Issue 28: 2014


Sustainable Bond Strategies

Breckinridge Capital Advisors

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Why and how do you incorporate
ESG analysis into your investment process?

Nicholas S. Elfner: As a high-grade bond manager, we emphasize safety along with high credit quality, so we are very focused on mitigating downside risk. The kinds of risks we encounter include interest-rate risk, default risk and event risk, all of which can affect bond credit quality. We look at a variety of factors, and what we’ve found is that environmental, social and governance factors can affect present and future bond performance. So, we review ESG data as another way to reduce uncertainty in an increasingly uncertain investing world. We have formalized the ESG investment process by creating our own methodologies to assess sustainability, which incorporate over 100 indicators across nine frameworks.

What kinds of ESG liabilities catch your eye?

Elfner: These may be costs related to energy and water use, waste production or other factors, but these costs are real, particularly in energy- and commodity-intensive sectors such as food and beverage. And, as resources such as energy and water become more constrained, we expect a more efficient use of resources will become critical. There might also be regulatory risks such as the prospect of a carbon tax or litigation costs, something we have seen in the energy and banking sectors. Traditional credit research may be insufficient in fully assessing risks related to climate change, social unrest and regulatory shifts. We think long-term off–balance-sheet risks are best analyzed through an assessment of extra-financial ESG data and complemented by a rigorous fundamental analysis.

Nicholas S. Elfner, Director of Corporate Research,
Breckinridge Capital Advisors (Photograph by Michael Warren)


Are ESG factors systematically
included in agency credit rating methodologies?

Elfner: According to the portfolio analysis company MSCI Inc. and our own research team, there is a low positive correlation between ESG ratings and credit ratings. Agencies rate credit risk for 18 to 36 months. But, since we may invest in bonds with a 5- or 10-year maturity, we need to factor in longer-term ESG risks. So, while agencies may consider some ESG risks, they might say that some risks are not material or will not manifest themselves over the shorter term. We believe that ESG integration is additive to traditional credit analysis. We have 13 credit analysts, and part of their job is to do a fundamental sustainability assessment. We include the information they unearth in the sustainability rating we assign to each company, which ultimately informs our internal credit rating for a company.

How are companies integrating ESG?

Elfner: We see many larger companies hiring officers dedicated to sustainability. We find that leading companies understand ESG integration is about running a business more efficiently and using fewer resources. It is also about opportunity and product innovation and meeting the needs of more consumers focused on sustainability. Some companies are launching environmental-focused business segments that are, in some cases, growing at a faster rate than the overall company. Leading companies integrating ESG also recognize that brand and reputation can be enhanced through a comprehensive sustainability plan, or damaged if an enterprise is unresponsive to its broader stakeholders and responsibilities.

What are the negative aspects of ESG?

Elfner: There are costs associated with establishing and running a sustainability plan, but these expenses seem relatively small compared with the benefits that can accrue to a company’s brand equity because of its ESG-related activities. The bottom line for us is the statistical evidence — notably a 2012 report from Deutsche Bank called Sustainable Investing: Establishing Long-Term Value and Performance — that companies with high ESG ratings have a lower cost of capital and generally exhibit accounting and market-based outperformance over the medium to long term. So we would maintain that there is a strong positive correlation between ESG integration and long-term financial health.

How are global corporations approaching
ESG in the world at large?

Elfner: We’ve found that multinationals often have a broader appreciation of the implications of certain issues. Water scarcity in India, for example, is a huge concern for U.S. beverage companies operating there. And, of course, parts of the United States are also experiencing serious water issues.

Do you invest in green bonds?

Elfner: Yes, and we’ve seen growing interest in them among issuers and investors. The World Bank and other supranational organizations are among the largest issuers of green bonds to date and are focused on projects that, for instance, help promote clean water and reduce carbon emissions. The real estate investment trust sector has also issued green bonds. Proceeds of these investments generally target new construction and Leadership in Energy and Environmental Design (LEED®) certification, as well as retrofitting older buildings to be more green, and reducing the environmental impact of commercial properties. Some banks, including Bank of America, have issued green bonds.




Investing involves risk. There is always the potential of losing money when you invest in securities.

Some of the featured participants are not employees of U.S. Trust. The opinions and conclusions expressed are not necessarily those of U.S. Trust or its personnel. Any of their discussions concerning investments should not be considered a solicitation or recommendation by U.S. Trust and may not be profitable.

Always consult with your independent attorney, tax advisor, investment manager and insurance agent for final recommendations and before changing or implementing any financial, tax or estate planning strategy.


Fixed Income
Investing in fixed-income securities may involve certain risks, including the credit quality of individual issuers, possible prepayments, market or economic developments, and yields and share price fluctuations due to changes in interest rates. When interest rates go up, bond prices generally drop, and vice versa.

International Investing
International investing involves special risks, including foreign taxation, currency risks, risks associated with possible differences in financial standards, and other risks associated with future political and economic developments. Investing in emerging markets may involve greater risks than investing in more developed countries. In addition, concentration of investments in a single region may result in greater volatility.