on the Bloomberg Terminal, which opens up
Bloomberg Intelligence, our research dashboard. If you have an E.
S G quandary or a burning question you'd like to
ask BI experts, please send us an email at ESG
(42:28):
Currents at Bloomberg dot net. Thank you everyone,
ESG has become established as a key business theme as
companies and investors seek to navigate the climate crisis, energy transition,
social mega trends, mauting, regulatory attention, and pressures from other stakeholders.
The rapidly evolving landscape has become innundated with acronyms, buzzwords,
and lingo, and we aim to break these down with
industry experts. Welcome to ESG Currents, brought to you by
(00:32):
Bloomberg Intelligence, your guide to navigating the evolving ESG landscape,
one topic at a time. I'm Chris Rady, senior ESG
credit Analyst.
Speaker 2 (00:42):
And i am Shahin Contractor, senior ESG strategists, and we
are your hosts for today's episode. Today we'll be speaking
with Rob Fernandez, the director of ESG Research at Breckenridge
Capital Advisors, and Tim Coffin, director of Sustainability. We're going
to dig in what the acid management industry is looking
(01:02):
at when it comes to the climate transition net zero
goes and also dig a little deeper into a topic
that I find fascinating but probably the hardest, which is
the physical risk of climate change. Thank you for joining us.
Speaker 3 (01:17):
You're welcome it's a pleasure to be here.
Speaker 4 (01:18):
That's great to be here, thank you.
Speaker 2 (01:20):
So my first question either one if you can take
but as asset managers who are controlling the dollars, can
you give me one climate trend or theme that you
think is tough of mind? And I apologize for the
one because I know there are so many. Either if
you can start to go.
Speaker 4 (01:37):
First run, oh sure, all right, thanks to a key
climate risk, just one, just one, It will be tough.
But a key one that we're paying attention to is
transition risk, especially for companies. So Breckenridge signed on to
the net zero Asset Manager's Pledge a little over two
years ago, and by signing on, we committed to managing
(02:01):
and understanding that transition risks in corporate corporate bond, corporate securities.
We did a lot of work to you know, in
anticipation and preparation of signing onto that pledge, and then
have just done so much work since then, and our
research team has been really a big part of that.
Speaker 2 (02:17):
Interesting.
Speaker 3 (02:20):
So I think my answer to that would be disclosure.
So I think disclosure for investors is an increasingly important theme. Obviously,
there have been great strides in standardizing disclosure and reporting.
But that's something that investors are clearly focused on.
Speaker 1 (02:38):
Okay, so maybe i'll just jump in with and what
kind of tools or what are you using to try
to manage this transition risk and how are you combating
the kind of vagueness of disclosure right now?
Speaker 3 (02:53):
So well, just for a point of clarity, Breckenridge is
a fixed income manager, so we manage bond portfolios and
I think we're we can speak to answer that question
is kind of twofold one on the municipal side, which is,
I think it's fair to say the municipal market is
very much on the front lines of climate change from
a capital market standpoint, and then maybe also on the
corporate side. So Rob, do you want to start since
(03:14):
you've already touched on that zero on the corporate side,
and I can follow up on the municipal side.
Speaker 2 (03:19):
Yeah.
Speaker 4 (03:19):
Absolutely, And you know, so as far as data and tools,
there's just been a proliferation of data sets startup firms
looking at providing ESG and climate data to asset managers
and to other interested parties, and so it's something that
we've been paying attention to quite a good deal. As
(03:42):
far as tools that we're actually using today. There's a
few of them. We have subscribed to an outside data
vendor for emissions information and other related climate related analysis,
such as a term called implied temperature rise projected pathways
for companies, So that's been a really useful tool for us.
(04:05):
Another one that we looked to is the organization Climate
one hundred plus or Climate Action one hundred plusa one
hundred plus global initiative around encouraging companies to take action
on managing transition risk. They have a benchmark that brings
in outside information from firms such as carbon Tracker that
(04:29):
assesses a company's climate transition kind of progress and preparedness,
and that's been a really great tool. It's helpful from
an analytical standpoint and also from an engagement standpoint, which
I know we're going to get into more later. And
one last organization I just wanted to kind of give
a shout out to is Planet Tracker, based in London.
I think they're doing really excellent analysis across a variety
(04:53):
of themes, but one of them is climate transition and
they do really great and in depth analysis on specific
company which that's another really great tool as well.
