We live in an age of technological miracles, but many of these miracles come with steep costs for society. Our changing climate is one such example; much of our civilization’s progress would have been impossible over the past century without a massive expansion in energy and industrial output, alongside the emissions associated with that output. In recent decades, however, the harm of all those emissions has become clear, and projections for the future have grown increasingly dire.
During that time, new industries have emerged, such as solar power, wind power, battery technology and electric vehicles. To reduce emissions and/or resource use, many cities and even entire nations are investing meaningfully in these technologies as well as climate adaptation and mitigation, including labeled bond issues that pledge their proceeds toward specific environmental projects.
For our part, as an investment firm, we must view climate decisions through the lens of our fiduciary duty to generate attractive investment returns that help our clients achieve their goals over the long term. This long-term lens, we believe, requires an appreciation of how our climate and other sustainability challenges will strengthen or weaken an investment case.
Brown Advisory considers climate change risks and opportunities across both our institutional “single-strategy” solutions—our long-only equity and fixed income strategies—and our “advisory” solutions for broadly overseeing an entire multiasset investment portfolio for individuals, families, endowments and foundations. In this report, we discuss this work and our broader sustainable investing initiative, which informs our climate and impact analyses—including our ESG research, portfolio management, engagement, proxy voting, internal colleague education and other programs. We also describe our initial plans under the Net Zero Asset Managers initiative (NZAMi).
In short, we believe our firm’s approach to climate change, and to environmental, social and governance (ESG) research in general, is very much in line with our philosophy of “thoughtful investing.” We have long conceived of sustainable investing as a performance-focused practice, but only when thought, discernment, patience and discipline are at the core of each individual investment decision within a portfolio.
There are no shortcuts to making good investment decisions, and we are extremely leery of top-down approaches to investing—sustainable or otherwise. For example, while we typically utilize screening as a tool for satisfying a client’s individual preferences or policies, we do not use it as a tool in our process for finding and evaluating attractive investments. Instead, the portfolio managers of our sustainable investment strategies actively seek out investments whose valuation is being driven, in their view, by climate or broader sustainability strategies (operational emissions reduction, products that help customers reduce emissions, etc.). Nuance is also essential in our engagement with portfolio holdings or proxy vote decisions. We consider situations on a case-by-case basis, which focuses our engagement priorities and leads to a mix of “yea” and “nay” votes on various shareholder proposals after our investment teams understand as best we can whether the intent of the proposal is in fact likely to be beneficial to shareholders.
Further, we believe that our approach to NZAMi is a natural outcome of our performance-focused sustainable investment philosophy. In our view, there are many ways for companies, bond issuers and other potential portfolio holdings to contribute positively to the trajectory of climate change, and we have extensive experience seeking out situations where sustainability strategies, products and services can materially and positively impact financial outcomes.
We must also underline and reiterate our appreciation for the fact that the assets we manage do not belong to us—they belong to our clients. We think this is a critical distinction when deciding whether those assets are appropriate for a meaningful initiative such as NZAMi. Selecting from assets where clients expect our sustainable investing expertise, we created an aggregated portfolio (“A.P.”) and have committed to pursue a series of net-zero outcomes within that A.P., which represents approximately 20% of discretionary client assets as of September 30, 2022. Our decisions on which assets made sense for the initiative were guided by two core ideas:
- Robust, climate-focused investment research and the pursuit of net-zero outcomes require access to sufficient climate data to make informed investment decisions. Today, there are only a few asset classes, such as public equities or the corporate bond sector, where we feel that carbon data is even directionally helpful, and that data is almost nonexistent in many other asset classes. We can only seek to adapt our approach within an asset class when we have enough information to do it. We also commit to help solve some of these data challenges.
- We must ensure that all clients invested in our sustainable investing (SI) strategies and/or strategies in the A.P. understand that net zero is not an input in our investment process—it is an outcome. Our sustainable investment strategies have always sought to generate returns through investments that, in our view, drive long-term climate resiliency. We expect that these strategies will continue to operate as they have previously, but should now be better armed with additional net-zero tools and processes to aid in decision-making. Clients should not expect a change in how these strategies are managed.
While we are not ultimately the owners of any of the assets we manage for clients, we do believe we can play a major role in identifying relevant climate issues, developing and using climate data effectively, and continuing to refine our techniques for integrating sustainability factors into our investment decisions. We believe all of these activities can help encourage our portfolio holdings to better prepare themselves for the risks and opportunities that climate change has produced.
Sincerely,
Carey Buxton
Head of the
Sustainable Investing Business