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SKY Harbor Capital Management

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.

Corporate (financial)
0 Screening alone
0 Thematic alone
46 Integration alone
54 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
54 Integration alone
46 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.

SKY Harbor’s investment process is designed to identify, value and manage specific High Yield market risks, which inherently includes ESG factors. It has long been our view that ESG factors play a material role in identifying potential investment risks and can, through analysis and consistent monitoring, be integral to investment decision making and performance.  We recognize the potential for a high correlation between companies that manage ESG factors well and superior investment returns, and, accordingly, ESG integration in our fundamental credit analysis and overall investment process is applied to all assets under management.

Additionally, more than half of current AUM is managed in client mandates that include ESG exclusionary screens or in funds which comply with the Convention on Cluster Munitions and do not invest in companies that manufacture cluster bombs and anti-personnel mines.

04.3. Additional information [Optional].


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:

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

06.3. Additional information. [Optional]


(A) Implementation: Screening

FI 07. Types of screening applied

07.1. Indicate the type of screening you conduct.

Select all that apply
Corporate (financial)
Corporate (non-financial)
Negative/exclusionary screening
Positive/best-in-class screening
Norms-based screening

07.2. Describe your approach to screening for internally managed active fixed income

Negative screening based on ESG factors is not a regularly applied component in our credit research and investment process.  We do, however, offer exclusionary screening at an individual mandate level for clients with specific RI requirements, as well as apply exclusionary screening for funds which comply with the Convention on Cluster Munitions.

07.3. Additional information. [Optional]


FI 08. Negative screening - overview and rationale

08.1. Indicate why you conduct negative screening.

Corporate (financial)

Corporate (fin)

Corporate (non-financial)

Corporate (non-fin)

08.2. Describe your approach to ESG-based negative screening of issuers from your investable universe.

Exclusionary screening is applied in meeting the RI/ESG requirements as prescribed for certain segregated accounts and for funds which comply with the Convention on Cluster Munitions.

08.3. Additional information. [Optional]


FI 09. Examples of ESG factors in screening process (Private)


FI 10. Screening - ensuring criteria are met

10.1. Indicate which systems your organisation has to ensure that fund screening criteria are not breached in fixed income investments.

Type of screening
Checks
Negative/exclusionary screening?

10.2. Additional information. [Optional]

SKY Harbor’s pre-trade compliance order generation tool as well as our post-trade compliance application are custom-coded for any ESG/SRI guidelines and constraints. Full audit trails and security access controls are maintained at each step of our electronic straight-through processing system to ensure client requirements are consistently met.  Compliance and the Operations team regularly conducts testing to ensure all constraints are met and in effect.  


(C) Implementation: Integration

FI 14. Integration overview

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

SKY Harbor’s investment process is designed to identify, value and manage specific High Yield market risks, which inherently includes ESG factors. It has long been our view that ESG factors play a material role in identifying potential investment risks and can, through analysis and consistent monitoring, be integral to investment decision making and performance.  We recognize the potential for a high correlation between companies that manage ESG factors well and superior investment returns, and, accordingly, ESG integration in our fundamental credit analysis and overall investment process is applied to all assets under management.

Paramount to our fundamental process is a focus on the securities of companies that have sustainable business models in light of the globalization of economies and the interrelatedness of capital markets, which, together can lead to rapid shifts in high yield issuer financial flexibility. As such, we look for themes that both support and sustain corporate profitability and enhance financial flexibility. We develop and retest specific themes through quarterly earnings trends, aggregate industry and economic data, ESG specific research and anecdotal evidence collected broadly which is then weighed against valuation opportunities and market realities.

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

Corporate (financial)

SKY Harbor’s research integration of ESG factors for corporate issuers in banking and financial services follows the same approach as that for non-financials corporates, but with a different weighting on certain factors more relevant to the financial industry. 

Corporate (non-financial)

SKY Harbor’s research process and credit selection targets issuers with solid credit characteristics, a high level of financial flexibility and strong operating potential. Analysts perform in-depth analysis to identify risks associated with an issuer’s Industry Outlook, Operating Potential or Financial Flexibility

Analysts consider a broad range of ESG factors depending on the issuer and industry at various stages of our research process. Certain Governance issues are applicable across all industries, including corporate board and ownership structures, alignment of executive pay, and accounting. Other social and environmental factors, may have greater relevancy in one industry versus another.

The identification, analysis and ongoing monitoring of ESG factors through our credit research process is integral to our risk-based approach, security selection and positive investment outcomes.

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
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]


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
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.

Corporate (financial)

SKY Harbor’s research integration of ESG factors for corporate issuers in banking and financial services follows the same approach as that for non-financials corporates detailed below, but with a few distinctions.  Because the sector is highly regulated, our ESG analysis of financials places particular emphasis on business ethics and lending practices which may materially adversely impact an issuer via regulatory investigations, fines and reforms.  Indirect social factors include compliance with regulations against predatory lending, and adherence to standards for equal opportunity lending and the community reinvestment act. Environmental factors are also assessed, but typically have a lower impact relative to social and governance factors in this industry. 

Corporate (non-financial)

SKY Harbor’s research process and credit selection targets issuers with solid credit characteristics, a high level of financial flexibility and strong operating potential. Analysts perform in-depth analysis to identify risks associated with an issuer’s Industry Outlook, Operating Potential or Financial Flexibility. Our analysis of the risks associated with an issuer’s industry evaluates cyclical and secular trends, the efficacy of industry sustainability and the regulatory environment to assess the external forces in place or looming that may impact the outlook for an issuer and its peer group. Our analysis of the risks associated with an issuer’s operating potential takes the form of a full Business Due Diligence designed to uncover the key drivers of an issuer’s business model, the soundness of its execution strategy and its sensitivity to various internal and external factors. Our analysis of the risks associated with an issuer’s financial flexibility takes the form of a robust Financial Model that is designed to assess an issuer’s long-term ability to operate within its existing capital structure and service its debt. This financial model highlights an issuer’s liquidity profile and credit trends using four to five years of historical financial data and full financial results projected out five years.

Analysts consider a broad range of ESG factors depending on the issuer and industry at various stages of our research process. Certain Governance issues are applicable across all industries, including corporate board and ownership structures, alignment of executive pay, and accounting. Other social and environmental factors, may have greater relevancy in one industry versus another. Examples of ESG factors regularly examined include:

Environmental: industrial practices, waste management, pollution prevention, safety procedures and capital expenditure/cost to maintain high standards in these areas.

Social: worker rights and benefits, pay practices, workforce diversity, employee training and retention; also consumer demographics, product liability potential, and reputation

Governance: management stability and credibility, board structure, legal risk, tax patterns, and historical treatment of bondholders.

The identification, analysis and ongoing monitoring of ESG factors through our credit research process is integral to our risk-based approach, security selection and positive investment outcomes.

16.3. Additional information.[OPTIONAL]


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