Speaker 3 (05:03):
So just to speak briefly on the municipal side. I mean,
I don't think it is a giant leap to understand
how climate is so material to the municipal bond market
and to investors and to local governments, but it's you know,
one of the things that has always been both a
challenge and an opportunity in the MEUNI market is how
fragmented it is. You know, there's close to forty thousand issuers,
(05:25):
it's a four trillion dollar market, and so where do
you find kind of disclosure and tools that can help
you navigate physical and adaptation and transition risks across public finance?
And you know, I would say that the important thing
to emphasize is how sector specific it needs to be,
(05:45):
right because heat stress will matter in one community, sea
level rise or drove vulnerability may matter in another community.
And I would just make the point that our credit
analysts who follow these terms would tell you that they
really look at climate as a risk multiplier or risk
accelerator in the UNI market, and that it's not necessarily
(06:07):
an affluent seaside community that's suffering from sea level rise
that becomes a credit concern. That community for the time
being has plenty of access for capital to do the
type of infrastructure improvements they need. It's really communities that
are already showing some sorts of kind of credit vulnerability,
where if you have a singular economy where people can't
(06:29):
work out for several can't work outside for several days
a year because it's too hot, or if companies are
moving away because there's not enough water. Those are the
types of things where our analysts are trying to find outliers,
both on the positive side and the negative side, and
a lot of that is finding communities that are forward
looking and transparent and really building that kind of resilience. So,
(06:51):
you know, I think that's there's a lot you could
unpack there because it is such a fragmented market. But
I also think it's it's also very much a part
of where we will solve a lot of climate issues
because we do finance so much infrastructure at the local level,
and to the point about different communities, climate is local.
Speaker 2 (07:10):
Right when a photo open something you mentioned you said,
you know so many startups with climate data. I personally
think there's information overload. But do you have a case
study or you know example where some kind of useful
data has actually pointed to either a climate risk or
an opportunity for a bond or if not today, what
(07:33):
do you expect this done govern in the future.
Speaker 4 (07:36):
I guess, oh, yeah, that's that's a great question. So
as far as a specific case study, so, like I mentioned,
we are subscribing to a kind of a climate data
package and we using that data, we created what we
call a Corporate Transition Risk Framework, okay, and it's a
(08:00):
model that consists of about ten different indicators that we're
using to measure a company's transition preparedness. And some of
the indicators that we're looking at would be whether the
company has an approved science based target from the Science
Based Targets initiative, are they reporting to CDP or preferably
(08:24):
or in addition, doing a TCFD report. So we're scoring
companies based on these metrics, and so what we're seeing
is that, Oh and then the last piece is that
we have that score, and then the analysts are also
doing kind of qualitative analysis looking at a company's Corporate
Sustainability Reporting TCFD reporting to see, okay, have they set
(08:48):
additional GHG reduction targets, how are they progressing on those targets.
All that comes together into an analysis of a company's
transition alignment, and we're using the IGCC Implementation Guide for
those alignment categories. So the best would be if a
company's achieving net zero and currently there aren't any companies
(09:10):
in our investable universe.
Speaker 2 (09:11):
Who are When you say achieving, you mean today.
Speaker 5 (09:14):
Or today, Okay, today, okay, yeah, so yeah, so that's
really that's really difficult to achieve of you know, using
that term again all the way down to you know,
not aligned.
Speaker 4 (09:25):
And so the companies that we're following are more kind
of in the middle that some are our aligning, meaning
they're on a net zero pathway. So I think that
analysis has been really helpful to really focus in. Okay,
this company, based on our scorecard, based on our analysis
also looking at that C one hundred benchmark, is has
has aligned, so meaning they have set a net zero target,
(09:50):
they have means to achieve it, they have a science
based target set. I mean, there's certainly lots of companies
who have set a net zero target and we're gonna
I know, we're gonna to this later. But then when
you talk to them and they'll say, well, we know
how to get there by twenty thirty, but after that
the technology's not there. We're hoping it comes. We're doing
(10:11):
some investment to get there. But so this net zero
target is more aspirational. So hopefully that provides a little
bit of that detail that you're asking for.
Speaker 5 (10:21):
Sheen and may I.
Speaker 3 (10:23):
Just follow up with a point on the materiality of
that alignment that Rob is talking about. So if you
think about it, I mean, it's really our analysts who
cover the highest emitting sectors, right so energy and utilities
and the basics, because that's where the transition will actually
be most material. And similar to my comments about municipal finance,
we're really looking for outliers, both on the positive and
(10:44):
the negative side. And you can see why you really
would want to lean into those high emitters that are
going to be aligning or aligned or better, particularly as
you approach those interroom target dates. So the investment thesis
there really is that that's where you'll find resilience and
be able to build portfolios that provide kind of the predictable,
(11:05):
reliable cash flows that long term investors, particularly long term
investors such as pension schemes and things like that, are
really relying on their fixed income to provide.
