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Breckinridge Capital Advisors

PRI reporting framework 2017

You are in Direct - Fixed Income » ESG incorporation in actively managed fixed income

ESG incorporation in actively managed fixed income

Implementation processes

FI 04. Incorporation strategies applied

04.1. Indicate 1) Which ESG incorporation strategy and/or combination of strategies you apply to your actively managed fixed income investments; and 2) The proportion (+/- 5%) of your total actively managed fixed income investments each strategy applies to.

SSA
0 Screening alone
0 Thematic alone
100 Integration alone
0 Screening + integration strategies
0 Thematic + integration strategies
0 Screening + thematic strategies
0 All three strategies combined
0 No incorporation strategies applied
100%
Corporate (financial)
0 Screening alone
0 Thematic alone
100 Integration alone
0 Screening + integration strategies
0 Thematic + integration strategies
0 Screening + thematic strategies
0 All three strategies combined
0 No incorporation strategies applied
100%
Corporate (non-financial)
0 Screening alone
0 Thematic alone
100 Integration alone
0 Screening + integration strategies
0 Thematic + integration strategies
0 Screening + thematic strategies
0 All three strategies combined
0 No incorporation strategies applied
100%

04.2. Describe your reasons for choosing a particular ESG incorporation strategy and how combinations of strategies are used.

We believe the market frequently ignores, and thus under prices, long-term risks that may be material to municipalities and corporations. It's most likely due to the fact that today's market suffers from a fixation on the short-term, and consequently seems less inclined to sufficiently account for significant challenges that lie ahead. We believe it's also due to the fact that most investors still don't consider the relevance of extra-financial factors, such as environmental, social and governance (ESG) factors. Breckinridge takes a very different view. We firmly believe that fully integrating the analysis of ESG factors into our research makes us smarter investors; that is, we can be better equipped to recognize under-priced risks and take a longer-term horizon for investing.

Breckinridge's integration of ESG research is entirely consistent with our investment philosophy. ESG is not simply a new strategy or product. Rather, it is fully integrated into our core investment process and it is a reflection of our commitment to rigorous, forward-looking research. Our highest priority at Breckinridge is to assure the security and safety of cash flows from principal and interest payments, and we believe ESG integration plays an important role in helping us carry out this mission. 

04.3. Additional information [Optional].

Since 2011, we have fully integrated ESG criteria into our core investment process and have developed proprietary frameworks to generate sustainability ratings that inform our internal credit ratings for issuers. We believe that this type of analysis provides a long-term, forward-looking perspective that can help identify and price credit risk. Ultimately, we strongly believe that integrating ESG analyses with traditional financial analyses can lead to improved long-term risk-adjusted returns.

We also offer clients the opportunity to select high-quality sustainable fixed income strategies that emphasize ESG criteria. These strategies identify and selectively invest in issuers with above average ESG profiles and bonds that fund essential environmental, social or economic development projects. In addition, as a customized separate account manager, we have the ability to implement negative screens through security-level or sector-based restrictions, or positive and/or thematic screens as it relates to an area of interest to the investor. We also offer a range of values-based mandates ranging from fossil fuel free to gender lens mandates for investors.


FI 05. ESG issues and issuer research (Private)


FI 06. Processes to ensure analysis is robust

06.1. Indicate how you ensure that your ESG research process is robust:

specify description

          We cross reference our insights on material ESG factors in direct discussions with issuers as part of our engagement process.
        

06.2. Describe how your ESG information or analysis is shared among your investment team.

06.3. Additional information. [Optional]


(C) Implementation: Integration

FI 14. Integration overview

14.1. Describe your approach to integrating ESG into traditional financial analysis.

Breckinridge has fully integrated ESG analysis into our core investment process, and the analysis of ESG factors is part of our traditional fundamental credit analysis. Our sustainability assessment consists of analyzing a wide range of ESG factors through a rigorous quantitative as well as qualitative process.

Municipal ESG Research

Quantitative Assessment: We determine our ESG performance indicators based on a number of internal and external sources as described in our response to question FI 14.2 (SSA) below. These ESG indicators are then weighted and scored within the context of internally-developed sustainability frameworks. 

