The threat of climate change is one of the greatest challenges our society faces. Droughts, floods and other weather-related disasters are devastating our communities, colleagues, and clients from Texas to California and beyond. We are not scientific experts, but we have watched the costs from these events rise, both financially and socially, and agree with the scientific community that climate change is likely to blame for the majority of these occurrences and that we will see more and worse in the coming years.
We strive to be a part of the solution to climate change by first taking responsibility for our own physical carbon footprint. As a business, we want to do what we can to minimize our operational carbon footprint—we shared our plan to become a carbon-neutral company in last year’s report, and below we outline what we have done to achieve that goal.
As investors, we know that the carbon impact of our portfolio investments is orders of magnitude larger than the impact we generate as an operating business. We have several motives that drive our actions as investors related to climate change:
- We believe that carbon-intensive businesses, municipal and sovereign bond issuers, and other entities face numerous meaningful long-term risks that we seek to mitigate or avoid in our portfolios. Drought, wildfires, unexpected freezing snaps, coastal flooding—all these occurrences can lead to higher operating costs, disruptions or loss of revenue, and/or the potential of default on debt obligations. We also think about the “transition risk” that all companies, municipalities and even nations face. Regulators, customers, and societal expectations are all stakeholders that could force heavy greenhouse gas (GHG) emitters to radically change their operating models, begin paying meaningful taxes or fees for their carbon emissions, or both.
- Conversely, we are attracted to many compelling investment opportunities that help address climate-related challenges and advance the transition to clean energy. Over the past decade, we have identified hundreds of different opportunities in the debt and equity markets that offered us attractive returns driven by smart sustainable strategies or solutions to environmental challenges.
- Many of our clients want their portfolios to be a part of the solution, not a part of the problem, and we act on their behalf to help achieve this.
- We believe that our investment decisions, our proxy voting and our engagement efforts send a strong signal to companies and bond issuers about the risks we view as most concerning over the long term, and climate change is one of the most material and salient risks facing many of the investments we hold. Many of our peers across the industry feel the same way. Today, there are more investors than ever before who view climate risk as a material investment risk, and the collective drumbeat of their voices is one of the reasons why we are seeing slow but steady progress on this issue across the economy.
Below, we highlight some of our actions related to climate change, as a business and as investors.
Operational Carbon Footprint/Carbon Neutrality
Because we do not manufacture or physically distribute tangible products, we do not consume significant amounts of natural resources, produce large amounts of waste, or generate notable point-source toxic pollution. Our primary operational impact on the environment is through the carbon dioxide equivalent (CO2E) emissions that stem from our operations.
Last year marked our first effort to calculate and report on our carbon footprint. As we noted at the time, it was a learning experience that required collaboration across the firm; our accounting and finance team gathered business travel data from our travel agencies, our information technology team provided data center energy usage, and our operations team did a significant amount of work collecting and parsing electricity and heating data from our landlords and utility companies around the world.
As shown in the table below, Brown Advisory’s emission totals for 2019 equaled 2,698 metric tons of carbon dioxide equivalent emissions (MTCO2E), and our energy intensity ratio was 3.98 MTCO2E per colleague. In 2020, our emissions decreased to 2,106 MTCO2E, equating to an energy intensity ratio of 2.85 MTCO2E per colleague.
Source: Brown Advisory analysis. Carbon emissions are generally reported in three categories, or "scopes." Scope 1 refers to emissions from direct energy generation/fuel consumption, Scope 2 refers to emissions from use of outside power (primarily electricity for most companies) and Scope 3 refers to emissions generated from a business' value chain (e.g., delivery trucks, captive vendor emissions or, in our case, air travel by colleagues).
We were pleased to see a reduction in our overall emissions in 2020, but we realize that the predominant factor was a notable curtailing of our commercial air travel due to the COVID pandemic. Our energy consumption/emissions from office operations did not change materially—these locations needed to be “powered up” for operational purposes regardless of whether we were present or working from home. The slight increase in emissions from our office electricity and heating was largely a result of the opening of several new locations.