Speaker 2 (11:14):
Okay, thank you.
Speaker 1 (11:16):
I think you hit you know, he kind of hit
it on the head in terms of, you know, the
aspirations to get to a certain level, especially from the
from the corporate side, and I think, you know, net
zero goals are definitely you know, top of mind and
a lot of people's investment thesis when they're when they're
looking at you know, some of these companies. But what
is maybe one over the longer term, do you think
(11:39):
there's other technologies that might be incorporated into you know,
what we're doing for net zero or do you have
any thoughts on future technologies that could be out there,
because as you mentioned it, we're not quite there, but
you know, like you know, kind of some of this
carbon capture is big right now that you know, one
of these top of my top of my mind anyway
where I've read recently about these huge carbon capture projects.
(12:01):
But are there any other technologies that you're considering or
thinking about in terms of a way to meet this
net zero.
Speaker 4 (12:07):
Gol Yeah, that's that's certainly something that we're paying attention to,
is you know, new technologies that might be coming and
it's something that we talk to talk with companies about
too when we engage with them. So, for example, one
sector that we engaged with last year was the utility sector,
and especially utilities that have a business in distribution of
(12:29):
natural gas. And so in terms of Scope three UH,
the natural gas that they're distributing to residential customers or
commercial customers, that's a big source of Scope three emissions,
the emissions from the use of that product. So in
terms of technology that these utilities are considering, which is
really interesting, is blending hydrogen, maybe hydrogen that's been produced,
(12:55):
you know, so called blue hydrogen, which is produced using
natural gas with the emission from the natural gas that's
captured and stored, or green hydrogen that's produced using renewable energy.
A lot of utilities are testing how to blend hydrogen
with natural gas because hydrogen being you know, a zero
(13:16):
carbon source of energy, with natural gas that is carbon intensive,
maybe they can reduce the emissions from from that natural
gas being delivered to resident denttrial customers by mixing and hydrogen.
But there's a lot of concerns about that. There's a
lot of UH. There's a lot of utilities or number
(13:36):
of utilities are doing pilots to see. Okay, you know,
how does you know can we blend hydrogen up to
you know, five percent, ten percent, twenty percent with natural
gas and safely deliver it to customers because it can
be combustible, and you know, how is it going to
how will it? You know, how will the homeowner's oven
that base uses natural gas? How will that deal with hydrogen?
(13:58):
So that's a really interesting kind of test case or
technology that we're paying attention to, is the use of hydrogen.
Speaker 3 (14:05):
Can I ask Rob a follow up question? So how
you and your previous answer you talked about you know,
how our analysts are looking at the alignment of companies
towards the pathway to Paris or net zero. Can you
talk a little bit about how the solutions that you
just described would fit in to that assessment of alignment
from perhaps a qualitative standpoint. Oh and you touched on engagement.
(14:28):
Does that a helpful follow up question?
Speaker 4 (14:30):
That's a good point.
Speaker 1 (14:31):
That's good to go here?
Speaker 4 (14:36):
This is too tough. Can you make it a little
easier so I get you know, part of what we're
looking at is a company's progress and reducing its scope one,
two and three emissions scope three in a lot of
cases can be the overwhelming majority of a company's emissions footprint.
So if a company, if utility is making really good
(14:57):
progress and you know, innovating and finding safe ways to
blend hydrogen with natural gas, their scope three emissions are
going to fall and maybe a lot, and so an
analyst is going to be paying attention to that and
will document, Okay, this is really great, this is going
to This says a lot about about that utilities emissions trajectory.
(15:18):
You know, maybe that utility has set a net zero
goal and this is going to show that. Okay, yeah,
there's real a meaningful way that they can achieve it.
So I think it helps support the analyst's you know alignment,
right kind of alignments.
Speaker 3 (15:31):
It makes the point about qualitative assessment. And again, we're
bond investors, so what we're really doing is trying to
raise our site lines on the horizon and try and
understand those factors that are going to be material, particularly
beyond kind of maybe the next business cycle or credit cycle,
because that's what our clients are hiring us to do, right,
to build portfolios that they can match liabilities where or
(15:51):
rely on for cash flows.
Speaker 4 (15:53):
And you might if I mention one other technology that
we're trying to pay attention to as well. Just to
elaborate briefly, you had mentioned carbon capture, sure, you know,
related to that as carbon removal. Carbon dioxide removal certainly
has been growing and there's been a lot of attention
being paid to that that sector, but it's something that
we're also thinking a lot about. You know, a company
(16:16):
like Microsoft, for example, has a really detailed carbon dioxide
removal strategy where they're investing in early stage companies such
as director capture and other approaches to removing carbon dioxide.