Qualitative Assessment: Our analysts review a municipality’s sustainability plan, if available, and evaluate its environmental and social initiatives. Engagement calls with municipalities also supplement our ESG research.

Sustainability Rating: We assign a sustainability rating based on an issuer’s quantitative score as well as our qualitative assessment of the issuer. Once the analyst determines his/her sustainability rating for an issuer, he/she incorporates that rating into the overall credit rating for the issuer. In general, credit analysts can raise the internal rating to reflect low ESG risks, or downgrade the rating if ESG risks are considered high or poorly-managed.

Corporate (Financial & Non-Financial) ESG Research

Quantitative Assessment: We determine our ESG performance indicators based on a number of internal and external sources, described in our response to question FI 14.2 (corporate financial and non-financial) below. These ESG indicators are then weighted and scored within the context of an internally-developed sustainability framework.

Qualitative Assessment: As part of our qualitative credit research, our corporate analysts review a company’s ESG policies and targets. Analysts also consider how corporate management teams articulate their strategic priorities and where sustainability issues are viewed as an opportunity to drive revenue growth. Additionally, takeaways from our engagement calls with corporate management teams may have an impact on the analyst’s ESG and overall credit opinions for a company.

Sustainability Rating: Our analysts are informed by an issuer’s quantitative score and consider internal qualitative analysis when determining a sustainability rating for an issuer. Once an analyst determines a sustainability rating for an issuer, they incorporate the sustainability rating into the overall credit rating of the issuer. In general, credit analysts can raise the internal rating of an issuer to reflect low ESG risks, or downgrade the rating if ESG risks are considered high or poorly-managed.

14.2. Describe how your ESG integration approach is adapted to each of the different types of fixed income you invest in.

SSA

Environmental

When evaluating environmental risk, our examination is two-fold. For municipal bonds, we consider the “essentiality” of a bond’s purpose to the municipality, as well as the environmental sustainability practices of the issuing entity. Breckinridge understands the more a project or public organization’s purpose aligns with the environmental, social needs and values of its constituents, the more likely that bond investors will be repaid. At the issuer level, to assess environmental risks, we evaluate indicators such as the depth and breadth of sustainability plans and the region’s air quality.

Social

Breckinridge’s examination of social risk is also two-fold. Again, we consider the “essentiality” of a bond’s purpose as well as the social and economic characteristics related to each issuer. Social indicators such as the local unemployment rate, median household income, affordability of the community’s housing stock and education level of the residents are evaluated, as poor performance on these measures could portend long-term credit stress. We believe that municipalities that prudently invest to strengthen their communities’ social and economic fabric pose fewer social and long-term investment risks.

Governance

Breckinridge strongly believes that sound governance can reduce default risk. Municipalities that think beyond immediate budgetary needs tend to avoid destabilizing credit events. Examples of sound practices may include close monitoring of long-term pension liabilities and principal maturities, implementing affordable capital plans, or instituting strong financial controls. We have also expanded our governance analysis to include a systematic assessment of a municipality’s disclosure practices.

City/County Framework

Breckinridge introduced a new framework for analyzing cities and counties that we believe is the first of its kind to combine measures of economic success with social progress. This innovative approach enables our firm to reach beyond more-widely accepted sustainability-focused investment analyses and emphasize inclusiveness as a potential key determinant of long-term investment performance. The two main components of the city/county framework include economic metrics and inclusiveness metrics. The economic category includes a range of traditional economic indicators for cities and counties. The inclusiveness category is modelled after the globally recognized Social Progress Index (SPI) and evaluates cities and counties on three key dimensions:

  • Basic Human Needs
  • Foundations of Wellbeing
  • Opportunity

The impetus for the new city/county framework is our belief that communities that are thriving both economically and socially are more attractive to talented and diverse citizens as well as companies that will continue to enhance these communities and ensure their social and economic stability over the long term. As such, Breckinridge believes that inclusive communities should exhibit stronger creditworthiness and offer greater opportunity and lower risk for investors.