These are valuable steps in terms of general environmental impact, but ultimately, we cannot materially impact our carbon-equivalent emissions in the short term. Our air travel is generally for essential business purposes—most of our travel is to visit clients and more effectively serve them. We have become much more adept over the years at leveraging technology to collaborate and manage teams across multiple locations, so travel for internal purposes is limited. We are in long-term leases at most of our office locations, and in most cases, we do not control decisions relating to HVAC and electricity. We have established stricter environmental standards for choosing new office space and will seek to apply these standards when choosing new spaces in the future.
As such, we are focused on maintaining carbon neutrality through the purchase of carbon renewal and offset projects as well as renewable energy certificates (RECs), and this year we took the initial step of offsetting our emissions for both the 2019 and 2020 calendar years.
- Our 2020 office-based electricity consumption of 2,253 MWh was matched by the purchase of RECs in three jurisdictions (two based in the U.S. and one in the U.K.)
- The remainder of our emissions—roughly 920 MTCO2E—was offset by our investment in two offset projects through Cool Effect, a nonprofit platform offering a wide range of scientifically validated carbon-reduction projects around the world. Factors that we consider (as does Cool Effect) in choosing projects include additionality ("does the project generate environmental benefits that would not otherwise be achieved?") and permanence ("what is the chance of the carbon removal being halted or reversed?"), as well as the project’s broader environmental and community impact. The projects underlying the offsets we purchased were:
- Mangrove Planting (Project name: "Sea of Change"), a mangrove planting project in Asia that safeguards shorelines and removes carbon from the atmosphere, with 30-year contracts in place to ensure permanence of its efforts.
- Community Tree Planting (Project name: "The Giving Trees") in Uganda, Kenya and India through the Int’l. Small Group and Tree Planting Program (TIST). Tree planting would not occur in the participating remote communities without the capital and organizational implementation provided by TIST.
- Finally, we offset the entirety of our emissions from 2019 through a third Cool Effect-sourced project.
- Mirador Clean Cookstoves (Project name: "Breath of Fresh Air") constructs cookstove in rural homes in Honduras that provide clean air and health benefits to families. These stoves produce lower carbon emissions than traditional cooking methods used in the region, equal to about 3 MTCO2E per stove per year; they also burn 50% less wood and reduce carbon monoxide and particulate matter emission by 79%.
Investment Carbon Footprint
As noted above, the carbon emissions generated from our investment holdings are much larger than those generated by our operations. For a brief comparison: We calculated our 2020 carbon emissions from operations at 2,102 MTCO2E. We estimate that our $81 billion in total equity holdings as of April 30, 2021 (across the following entities: Brown Advisory, LLC, Brown Investment Advisory and Trust Company, Brown Advisory Ltd., and Brown Advisory Trust Company of Delaware LLC) represents a total carbon footprint of more than 1.9 million MTCO2E.
We believe our responsibility as investors is clear—protect our clients’ interests, make decisions that we believe can enhance future returns, and encourage the companies, bond issuers and managers with whom we invest to act in a way that has the potential to reduce risk and enhance future returns. We view climate change entirely from this perspective.
In our view, entities that have mitigated their carbon footprint are likely better positioned for the future with respect to climate change than those that have not. Companies that can additionally help address the challenges presented by climate change may be well positioned to take the lead in certain industries, and perhaps even invent entirely new business segments. When we think about the overall carbon footprint of our investments, it is primarily because we believe that carbon-intensive investments face growing material risks due to the threat of climate change.
We aspire to be a leader on this issue, in both our thinking and our actions. There are several ways that we can use our voice and our decisions as investors to help influence the path of climate change.
Build investment strategies and portfolios that represent the best thinking of our sustainable investment research teams. We have committed the past decade-plus to this idea, and we have built a substantial business serving clients with these solutions and garnered a global reputation for sustainable investing excellence. More and more investment firms are following the example of peers who are succeeding in their sustainable investing efforts; in most cases, those efforts involve a keen awareness of climate risk and associated opportunity that informs investment decisions.
