Through Engagement on Mortgage-Backed Securities, Breckinridge Seeks to Highlight Climate-Risk

Breckinridge integrates ESG analysis when investing in MBS to better understand how events often attributed to climate change—hurricanes, flooding, drought, wildfires—can affect MBS cash flows and investment returns.

Breckinridge invests primarily in agency MBS, those with low credit risk thanks to explicit or implicit guarantees from GSEs: Government National Mortgage Association, Federal National Mortgage Association, and Federal Home Loan Mortgage Corporation.

Our team researched the effect of climate-related events on mortgage prepayment speeds, a key determinant of cash flows and performance. We compared prepayment speeds in various geographic regions against national averages to isolate the effect of disaster-related buyouts on prepayments.

A challenge when attempting to assess climate risks for agency MBS is a lack of disclosure. For privacy reasons, the GSEs stopped disclosing the location—other than state—of the homes backing mortgages in agency MBS pools. This policy means that investors are unable to determine if a home for an underlying mortgage is located on a coast, where it may be subject to flooding, or in an inland region exposed to climate change effects like wildfires or ground water depletion that causes land subsidence.

Breckinridge raised this concern during an engagement discussion with a GSE in late 2020, and subsequent discussion in May 2021. We learned that the GSE was in the early stages of considering climate risks in its underwriting process. To kickstart the effort, the GSE established an interdepartmental sustainability committee.

Favorably, we were told that the GSE is open to collaborating with investors to better understand and address climate change and other ESG risks. We think our engagement with the GSE helped to heighten awareness of the important of ESG risk and disclosure for investors.