Introduction

At BBH we recognize that climate-related risks present significant challenges to society, the global economy, and financial markets. BBH Investment Management believes that physical climate risk and the global transition toward a lower-carbon economy present both potential risks and opportunities to our clients’ investments. The consideration of environmental, social and governance (ESG) criteria, including climate risk, in our investment due diligence enhances our ability to manage risk and achieve our long-term objectives.

Investment Approach

As an active asset manager, our investment teams conduct research to determine the materiality of risks and opportunities, including climate-related issues, for each security. Across our equity and fixed income businesses, consideration of the range of physical risks (e.g. extreme weather events) and transition climate risks (e.g. lower carbon policies and regulations), help us to effectively assess the long-term sustainability and durability of our investments. Each portfolio management team integrates the consideration of relevant climate-related issues and assesses the materiality of their impact within its investment analysis, taking into account specific company, sector, and asset class issues. Material ESG factors, including climate-related risks and opportunities, have always, and continue to be, embedded in our investment criteria as they impact our assessment of the potential economic returns of a business.

Industry Collaborations

We are a member of the United Nations Global Compact and a signatory to the UN-supported Principles for Responsible Investment (PRI). Through the PRI we are engaged with the Taskforce on Climate Related Financial Disclosure (TCFD). We support the principles and goals of these organizations, including efforts to help society manage the challenges associated with climate-related risks.

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-related risks. In BBH Investment Management the ESG Oversight Committee (ESG OC) is responsible for monitoring ESG best practices and developments, including the impact of climate-related factors on our clients’ portfolios. 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.

Fixed Income

Across the Fixed Income universe, we assess both the direct environmental risk to a given investment, in addition to the risks and opportunities associated with the transition to a lower carbon economy.

When evaluating these risks, we consider the financial, operational and structural mitigants to those risks:

• Financial risk – we assess our obligors’ ability to manage the potential financial implications related to climate risk, as well as obligors’ ability to appropriately invest in their businesses to ensure compliance with environmental standards and best practices to support decarbonization.
  
  
• Operational risk – we recognize that certain capital-intensive businesses and issuers are inherently more exposed to environmental risks than other businesses that consume less power and natural resources.
  
  
• Structural considerations – we generally consider that the upper tiers of the capital structure, or other secured debt, tend to have lower credit risk as it relates to ESG, given that the overall risk of credit impairment is lower.
  
  
• Transparency – when interacting with management teams, our investment teams encourage transparency and proactive disclosure of climate-related data, which in turn helps us ensure that material risks are appropriately managed.
  
  

Given our emphasis on prioritizing capital preservation, 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 risk or material, unmitigated environmental risk.

Equity

Across the equity universe, portfolio managers and analysts assess a variety of risks and opportunities for any business under consideration for investment. This includes the evaluation of ESG factors. In evaluating whether climate risk may be material for an equity investment, we consider both the physical aspects of climate change and the implications of the ongoing energy 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 in extreme weather events
  
• manage their carbon footprint and improve production efficiency

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 flow and are managed by management teams with high levels of integrity and operational capability. Analysis of ESG factors is integrated into this investment process.

To the extent that a company bears climate-related risk factors such as i) current or future environmental liabilities, ii) regulatory mandates that could substantially increase the costs of doing business, or iii) obsolescence risk related to de-carbonization, we would typically avoid the investment.

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-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 will 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 IM Engagement Statement

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

Risks

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.

Considering ESG factors as part of investment decisions may result in forgoing otherwise attractive opportunities, which may result in lower performance when compared to advisers that do not consider ESG factors.