Identify and report on the carbon footprint of assets under discretionary management. In our 2020 Sustainability Report, we provided a snapshot of the carbon footprint of our institutional sustainable equity strategies. This year, we are reporting emissions related to all of the equities we hold for clients for which carbon emissions data is available to us (currently we are able to collect data for 95% of those equity assets), either as standalone common stocks, within funds and strategies that we manage, and within third-party funds we recommend to clients. Going forward, we plan to develop methodologies to estimate carbon footprint in other classes, such as fixed income or private equity, for which third-party data is not readily available.
The chart "GHG Emissions of Brown Advisory Equity Holdings" provides this carbon emission information as of April 30, 2021—a total of more than 1.9 million metric tons of CO2 equivalent emissions on an absolute basis.
On a relative basis, the carbon intensity of our equity holdings is less than one-third of the broad-market MSCI All-Country World Index (figures in the chart are normalized on a per-million-dollars-invested basis); this is not due to an intentional effort to exclude high-carbon holdings, but rather an outcome from a fundamental research process that emphasizes companies that, in our view, offer attractive opportunity relative to risk.
Going forward, we will continue to reflect on the overall footprint of our investments. We always aim to make thoughtful investment decisions on a case-by-case basis, and that principle must guide our thinking related to climate change. We have learned that in some cases, removing an investment from our portfolios may be the right choice (for a specific client, and/or the pursuit of a strategy’s long-term objective), while in others, holding onto that investment while it improves, or while we engage with its stakeholders to encourage positive steps related to GHG emissions, may be the better call.
Source: MSCI and Brown Advisory analysis. Data is based on the $81 billion in total equity holdings as of April 30, 2021 held across the following entities: Brown Advisory, LLC, Brown Investment Advisory and Trust Company, Brown Advisory Ltd., and Brown Advisory Trust Company of Delaware LLC. *Total CO2-equivalent emissions refers to the absolute emissions generated by underlying companies, in proportion to our equity ownership percentage of those companies. Normalized CO2 equivalent emissions refers to emissions per $1 million of invested assets, a metric that allows for comparison of the emission "intensity" of one portfolio to another portfolio or a benchmark index.
Engage with companies and bond issuers to encourage policies, products and operations that acknowledge and address the risks of climate change. We encourage you to refer to our Engagement Policy, Proxy Voting Policy and 2020 Engagement Report for more information about our engagement efforts with hundreds of different companies and bond issuers every year. Many of those engagements cover the topic of climate change, either directly or indirectly; in our discussions with management teams and stakeholders, we often ask them to report on climate risk transparently, take various steps to manage physical climate risk, align their lobbying or political spending with climate goals, and set science-based targets for reducing GHG emissions.
As part of this effort, we are committed to continuously building our internal expertise on this issue, and to working collaboratively with industry peers on broad engagement programs. We have ramped up our collaboration with CDP on several carbon-reporting initiatives in the past two years, including a project aimed at increasing disclosure of climate risk by municipal bond issuers. We also continue to work with the Climate Action 100+ initiative that aims to persuade the world’s largest corporate carbon emitters to take steps to reduce their emissions.
Continually enhance our own reporting and disclosure. This is our second corporate sustainability report; we have issued strategy-specific impact reports for several of our SI investment strategies for the past four years; and, we have submitted comprehensive disclosure reports to PRI (Principles for Responsible Investment) since 2014. (Our recent PRI Assessments: 2021 (coming soon), 2020, 2019.)
We are committed to consistent improvement and expansion of our general sustainability reporting and specifically our climate-related reporting. We actively partner with a variety of expert organizations and coalitions, including CDP, PRI, Ceres, the International Capital Markets Association (ICMA), the Interfaith Center for Corporate Responsibility (ICCR), the Sustainable Accounting Standards Board (SASB) and the Financial Stability Board’s Task Force on Climate-related Financial Disclosure (TCFD).