But we think in the coming years that's going to
become increasingly popular and an important way for companies to
(16:36):
manage their emissions footprint. You know, Decarbonization is the number
one priority they have to roll out. These companies have
to roll out solar wind find ways to reduce their emissions,
but there's going to be hard to abate areas where
it's going to be very challenging, and so we're looking
to see how companies are going to invest in the
carbon dioxide removal industry.
Speaker 2 (16:58):
Interesting to get back to, you know, the nets you
mentioned alignment, You mentioned a lot of these goals are aspirational.
How does one analyze preparedness? Gobbon ambition is I think
an easier piece of that puzzle. You just you know,
you focus their emissions out, but how do you actually
(17:19):
dig into preparedness whether they're going to meet those goals
or not? Any any tipsod tricks? You know.
Speaker 4 (17:25):
We think when we think of preparedness, we are looking
at like I guess I mentioned already are Corporate Climate
Transition Risk Framework, and we're looking at a number of
data points, the quality of the targets that have been set.
Speaker 2 (17:40):
The quality like can you describe, give.
Speaker 4 (17:42):
Me examples, Oh, yeah, you know, has has the company
just set a net zero target? So there, you know,
are they going to be net zero by twenty fifteen?
Maybe that's all they said? Oh so like an interim Yeah,
what is there an interim target? Has an interim target
been approved by the Science Based Targets Initiative for example?
(18:03):
We feel like that's like a good housekeeping seal of
approval for their target. And then we're really paying attention
to capital spending, capital expenditures related to the transition. You know,
if a company has pledged to reduce emissions, but then
they're not investing much to get there, then you know
(18:24):
that would be concerning from a preparedness standpoint. So I
guess it's just trying to cut through, you know, maybe
some stated aspirations and stated goals to see if is
there really substance behind it.
Speaker 3 (18:36):
Rob touched on IGCC earlier in the conversation, and I
think they really break it into kind of channels of
what kind of exposure, what sort of track record do
they have, what kind of targets are they setting, and
then what sort of governance is in place? So those
are kind of the high level categories, and then Robs
kind of discussing the kind of the more granular quantitative elements.
(18:58):
And then you add the qualitative ass which is where
you're really trying to make that quality assessment but also
looking at investments and opportunity and cap backs and things
like that.
Speaker 2 (19:08):
And when you say governance in place, do you mean
who's overseeing that something?
Speaker 3 (19:15):
Yes, I mean you know who's is there. I mean,
I'll let Rob details if necessary, but you know, is
executive compensation tied to these these goals?
Speaker 2 (19:25):
Right?
Speaker 3 (19:25):
Is there somebody on the board who is taking ownership
and responsibility? This from a stewardship standpoint, would you add anything.
Speaker 4 (19:32):
Yeah, that's a great example about the board. That's something
that the Climate Action one hundred benchmark calls out as
one of their criteria. Excuse me, has a particular board
member been designated as the climate expert?
Speaker 2 (19:45):
You know?
Speaker 4 (19:45):
So we're looking for that. Some companies will say that,
you know, the whole board is experienced in climate, but
you know that's maybe questionable, so to Tim's point that
we're looking for that as well.
Speaker 1 (19:56):
Right, And then Tim kind of touched on, you know,
some of the municipal work that you know, you guys
have engaged in. But how about a similar question there,
how do you know, think about governance when it comes
to municipalities and their preparedness for some of these future
climate or THEIRS transition events.
Speaker 3 (20:11):
Well, go right back to disclosure, I guess, right. So
that's one aspect that you could look at. But I
know our team also has a number of, you know,
factors that they will look at in terms of what
sort of sustainability plans do communities have. So remember there's
a lot of different types of issuers, so it's going
to be so specific, right, So I mean airports and hospitals,
(20:32):
which kind of are on the balancing, you know, between
corporate finance and municipal finance, but they're big, huge municipal
bond issuers, and so what's a lot of the attributes
that Rob might be talking about in the corporate bond
market may be very material there for healthcare for a
hospital system, and I think for local communities you just
have to look at from them, you know, you have
(20:53):
to look so locally, and obviously quantitative data is going
to play an important role there as well, but just
have forward looking assessments, transparency, sustainability officers, sustainability plans, all
of those factors can help really give the analyst a
sense to understand the character of the town management and
how forward looking they are.