Corporate (financial)

Our approach to ESG analysis for financial and non-financial corporates is largely similar. However, ESG factors and materiality will differ.  Also, due to the unique regulatory oversight of large financial institutions, a greater focus of our ESG research is made to a financial company's history of managing its relationships with regulatory bodies. Additionally, Breckinridge's high-quality fixed income focus gives us a unique perspective and opportunity to assess the financial sector's landscape.

Corporate (non-financial)

Environmental

Breckinridge believes that corporate issuers who are efficiently managing their environmental impact may have lower regulatory and event risk. We also believe that close monitoring of environmental impacts may help certain bond issuers better manage their resource footprint. We examine a number of indicators and reports to evaluate environmental risks. At a high level, they include:

  • Sustainalytics, MSCI ESG research, and Newsweek Green Rankings
  • Bloomberg ESG data for trends and targets
  • Company reports on environmental liabilities, carbon emissions and other key issues

Social

Breckinridge believes that corporate investors who carefully weigh the costs and benefits associated with social practices mitigate controversy risk, and hence reduce our investment risk. Controversy risk can rise when a corporation fails to adequately engage employees, customers or other key stakeholders when implementing certain corporate policies. We believe that managing a "social" footprint is an integral component of brand management and can have a clear impact on bond prices and price volatility. We examine a number of indicators to evaluate social risks. At a high level, they include:

  • Sustainalytics and MSCI Corporate Social Responsibility (CSR) reporting
  • Bloomberg ESG data for trends and targets
  • External reporting on sustainability initiatives
  • Controversy scores from Sustainalytics and MSCI

Corporate Governance

Breckinridge believes corporate issuers with sound governance practices represent lower-risk investments for bondholders. Corporations that self-evaluate business practices through independent boards and audits may be less likely to sanction inappropriately-structured executive pay packages or engage in questionable accounting practices. Management and governance practices are also associated with better disclosure of financial and non-financial information. Disclosure can prove vital to a company's effort to drive corporate responsibility, transparency and sustainability throughout its operations. We evaluate governance risks by examining a number of key issues, such as the structure and independence of the board of directors and the strength of its bribery and corruption policies.

14.3. Additional information [OPTIONAL]


FI 15. Integration - ESG information in investment processes

15.1. Indicate how ESG information is typically used as part of your investment process.

Select all that apply
SSA
Corporate (financial)
Corporate (non-financial)
ESG analysis is integrated into fundamental analysis
ESG analysis is integrated into security weighting decisions
ESG analysis is integrated into portfolio construction decisions
ESG analysis is a standard part of internal credit ratings or assessment
ESG analysis for issuers is a standard agenda item at investment committee meetings
ESG analysis is regularly featured in internal research notes or similar
ESG analysis is a standard feature of ongoing portfolio monitoring
ESG analysis features in all internal issuer summaries or similar documents
Other, specify

15.2. Additional information [OPTIONAL]

ESG is fully integrated into our investment process and informs our credit research decisions. Resultantly, both sector weighting decisions and portfolio construction are influenced by our ESG analysis. For our sustainable strategies, ESG analysis is integrated into both sector weighting decisions and portfolio construction.


FI 16. Integration - E,S and G issues reviewed

16.1. Indicate the extent to which ESG issues are reviewed in your integration process.

Environment
Social
Governance
SSA

Environmental

Social

Governance

Corporate (financial)

Environmental

Social

Governance

Corporate (non-financial)

Environmental

Social

Governance

16.2. Please provide more detail on how you review E, S and G factors in your integration process.

SSA

Environmental

When evaluating environmental risk, our examination is two-fold. For municipal bonds, we consider the “essentiality” of a bond’s purpose to the municipality, as well as the environmental sustainability practices of the issuing entity. Breckinridge understands the more a project or public organization’s purpose aligns with the environmental, social needs and values of its constituents, the more likely that bond investors will be repaid. At the issuer level, to assess environmental risks, we evaluate indicators such as the depth and breadth of sustainability plans and the region’s air quality.