In 2020, we established a formal relationship with both ICCR and SASB (we have worked informally with SASB for several years), as well as with TCFD. TCFD is one of the frameworks that we encourage companies to reference when preparing their climate-related disclosures. For our first step to align with TCFD’s guidelines, we have prepared a general risk disclosure for clients and prospective clients using TCFD’s suggested framework of Governance, Strategy, Risk Management and Metrics and Targets. On each of these fronts, we believe we are on very solid ground.
- Governance of sustainability and climate issues is a documented priority for our CEO, senior executives and governing boards.
- Our strategy to address climate change and manage climate risk is discussed throughout this report and includes a comprehensive approach to our operational impact as well as an ongoing focus on the climate impact of our investments as outlined above.
- We believe that we provide ample reporting on our investment and operational emissions metrics and targets, through this sustainability report as well as the suite of impact and engagement reports we issue on an annual basis.
We are still in the early innings of our TCFD-related efforts; our goal for 2021-2022 is to expand the climate tools available to our investment teams—in particular, scenario analysis tools to enable assessments of potential outcomes from future temperature increases. These scenarios analyses are key components of TCFD’s reporting regime, and we believe they should improve our reporting as well as help us increase our understanding of the risks embedded in our portfolios.
We are firm believers in the maxim, “what gets measured, gets managed.” Looking back at the history of our SI business, we know that our consistent participation in PRI reporting was extremely helpful for us, as each year it helped us clarify our areas of strength as well as areas where we have room for improvement vs. our peers, today and in the future. Similarly, we believe that increased participation in state-of-the-art climate reporting regimes should offer us a similar benefit, helping us to understand climate risk, weigh it against other risks and considerations, and thereby widen the lens through which we view our investment decisions. We face several challenges, most notably the fact that carbon emissions data for any emitter is rarely 100% reliable, due to a lack of standards for reporting or even a requirement that the data be reported at all. Despite this, we believe that our continued focus on the topic, on our own and in collaboration with industry partners, can help us move steadily forward.
Thank you for taking the time to review our 2021 Sustainability Report. We hope that the report has provided a sense of our priorities with respect to serving our clients, colleagues, community and society, the progress we are seeking to achieve, and importantly what it means to us to be leaders on the topics discussed in the report. We believe that our progress over time is greatly supported by listening closely to our clients, colleagues and other stakeholders, internalizing their perspectives and using them to help guide our decisions, so we encourage you to share your thoughts and feedback with us.
The views expressed are those of the author and Brown Advisory as of the date referenced and are subject to change at any time based on market or other conditions. These views are not intended to be and should not be relied upon as investment advice and are not intended to be a forecast of future events or a guarantee of future results. Past performance is not a guarantee of future performance and you may not get back the amount invested.
The information provided in this material is not intended to be and should not be considered to be a recommendation or suggestion to engage in or refrain from a particular course of action or to make or hold a particular investment or pursue a particular investment strategy, including whether or not to buy, sell, or hold any of the securities mentioned. It should not be assumed that investments in such securities have been or will be profitable. To the extent specific securities are mentioned, they have been selected by the author on an objective basis to illustrate views expressed in the commentary and do not represent all of the securities purchased, sold or recommended for advisory clients. The information contained herein has been prepared from sources believed reliable but is not guaranteed by us as to its timeliness or accuracy, and is not a complete summary or statement of all available data. This piece is intended solely for our clients and prospective clients, is for informational purposes only, and is not individually tailored for or directed to any particular client or prospective client.
ESG considerations that are material will vary by investment style, sector/industry, market trends and client objectives. ESG strategies seek to identify companies that they believe may have desirable ESG outcomes, but investors may differ in their views of what constitutes positive or negative ESG outcomes. As a result, the strategies may invest in companies that do not reflect the beliefs and values of any particular investor. The strategies may also invest in companies that would otherwise be screened out of other ESG oriented funds. Security selection will be impacted by the combined focus on ESG assessments and forecasts of return and risk.
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References to investment strategies or individual securities or issuers are intended to illustrate the application of Brown Advisory’s investment and research process only and should not be viewed as a recommendation of any particular strategy, security or issuer. The investments described in the selected case studies were not made by any single fund or strategy and do not represent all of the investments purchased or sold by any fund or strategy.
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