Speaker 1 (21:14):
And if you had situations where you've actively been like
this isn't going to cut it, and you've addressed it
with some of these.
Speaker 3 (21:22):
You know, I think it's important to understand that we're
looking at materiality of any kind of ESG factors, sustainability issues,
sustainable business practices, and for the most part that just
largely informs our overall credit assessment. So there's no binary
by cell type of scenario that I know of you know,
we follow over three thousand, close to thirty five hundred
(21:44):
municipal credits. But I'm sure an analyst would probably say
that a lack of disclosure, or a lack of plans,
or maybe just drought vulnerability at no fault of their own,
may have informed a credit decision to be instead of
maybe an A plus a single A, or instead of
a single A A minus. But I don't have a
specific example besides that, just kind of the scenario that
(22:05):
I can share with you. Do you have anything you.
Speaker 4 (22:07):
Would add, Yeah, that's certainly happened exactly what you're saying,
Or we may we have passed on a new municipal
bond deal a transaction because the analysts determine that the
climate risk and the lack of preparedness kind of outweighs
all other credit, you know, investment attributes.
Speaker 3 (22:27):
I mean one of the most I mean, just the
obvious factor about municipalities is they can't move right. So
if they have a heat issue, they've got to come
up with long term solutions, whether it's you know, trying
to create a tree canopy in their downtown areas or
heat you know, address heat islands within historically kind of
underserved communities within their districts and factors like that. So
(22:49):
it's just a it's not that it's more complicated, but
it's a lot different than kind of the way we
approach transition risk and corporate in the corporate bond market.
But incredibly, you know, certainly material from a credit assessment standpoint.
Speaker 2 (23:05):
I want to get into physical risk, and I know
that's at least for me, that's a challenging topic. But
maybe we'll start with corporate. So, Rob, how do you
evaluate physical risks when it comes to climate change? And
you know, my next question is going to be can
you give you an example of for financial impact?
Speaker 4 (23:26):
So in terms of physical risk, it is something that
we consider for companies in our investable universe, but we
don't view it as the key, you know, going back
to that initial theme. For US, it's uh, it's transition
and it kind of speaks to where we invest on
a corporate side. We generally invest in medium to large
capitalization companies in the United States, you know, essentially the
(23:49):
S and P five hundred, but we will invest in
US dollar denominated bond issuance from non US based companies,
but generally.
Speaker 2 (23:56):
Physical risk you think like diversified.
Speaker 4 (23:59):
It's more diverse. Yeah, that Jen. These companies are big operations,
lots of facilities. They're sourcing you know, from suppliers that
in many geographies, many locations, and if they're having troubles
sourcing from one spot, generally they can source from you know,
the same what they need from a different supplier. So
that physical risk, yeah, to your point, is generally diversified.
(24:23):
But we do pay attention, you know, just in terms
of one kind of case study. We do pay attention
to it in our engagement when it when you know,
may be kind of material for a specific sector. So
we talked to a number of rates real estate investment
trusts last year based in the US. You know, maybe
they manage and own commercial property or apartments. So we
(24:46):
are talking to them about how they're thinking about physical risk,
and we did that last year. So by and large,
across our amessable universe, it's not a priority, but we
will dive in in certain sectors. And so one particular
rate that we talked to did a whole physic coal
risk analysis across all their properties. They own, big apartment complexes,
(25:06):
develop and own across the US, and you know, they
highlighted how some of these properties were at risk, but
they felt like generally it was well maintained, so that
that was certainly a positive.
Speaker 2 (25:17):
And is that analysis common or it's far and in
between where a company is doing.
Speaker 4 (25:22):
This, Oh, it's far and in between. There would certainly
be a leader others I think they're just getting started,
but realize that it's an issue.
Speaker 1 (25:31):
And there are are there in your research certain sectors
that you inherently just aren't that interested in because of
their lack of maybe a transition plan. Or are there
certain sectors that you're really leading towards because of how
well they're you know, what's kind of the thought process there?
Do you have certain sectors that you're really just not
(25:51):
worried about as much?
Speaker 5 (25:52):
Oh?
