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Longfellow Investment Management Co., LLC

PRI reporting framework 2018

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

ESG incorporation in actively managed fixed income

Implementation processes

FI 01. Incorporation strategies applied

01.1. 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
10 Integration alone
0 Screening + integration strategies
0 Thematic + integration strategies
15 Screening + thematic strategies
5 All three strategies combined
70 No incorporation strategies applied
100%
Corporate (financial)
0 Screening alone
0 Thematic alone
95 Integration alone
0 Screening + integration strategies
0 Thematic + integration strategies
0 Screening + thematic strategies
5 All three strategies combined
0 No incorporation strategies applied
100%
Corporate (non-financial)
0 Screening alone
0 Thematic alone
95 Integration alone
0 Screening + integration strategies
0 Thematic + integration strategies
0 Screening + thematic strategies
5 All three strategies combined
0 No incorporation strategies applied
100%
Securitised
0 Screening alone
0 Thematic alone
0 Integration alone
0 Screening + integration strategies
0 Thematic + integration strategies
5 Screening + thematic strategies
0 All three strategies combined
95 No incorporation strategies applied
100%

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

Screening and thematic strategies are client directed with a few firm-wide exceptions for ethical reasons.

ESG integration is applied across corporate (financial and non-financial) and municipal holdings.

 

01.3. Additional information [Optional].


FI 02. ESG issues and issuer research (Private)


FI 03. Processes to ensure analysis is robust

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

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

03.3. Additional information. [Optional]


(A) Implementation: Screening

FI 04. Types of screening applied

04.1. Indicate the type of screening you conduct.

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

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

Most of our screening is client directed. We accommodate our client's guidelines by applying a blend of negative, positive and norms-based screening techniques that draw from a set of ESG factors. Firm-wide, we restrict investment in certain industries and negative screen to remain compliant with this rule.

04.3. Additional information. [Optional]


FI 05. Negative screening - overview and rationale

05.1. Indicate why you conduct negative screening.

SSA

SSA

Corporate (financial)

Corporate (fin)

Corporate (non-financial)

Corporate (non-fin)

Securitised

Securitised

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

As previously discussed, restricted investment in certain issuers and industries (e.g. Tobacco sales, Weapons of Mass Destruction) is client directed and we apply negative screens to remain compliant with their respective guidelines.

Firm-wide, we avoid investment in certain industries on a discretionary basis (e.g. Tobacco producers, Adult Entertainment).

05.3. Additional information. [Optional]


FI 06. Examples of ESG factors in screening process (Private)


FI 07. Screening - ensuring criteria are met

07.1. 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?
Positive/best-in-class screening
Norms-based screening

07.2. Additional information. [Optional]


(B) Implementation: Thematic

FI 08. Thematic investing - overview (Private)


FI 09. Thematic investing - themed bond processes

09.1. Indicate whether you encourage transparency and disclosure relating to the issuance of themed bonds as per the Green Bonds Principles, Social Bond Principles, or Sustainability Bond Guidelines..

09.2. Describe the actions you take when issuers do not disburse bond proceeds as described in the offering documents.

We ensure the offering documents of prospective investments explicitly state what the proceeds may be used for. If such language exists and the proceeds are used for another purpose, this could constitute a legal case of misguiding the consumer using false information.

09.3. Additional information. [Optional]


FI 10. Thematic investing - assessing impact

10.1. Indicate how you assess the environmental or social impact of your thematic investments

10.2. Additional information. [Optional]


(C) Implementation: Integration

FI 11. Integration overview

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

All our investments are subject to a thorough assessment of environmental, social, and governance characteristics as part of our normal credit research process. While our assessment always includes qualitative indicators, the emphasis on quantitative indicators varies by sector. This integration is driven by our view that ESG factors can have material long-term financial impact, including but not limited to profitability, cost of capital, access to funding, and competitiveness.

However, unless client directed, we do not make investment decisions based solely on ESG. Rather, ESG is one piece of the investment analysis in addition to fundamental, industry, technical, and relative valuation considerations.

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

SSA

We invest solely in domestic USD dollar denominated SSAs (government-related securities). For SSAs, ESG is integrated into our analysis of each project and program. However, we don't generate ESG scores for SSAs due to a lack of consistent and comparable data.

