At BBH we recognize that climate change-related risks present significant challenges to society, the global economy, and financial markets. BBH Investment Management believes that climate change physical and transition risks, the latter towards a lower-carbon economy, present both potential risks and opportunities for our clients’ investments. We believe that the consideration of climate change related risks and opportunities in our equity strategies, corporate bonds, municipal debt and structured products investments’ due diligence can enhance our ability to manage risk and help us achieve our long-term objectives.

Investment Approach

As a bottom-up, fundamental active asset manager, our investment teams conduct research to determine the materiality of risks and opportunities, including climate change-related issues. We think that assessing these matters inform our opinion on the long-term sustainability and durability of our investments. Portfolio management teams integrate the consideration of relevant climate-related issues and assess the materiality of their impact within their investment analysis, taking into account issuers’, sectors’ and asset classes’ specific issues. Material factors, including climate-related risks and opportunities are embedded in our investment criteria as they impact our assessment of the potential risk and return profile of an investment.

Industry Collaborations

We are a member of the United Nations Global Compact and a our Investment Management team is a signatory to the UN-supported Principles for Responsible Investment (PRI). We support the goals and principles of these organizations, including their efforts to address the challenges associated with climate change.

Governance

On a firmwide basis, the BBH Executive Sustainability Council serves as a governing council for BBH’s sustainability initiatives, overseeing and monitoring our sustainability framework, including the approach to and management of climate change-related risks. In BBH Investment Management, the ESG Oversight Committee (ESG OC) is responsible for monitoring ESG best practices and developments, including those related to climate change. On a regular basis, the ESG OC and our portfolio managers report to the BBH Investment Management Oversight Committee (IMOC), which has ultimate oversight of our investments and of the employment of climate change-related considerations in the investment process.

Fixed Income

For corporate bonds, municipal debt and structured products investments, we assess the physical risks to a given investment, in addition to the risks and opportunities associated with the transition to a lower carbon economy.

When evaluating these risk exposures, we consider the corresponding risk management capabilities on:

• Financial risk – we assess our obligors’ ability to manage the potential financial implications related to climate change risk, as well as their ability to appropriately invest in their businesses towards adopting best practices to support decarbonization of their value chain.
• Operational risk – while we recognize that certain capital-intensive issuers are inherently more exposed to climate change risks, we include them in our investment universe and assess them on the merits of how well they manage these exposure to assess their long-term asset resiliency.
• Capital structure– we test the assumption that the upper tiers of the capital structure, or other secured debt, tend to have lower credit risk in general and to climate change in particular.
• Transparency – to be able to properly evaluate whether climate change risks are recognized, assessed and managed. To this end, we encourage transparency and proactive disclosure of climate change-related data, policies and programs.

Given our emphasis on prioritizing capital preservation over a full market cycle, understanding the magnitude to which climate change impacts our investments is inherently part of our overall credit assessment. We seek to avoid credits with uncompensated or unmitigated climate change risk.

Equity Strategies

Across the equity strategies universe, portfolio managers and analysts assess a variety of risks and opportunities for any business under consideration for investment. This includes the evaluation of climate change. In evaluating whether climate change related risk may be material for an equity investment, we consider both the environmental physical aspects and the implications of the transition to a low carbon economy. This may include our assessment of the ability of our target companies to:

• minimize business disruption and maintain operational continuity when facing extreme weather events or slow onset change in weather patterns
• manage their value chain towards a resilient position in a lower-carbon economy

Our equity investment team uses a set of investment criteria to find businesses which provide an essential product or service, have leadership positions in attractive industries, have attractive returns on capital and free cash flows, and are managed by management teams with high levels of integrity and operational capability. Analysis of climate change-risk factors is integrated into this investment process.

We would typically avoid an investment in a company that bears climate-related risk-exposure without risk-management capabilities to address those exposures, including, for instance:

• current or future climate change related liabilities;
• regulatory mandates that could substantially increase the costs of doing business; or,
• obsolescence risk related to decarbonization.

Engagement

Typically, portfolio managers and analysts rely on direct company engagement, companies’ annual reports and financial statements, data information services and other public information to obtain disclosure regarding environmental issues. The amount and quality of disclosure varies by sector and geography, as mandates vary by region. As BBH utilizes external ESG data vendors and sources, portfolio managers and analysts incorporate additional information as warranted.

Where and when we identify climate as a material risk to a security, we will engage with a company to determine what strategies are in place to mitigate those risks. Proxy voting offers another avenue for us to address climate change-related matters, as and when they arise in that forum.

As an active investment manager, BBH seeks to ensure that our businesses and issuers are well positioned for any material risks that may be on the horizon. We continue to develop our approach, as we proactively assess and manage the risks and opportunities created by climate risk and an evolving global economy.

Investors should be able to withstand short-term fluctuations in the equity markets and fixed income markets in return for potentially higher returns over the long term. The value of portfolios changes every day and can be affected by changes in interest rates, general market conditions and other political, social and economic developments.

For more information, please refer to the BBH IM Position Statement and BBH Investment Management Investment Stewardship Policy.

A less favorable ESG profile may not preclude the manager from investing in a company, as the consideration of ESG factors is not more influential than the consideration of other investment criteria.