Speaker 4 (25:53):
Yeah, I mean, like Tim mentioned earlier, you know, in
certain corporate sectors are much more exposed to that transition risk,
you know, than others such as energy utilities, like I mentioned,
autos chemicals, basics. You know, generally, from a firm's philosophical standpoint,
our investment philosophy has been that we have never looked
(26:14):
to divest or avoid any particular sector. You know, we
manage approximately ten billion in sustainable bond strategies and we've
never we have it hasn't been our focus to avoid
any particular sector for maybe more elevated ESG risk. You know,
we will we will manage that and something the analysts
(26:35):
are focused on. If a client wants to screen out
a particular company or sector, we can do that and
we've done that on a number of occasions and Tim
can speak to that better than me. But in terms of,
you know, specific sectors that we're overweighthing or watching for
transition risk. It was interesting in the in the energy sector,
(26:59):
the integrate the ones that the large oil and gas
companies that you know do exploit exploration, production, marketing. They
have gas stations. We're seeing that they're doing more investing
for the future, you know, investing in ev charging stations
for example, solar, wind, hydrogen, biofuels, more of that's going on.
(27:24):
Certainly they need to be doing a lot more, you know, personally,
the you can't compare the integrateds to just the exploration
and production companies, you know, bigger ones like in the US,
and that we see them as really falling behind. You know,
they're they're not looking to it to invest in other
potential future technologies.
Speaker 2 (27:46):
And I don't know if you have any comments on
the physical rece aspect, maybe.
Speaker 3 (27:51):
For mutis well in either case in municipals or corporates.
I mean, I can't underscore the notion of materiality enough, right,
I mean, it's really the foundation for everything we're talking
about here. Again, we're really trying to improve risk adjuster
returns over the medium to long term. I think on
the municipal side, you know, it just becomes again. And
(28:17):
going back to my opening comments was that the UNI
market really is very much on the front lines, but
also that notion of climate really being a risk accelerator.
But it's going to be so local, right, and so
sect or specific.
Speaker 2 (28:30):
Right.
Speaker 3 (28:30):
What is material to a water and sewer authority is
going to be very different than what's material to a
school district or a library district. But it doesn't take
a lot of reach to kind of unpack how those
can be affected both by the nature of the sector,
like where their source of revenue comes from. Is it
property taxes, right? And what's happening to the value of
(28:51):
property taxes if you can't get insurance for those properties, right?
Or is it a rate payer base, you know, and
what is the what happens if there's not enough water
for a water authority and they're just running around drilling
drilling wells like whack a mole. Right, that's just not
a sustainable model, right. And public transportation, you know what
(29:12):
if you start running into situations where rapid transit or
light rail is running into physical damages to the point
where people can't use it, and so, I mean it
just takes a logical approach to kind of going down
how all of those revenue sources can be interrupted. But
when you think about like the breadth of the MUNI market,
(29:32):
so much of it is local general obligation bonds which
are backed by property taxes for things like schools and libraries,
things that don't have their own source of revenue. And
you know what is that a lot of these projects
are financed over twenty or thirty years, right, and yet
the properties are carrying you know, property and casualty insurance
(29:54):
that renews every year. So what are the long term
implications to those types of property values? And I think
that's what our an US are trying to stay ahead of. Right,
the MUNI market is inherently a very safe market. As
you know, you know, multiple multi notched downgrades are incredibly rare.
You know, there's and you really do have an ability
both from a willingness and ability to pay, to see
(30:16):
far out into the future. But this climate is material
in some sectors and in some regions more than others.
But it would be we would be tying one hand
behind our analysts back if they weren't able to do
this type of work. They really need to be able
to look out beyond further on the horizon.
Speaker 1 (30:35):
Okay, And I mean you mentioned the MEUNI market again
with the general obligations, but what about with actual labeled
green social sustainability bonds. Have you done a lot with those?
And do you give those a higher weight in the
portfolio if it's an actual labeled bond then just a
general you know, a conventional bond from the same company,
or do you do anything along those lines.
Speaker 4 (30:57):
Do you want to start, tim and then I'll touch
and a little bit.
Speaker 3 (31:00):
I'll just say briefly, we certainly have clients who love
to see green bonds in.
Speaker 1 (31:05):
Their portfolios, and the municipal market in.
Speaker 3 (31:09):
The UNI market as well. In fact, I'm pretty sure
Massachusetts issued the first green bond in the MUNI market,
so it's over ten years hometown plug there for Massachusetts.
But I would say, you know, I'm not an analyst,
so I get a little nervous speaking on behalf of
our analysts. But I suspect that our analysts would rather
see robust climate disclosure in an offering document than a
(31:33):
green bond label on the front of that offering document,
because that's really what matters, and I think that's what
should matter to investors too, including those investors who'd like
to see green bonds. That's what I would say.
Speaker 4 (31:44):
In the I think that's true, definitely true for our
corporate analysts. They want to see that really strong disclosure.