Local Authorities (Municipals): In the municipal sector, we integrate ESG via factor and theme in our analysis of revenue and general obligation bonds. We focus on four key factors across all our municipal investments: use of bond proceeds, infrastructure quality, pension/OPEB contributions and governance. For clients with ESG/SRI specific considerations, we may invest in municipal bonds whose use of proceeds align with a desired impact or theme. For example, a revenue bond issued by a school district may be an attractive investment for a client who seeks to promote education.

Agencies: In the agency sector, we integrate ESG via theme in our analysis of Federal Agency bonds. For clients with ESG/SRI specific considerations, we may invest in the bonds of a Federal Agency who supports a cause aligning with a desired impact or theme. For example, a bond issued by the Small Business Administration (SBA) may be an attractive investment for a client who seeks to promote local businesses.

Treasuries: We use U.S. Treasuries for duration and liquidity management. Political risk and economic effectiveness are key factors in our overall sovereign risk analysis.

Corporate (financial)

For corporates, ESG is integrated into our analysis of each company and industry. We focus on of industry-specific ESG factors that we believe are material to creditworthiness and reference the SASB standards and UN PRI to establish materiality. We place a greater emphasis on factors tied to governance, capital and business practices for financial corporates.

We use these factors to score companies on their performance, using three years of historical data. When scoring a company, we evaluate 1) year-over-year changes in performance, 2) performance relative to peers, and 3) the level of public disclosure. This helps us identify areas of weakness (risks) and strengths and their possible financial implications.

The ESG scores and relevant takeaways are summarized on tear sheets that our analysts write for each company on an annual or more frequent basis. Our analysts also discuss takeaways in credit presentations and morning meetings.

While lower ESG scoring companies are not excluded from portfolios, analysts must feel comfortable that valuations appropriately compensate investors for these risks before an investment is made.

Corporate (non-financial)

For corporates, ESG is integrated into our analysis of each company and industry. We focus on of industry-specific ESG factors that we believe are material to creditworthiness and reference the SASB standards and UN PRI to establish materiality.

We use these factors to score companies on their performance, using three years of historical data. When scoring a company, we evaluate 1) year-over-year changes in performance, 2) performance relative to peers, and 3) the level of public disclosure. This helps us identify areas of weakness (risks) and strengths and their possible financial implications.

The ESG scores and relevant takeaways are summarized on tear sheets that our analysts write for each company on an annual or more frequent basis. Our analysts also discuss takeaways in credit presentations and morning meetings.

While lower ESG scoring companies are not excluded from portfolios, analysts must feel comfortable that valuations appropriately compensate investors for these risks before an investment is made.

11.3. Additional information [OPTIONAL]


FI 12. Integration - ESG information in investment processes

12.1. 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

12.2. Additional information [OPTIONAL]

The above applies when material ESG information is made available to us, either publicly or through engagement.


FI 13. Integration - E,S and G issues reviewed

13.1. 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

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

SSA

Within SSAs, our integration of ESG factors is primarily concentrated to the municipal (local authority) sector as we take more of a thematic approach in the agency sector. We focus on four key factors across all our municipal investments: use of bond proceeds, infrastructure quality, pension/OPEB contributions and governance. We may add to these factors or vary the weighting placed on each as long-term structural shifts occur. For example, the gradual rise of acute weather-related events has similarly increased the risk of issuer proximity to flood-prone and coastal areas and the emphasis our analysts place on this environmental factor.

Corporate (financial)

Within corporates, the ESG factors we integrate vary by industry. In financials, we place a greater emphasis on social and governance factors. We review these factors annually, considering any updates to the SASB standards and evaluating the appropriateness of any newly reported metrics. For instance, U.S. companies began reporting CEO-to-median workers' pay in 2016 and we are currently evaluating if this is an appropriate metric to include in our analysis of financial and non-financial corporates.

Corporate (non-financial)

Within corporates, the ESG factors we integrate vary by industry. In non-financials, we place a greater emphasis on environmental factors. We review these factors annually, considering any updates to the SASB standards and evaluating the appropriateness of any newly reported metrics. For instance, U.S. companies began reporting CEO-to-median workers' pay in 2016 and we are currently evaluating if this is an appropriate metric to include in our analysis of financial and non-financial corporates.

13.3. Additional information.[OPTIONAL]


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