This report shows public data only. Is this your organisation? If so, login here to view your full report.

SKY Harbor Capital Management

PRI reporting framework 2020

You are in Direct - Fixed Income » ESG incorporation in actively managed fixed income » (C) Implementation: Integration

(C) Implementation: Integration

FI 10. Integration overview

10.1. 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 growing body of evidence of a high correlation between companies that manage ESG factors well and superior investment returns. Accordingly, we have prioritized ESG integration in our fundamental credit analysis. The ESG-integrated investment process applies to all assets under management, not solely to assets in our Sustainable Strategies.

Paramount to our fundamental process is a focus on the debt 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.

10.2. 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 and guided by SASB industry materiality factors. 

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. Industry ESG-related risk is guided by SASB materiality factors.

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.

10.3. Additional information [OPTIONAL]


FI 11. Integration - ESG information in investment processes

11.1. 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 used to adjust the internal credit assessments of issuers.
ESG analysis is used to adjust forecasted financials and future cash flow estimates.
ESG analysis impacts the ranking of an issuer relative to a chosen peer group.
An issuer`s ESG bond spreads and its relative value versus its sector peers are analysed to find out if all risks are priced in.
The impact of ESG analysis on bonds of an issuer with different durations/maturities are analysed.
Sensitivity analysis and scenario analysis are applied to valuation models to compare the difference between base-case and ESG-integrated security valuation.
ESG analysis is integrated into portfolio weighting decisions.
Companies, sectors, countries and currency and monitored for changes in ESG exposure and for breaches of risk limits.
The ESG profile of portfolios is examined for securities with high ESG risks and assessed relative to the ESG profile of a benchmark.
Other, specify in Additional Information

11.2. Additional information [OPTIONAL]


FI 12. Integration - E,S and G issues reviewed

12.1. 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

12.2. Please provide more detail on how you review E, S and/or 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 companies detailed below, but with a few distinctions. Because the sector is highly regulated, our ESG analysis of financial companies places particular emphasis on business ethics, customer privacy, data protection, 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. Our industry assessment is guided by SASB materiality and our assessment of a company's preparedness for those material ESG-related risks.

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 proprietary 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, GHC emission, physical and transition climate-related risks, 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, community engagement and charitable contributions, product liability potential, and reputation
  • Governance: management stability and credibility, board structure, legal risk, tax patterns, and historical treatment of bondholders.

In addition, we track the company's transparency and disclosure in these topics and regularly engage with companies to request further information and encourage public dissemination related to various ESG topics.

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.

12.3. Additional information.[OPTIONAL]


Top