But it's certainly a market that we've been paying attention
to for a long time. We invested in as a
company and as in the first green bond in twenty thirteen,
it was the International Finance Corp issued a billion dollar
(32:06):
green bond over ten years ago. And so we will
allocate green social sustainability bond, sustainability link bonds to our
sustainable portfolios because like ten men mentioned, clients love to
see them there. They're great from a so called ESG
storytelling standpoint, you know, you can get some information from
(32:26):
the impact report, assuming companies have published those, and generally
they do if they're adhering to the EKMA Green Social
Sustainability principles.
Speaker 1 (32:39):
Right, Yeah, because sometimes just the disclosure is better if
they have that label. Yeah, they're putting out that allocation report,
that impact report. You just get a little bit more
disclosure on what the actual impact of that those proceeds were.
Speaker 4 (32:51):
Yeah, and clients like it. We like it as well,
that transparency. And it's also a form of climate solutions
potentially too that would fit within the net zero strategy
as long as that bond is financing you know, clean
renewable energy. I think that could be a real opportunity
as well.
Speaker 2 (33:07):
And maybe to touch on engagement with companies, So Robbie
mentioned you engage on physical risk to some extent, maybe
probably transition risk. I guess what is the reaction you
get from companies Do they want to talk to do
they want nothing to do with you? And maybe what
(33:27):
is a measure of success in an engagement.
Speaker 4 (33:31):
That Yeah, that's a really good question. So we've been
engaging with companies and municipalities for a number of years now,
and how we determine the themes or the topics that
we want to talk to companies about, or cities and municipalities.
It's a kind of a discussion with the analysts, the
(33:52):
coverage analysts. So if there's a particular theme that they
feel like it's really important to talk to, you know,
companies in their sector about, then that's something that we
would it will pursue, will dive into, and our number
one objective when engaging and having these conversations is to
supplement our ESG research where generally our focus is not
(34:15):
on pushing for corporate behavior change. It's really about having
kind of meaningful, in depth, depth discussions with company management
teams or municipal issuers about their ESG practices and sustainability
initiatives and how they're looking to embed sustainability into their
(34:35):
corporate operating strategy as an example. But to your question,
one area where we have been involved in pushing for
action is in the CA one hundred. Breckenridge has been
co lead investors on three US companies in the C
one hundred list. So that means that's three companies out
of the one hundred and sixty six lists that are
(34:56):
you know, the largest one hundred and sixty six corporate
meters greenhouse gases globally. So they're big companies, big emitters,
and you know, so we're looking for them to make
progress in the three objectives within the C one hundred
around climate governance, emissions reduction, and reporting. And so to
(35:17):
your question, an area where we've seen some progress in
one of those companies is there's one that was kind
of dragging its feet in terms of measuring and disclosing
their Scope three emissions. They finally did this year, which
was which was really great and we applaud there's a
lot more progress. This company needs to make a lot
more progress, but we were certainly excited to see that,
(35:38):
and just by publishing that information, it really shed light
on their emissions profile. Like I mentioned earlier, and as
I'm sure listeners are well aware that Scope three emissions
can be like a big, big part of a company's
emissions profile, and it was very clear that when they
when the company published this report, it turns out it's
(35:59):
ninety five percent their emissions or from the use of
their products, and that wasn't clear before, so it really
helps from a transparency standpoint. So that was we felt
was a good win and companies happy to do no
not always.
Speaker 3 (36:13):
Does that put you in a different position as a
bond investor with companies like does that change the tenor.
Speaker 4 (36:17):
Oh yeah, versus an equity holder who can file a
shareholder proposal if they want to. You know, I haven't
necessarily seen any real difference. I think buy and large
companies are willing and open to speaking to bondholders because
we're another important stakeholder, right, just like equity holders or
anyone else. So we overall we feel that the conversations
(36:38):
are very productive.
Speaker 1 (36:40):
I think, you know, for us, a lot of the
conversations we have sometimes with clients is just about educating
them on as we've gone through, you know, all the
different data sets, all the different things that are going on.
But you know, there has been some pushback. I wonder
if you guys get some of the same pushback, and
maybe how do you overcome it or address it with
(37:02):
some of the people that you know you're trying to
educate them on what you're doing.