Social

Breckinridge’s examination of social risk is also two-fold. Again, we consider the “essentiality” of a bond’s purpose as well as the social and economic characteristics related to each issuer. Social indicators such as the local unemployment rate, median household income, affordability of the community’s housing stock and education level of the residents are evaluated, as poor performance on these measures could portend long-term credit stress. We believe that municipalities that prudently invest to strengthen their communities’ social and economic fabric pose fewer social and long-term investment risks.

Governance

Breckinridge strongly believes that sound governance can reduce default risk. Municipalities that think beyond immediate budgetary needs tend to avoid destabilizing credit events. Examples of sound practices may include close monitoring of long-term pension liabilities and principal maturities, implementing affordable capital plans, or instituting strong financial controls. We have also expanded our governance analysis to include a systematic assessment of a municipality’s disclosure practices.

City/County Framework

Breckinridge introduced a new framework for analyzing cities and counties that we believe is the first of its kind to combine measures of economic success with social progress. This innovative approach enables our firm to reach beyond more-widely accepted sustainability-focused investment analyses and emphasize inclusiveness as a potential key determinant of long-term investment performance. The two main components of the city/county framework include economic metrics and inclusiveness metrics. The economic category includes a range of traditional economic indicators for cities and counties. The inclusiveness category is modelled after the globally recognized Social Progress Index (SPI) and evaluates cities and counties on three key dimensions:

  • Basic Human Needs
  • Foundations of Wellbeing
  • Opportunity

The impetus for the new city/county framework is our belief that communities that are thriving both economically and socially are more attractive to talented and diverse citizens as well as companies that will continue to enhance these communities and ensure their social and economic stability over the long term. As such, Breckinridge believes that inclusive communities should exhibit stronger creditworthiness and offer greater opportunity and lower risk for investors.

Corporate (financial)

Our approach to ESG analysis for financial and non-financial corporates is largely similar. However, ESG factors and materiality do change. Also, due to the unique regulatory oversight of large financial institutions, a greater focus is made to a financial company's history of managing its relationships with regulatory bodies. Additionally, Breckinridge's high-grade fixed income focus gives us a unique perspective and opportunity to assess the financial sector's landscape.

Corporate (non-financial)

Environmental

Breckinridge believes that corporate issuers who are efficiently managing their environmental impact may have lower regulatory and event risk. We also believe that close monitoring of environmental impacts may help certain bond issuers better manage their resource footprint. We examine a number of indicators and reports to evaluate environmental risks. At a high level, they include:

  • Sustainalytics, MSCI ESG research, and Newsweek Green Rankings
  • Bloomberg ESG data for trends and targets
  • Company reports on environmental liabilities, carbon emissions and other key issues

Social

Breckinridge believes that corporate investors who carefully weigh the costs and benefits associated with social practices mitigate controversy risk, and hence reduce our investment risk. Controversy risk can rise when a corporation fails to adequately engage employees, customers or other key stakeholders when implementing certain corporate policies. We believe that managing a "social" footprint is an integral component of brand management and can have a clear impact on bond prices and price volatility. We examine a number of indicators to evaluate social risks. At a high level, they include:

  • Sustainalytics and MSCI Corporate Social Responsibility (CSR) reporting
  • Bloomberg ESG data for trends and targets
  • External reporting on sustainability initiatives
  • Controversy scores from Sustainalytics and MSCI

Corporate Governance

Breckinridge believes corporate issuers with sound governance practices represent lower-risk investments for bondholders. Corporations that self-evaluate business practices through independent boards and audits may be less likely to sanction inappropriately-structured executive pay packages or engage in questionable accounting practices. Management and governance practices are also associated with better disclosure of financial and non-financial information. Disclosure can prove vital to a company's effort to drive corporate responsibility, transparency and sustainability throughout its operations. We evaluate governance risks by examining a number of key issues, such as the structure and independence of the board of directors and the strength of its bribery and corruption policies.

16.3. Additional information.[OPTIONAL]


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