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Galliard Capital Management, Inc.

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.

Galliard's credit analysts use the "mosaic" approach, where data gets obtained from a wide variety of sources, both quantitative and qualitative, that ultimately drives investment decision making. ESG related items are an important part of the mosaic that may or may not change the analyst's opinion about a certain credit. Our credit write-ups contain information on the issuers current MSCI ESG-rating and a brief narrative around the issuer’s ESG strengths and weaknesses. Credit analysis is no exact science but ESG-related red flags have often been a precursor of credit problems.

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

Corporate (financial)

Galliard's ESG integration approach is an important part of the corporate credit analysis process, where ESG related red flags could be a precursor of credit problems.

Corporate (non-financial)

Galliard's ESG integration approach is an important part of the corporate credit analysis process, where ESG related red flags could be a precursor of credit problems.

Securitised

Galliard incorporates ESG factors in securitizations primarily in ABS securitizations involving consumer loans and leases and in business sectors including agriculture and construction equipment, trucking and transportation, equipment loans and leases and small business finance.  When available and applicable, we leverage the corporate ESG rating and analysis used by our Corporate credit team. 

 

10.3. Additional information [OPTIONAL]

Galliard applies the same philosophy to the selection of municipal and structured bond issuers, although ESG related data is harder to obtain and incorporate into the analysis.


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)
Securitised
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

Securitised

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)

The importance of E, S and G-related factors varies by industry. Environmental factors require mostly qualitative research using SEC filings, newspaper stories, anecdotal items and google searches. Galliard also relies heavily on the environmental records maintained by MSCI.

Similar qualitative analysis is required to measure a company’s social behavior, including labor relations, safety disclosures and health-related violations. Although companies are clearly improving their disclosures of such items, Galliard heavily relies on the research provided by MSCI.

We view Governance related problems as the most important part of the ESG analysis for financial corporate issuers. Galliard has always considered a company’s “character” as part of the firm’s 4-C approach to credit analysis. Galliard’s analysts periodically meet management teams, in person or at industry conferences, and follow earnings calls to better understand a company’s corporate culture. The analysis largely focuses on a company's board and members of the senior management team, and allows the analyst to identify excessive pay policies, overly shareholder friendly (bondholder unfriendly) financial policies and aggressive application of the accounting rules, which are all red flags of future credit problems.

 

Corporate (non-financial)

The importance of E, S and G-related factors varies by industry. Environmental factors require mostly qualitative research using SEC filings, newspaper stories, anecdotal items and google searches. Galliard also relies heavily on the environmental records maintained by MSCI.

Similar qualitative analysis is required to measure a company’s social behavior, including labor relations, safety disclosures and health-related violations. Although companies are clearly improving their disclosures of such items, Galliard heavily relies on the research provided by MSCI.

While still important, we view Governance as less important for industrial and utility issuers than for Financial issuers. Galliard has always considered a company’s “character” as part of the firm’s 4-C approach to credit analysis. Galliard’s analysts periodically meet management teams, in person or at industry conferences, and follow earnings calls to better understand a company’s corporate culture. The analysis largely focuses on a company's board and members of the senior management team, and allows the analyst to identify excessive pay policies, overly shareholder friendly (bondholder unfriendly) financial policies and aggressive application of the accounting rules, which are all red flags of future credit problems.

Securitised

Environmental factors are most applicable to our securitization analysis of ABS involving vehicles, automobiles, trucking, and agricultural equipment. Our analysis focuses on identifying underlying Parent/Issuer/Sponsor initiatives regarding energy efficiency, environmental impact, and sustainability.

Social factors identified in securitizations of consumer receivables involves the identification of predatory lending risks. This requires an understanding of the Sponsor's (issuer, originator, parent company, etc.) origination and servicing practices. Furthermore, consumer loan and lease products should provide a legitimate benefit for the borrower, as opposed to financial products designed specifically for securitizations. Social factors are also present in ABS of Small Business Administration program loans that promote employment growth through small business development in the United States.

Our analysis of Governance related factors is primarily focused on the alignment of interests between the sponsor, the investor, and the borrower. Securitization programs should benefit a sponsor as part of the ongoing, diversified funding strategy, and not be utilized primarily for the benefit of exploiting securitization markets. As highlighted in the previous section regarding social factors, financial products should have a readily identifiable benefit for the borrower (consumers and small businesses). Finally, governance should also include an analysis of the sponsor's compliance with consumer protection, environmental, and labor laws.

12.3. Additional information.[OPTIONAL]


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