Speaker 3 (37:06):
You're talking about the ESG backlash as it's kind of
been coined that way. So I would say a few
things I think the I think as an industry perhaps
we walked into a little bit of that criticism. I mean,
so many products kind of got rushed out so quickly
that there were a lot of there's a lot of dispersion,
(37:26):
I guess to use an investment term between kind of
definitions of what sustainability and responsible investing and in ESG
investing means. But I would take a step back, and
you know, one thing that I think is important to
understand is that in the rest of the world, in
the UK and Europe and Asia, I mean, the sustainable
investing has really been driven by the kind of the
(37:47):
fiduciary responsibility, right, and that these are pension schemes and
sovereign wealth funds who really are trying to do as
much rigorous due diligence on making sure that they're properly
building kind of lia about liability matching tools that will
serve the beneficiaries over the long term. And so obviously
integrating sustainability, whether it's climate or even some social factors
(38:10):
into research is all about kind of fiduciary and here
in the States, I think I'm speaking obviously and kind
of sweeping generalizations here, but I think a lot of
the kind of the ESG movement and sustainability movement has
been driven by mission driven investors. So certainly faith based
organizations like ICCR, who has been doing this long before anybody,
(38:30):
you know, going back to the nineteen seventies, but foundations
and endowments they really looked at ESG almost through a
mission alignment standpoint, and I expect that will certainly continue.
But I also believe that the fiduciary lens is going
to become more and more prevalent. If you're sitting on
(38:50):
an investment committee for an endowment or a pension fund,
and this is exactly the type of topic you're supposed
to be thinking about, right Like you have managers and
consultants and advisors who are helping you kind of allocate
assets and things like that, and so you really, from
a government standpoint, are the are the stakeholder who is
(39:11):
supposed to be taking the higher level longer tooking, longer
term looking view. And I think that actually is getting
some traction specific to the backlash quote unquote over the
last year. I think it has been effective in terms
of kind of hushing some of the narrative, but I
don't think it's actually have any sub having any substantive
(39:32):
impact on where capital is going or will go. Capital
doesn't change like that. People may stop talking about it,
but capital is going to go where capital thinks it
should be and where it's going to be safest and
where it's going to get those best risk adjusted returns,
regardless of kind of the banter at the political.
Speaker 4 (39:49):
Level, I guess I would echo what Tim said as
far as I would. I think the industry brought this
a little bit on ourselves because of all the differ
different terminology that was used to market different ESG funds,
sustainable funds and what does it mean in the end
if this fund is ESG and this one sustainable and
(40:10):
so being able to really describe it well is important,
and I think that has been a challenge for the industry.
But there's certainly initiatives that are in place to try
to improve that, like the SEC with their fund manager
Disclosure kind of guidance, which I'm not sure when that
will be officially published, and then the CFA Institute, the
(40:32):
ESG Technical Working Group has their own guidance that they
put out to help asset managers describe their ESG process
and communicate that externally. So overall, we feel like this
is probably unfortunate but maybe important scrutiny.
Speaker 2 (40:47):
You mean that the sort of the bedrock has been
laid regardless of some of this, I guess noise.
Speaker 4 (40:55):
Yeah, I think so. Yeah, certainly, And you have all
these managers, including ourselves, whoill build up you know, exg
ESG expertise and knowledge that that's not going anything for
many years. Yeah, for many years.
Speaker 2 (41:06):
Yeah. I don't have any other questions, Chris, any butting
thoughts or questions.
Speaker 1 (41:11):
No. I thought that was a great discussion a lot
of the risks that we're seeing and and some of
the ways to address them. So thanks guys.
Speaker 3 (41:19):
First of all, it's a great podcast. You know, we
really appreciate the content that you guys have been producing,
and we're certainly flattered to be included in the discussion.
So thank you for including Breckrage.
Speaker 2 (41:27):
Yeah.
Speaker 4 (41:27):
I echo what Tim said. You know, it's a podcast
that I listened to on the weekends while watching the
Walking the Dog around the neighborhood. So it's uh, it's
great to listen to and really appreciate being here.
Speaker 2 (41:38):
Thank you, and maybe some botting thoughts on you know,
is there anything you think we missed any gaps that
you know, we think we should have addressed. There's just
research analysts. This is just food for thought for us.
Speaker 4 (41:51):
Well, one I was wondering about was just the charm.
Well maybe the net zero pledge.
Speaker 2 (41:56):
Okay, yep, I think the must will do interesting questions
that are we missed, right.
Speaker 4 (42:01):
I know that was good? This is great? Yeah, this
is this is awesome.
Speaker 2 (42:06):
Yeah okay, well maybe to sum it up, you can
find more information on climate investments, net zero and a
hola ray of other topics by going to b I
E s G on the Bloomberg Terminal, which opens up
Bloomberg Intelligence, our research dashboard. If you have an E.
S G quandary or a burning question you'd like to
ask BI experts, please send us an email at ESG
(42:28):
Currents at Bloomberg dot net. Thank you everyone,
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