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Garcia Hamilton & Associates, L.P.

PRI reporting framework 2020

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

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
0 Integration alone
100 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
0 Integration alone
100 Screening + integration strategies
0 Thematic + integration strategies
0 Screening + thematic strategies
0 All three strategies combined
0 No incorporation strategies applied
100%
Securitised
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%

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

INTEGRATION

Since our founding, GH&A has included environmental, social and governance (ESG) considerations in our investment philosophy.  Our philosophy is nuanced and proactive and has evolved beyond negative screening processes. These factors are incorporated considerations in our portfolio construction, investment decision-making, investment analysis and due diligence.

GH&A’s investing policy seeks to incorporate ESG and responsible investing (RI) trends and metrics across our high-quality universe within our top-down macro framework. We continually evaluate corporate securities on their current ESG/RI initiatives and policies and evaluate their measurable improvement and implementation of these initiatives.

SCREENING

Negative Screening: Includes corporate liquidity criteria, ratings criteria, and the Firm’s long-standing exclusion of corporates with material ESG deficiencies

Positive Screening: Firm’s proprietary ESG overlay; quantitative scoring method of criteria including, but not limited to, sustainability, transparency, ESG risks and opportunities, governance, and integration

01.3. Additional information [Optional].

ESG factors are addressed during the final phase of vetting investment ideas and potential holdings.

We first conduct our initial screening process of the universe of eligible issuers for portfolio inclusion and only invest in high-quality securities. Within the corporate sector, we screen for the largest issuers and companies rated A- or better by 2 of the 3 rating agencies. We then remove foreign companies/Yankees, alcohol, tobacco, gambling, and defense companies. After applying this screen, our investable corporate universe shrinks to approximately 80 issuers at the present time. All portfolios will hold either U.S. Treasuries, agency debentures, agency guaranteed MBS and/or high-quality corporate securities. For strategies that include corporate bonds, the corporate issue selection process incorporates a relative ranking of corporate issuers across the relevant ESG metrics for the relative industry within our high-quality universe. This ESG relative score is used to, not only identify issuers which maintain a high proprietary ESG internal score and trend, but, all things equal, greater consideration is given to securities with higher or trending higher ESG internal scores versus their conventionally valued peers within the portfolio construction process. 


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]

The GH&A investment team formally meets once a week to primarily discuss the five key market factors, (i.e. sentiment, monetary, economic, valuation & inflation) that serve as the foundation of our investment process and fixed income strategy. During this meeting, the team discusses topics such as macroeconomic conditions, market trends, market outlook, headline news, portfolio performance, individual securities, and potential developments pertaining to our ESG assessment, and many other critical topics. An additional key component of this weekly meeting is the review and discussion of target portfolio characteristics. Sustainability risk and opportunities are documented in the Corporate Universe ESG Score and Rank spreadsheet that is produced for these meetings.

All GH&A investment professionals are physically located at the sole office of GH&A in Houston, TX, and sit together in an open trading floor, which leads to continuous daily communication between the team, including communication of ESG information and analysis.


(A) Implementation: Screening

FI 04. Types of screening applied

04.1. 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

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

Negative Screening: Includes corporate liquidity criteria, ratings criteria, and the Firm’s long-standing exclusion of corporates with material ESG deficiencies

Positive Screening: Firm’s proprietary ESG overlay; quantitative scoring method of criteria including, but not limited to, sustainability, transparency, ESG risks and opportunities, governance, and integration

04.3. Additional information. [Optional]


FI 05. Examples of ESG factors in screening process (Private)


FI 06. Screening - ensuring criteria are met

06.1. 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

06.2. Additional information. [Optional]

We use NorthPoint Trading Compliance rules manager in conjunction with the NorthPoint Order Management System from ACA Technology Solutions (division of ACA Compliance Group) to ensure that investments fall within firm and client investment guidelines.  The NorthPoint system supports the multiple attributes of fixed income debt securities and handles complex trade allocation scenarios.  The powerful rules-based compliance engine is user-configurable, including custom calculation capabilities that allow GH&A to set up internal guidelines based on concentration limits, eligibility parameters, restricted lists, and warning tolerances.

All account guidelines are reviewed by compliance and investment management to ensure that GH&A is managing an account in line with the client’s investment guidelines.  Guidelines are input into the NorthPoint Trading Compliance system by the Chief Compliance Officer, Chief Operating Officer or other members of the compliance team and cannot be overridden by the investment team. 


(C) Implementation: Integration

FI 10. Integration overview

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

ESG research is incorporated in our general research process. All firm-level ESG resources are available at the strategy level and have influenced our overall investment strategy since the Firm's inception (1988). GH&A’s internal resources consist of our initial screening process of the universe of eligible names for portfolio inclusion and only invest in high-quality securities. Within the corporate sector, we screen for the largest issuers and companies rated A- or better by 2 of the 3 rating agencies.  We then remove foreign companies/Yankees, alcohol, tobacco, gambling, and defense companies.  After applying this screen, our investable corporate universe shrinks to approximately 80 issuers.  All portfolios will hold either U.S. Treasuries, agency debentures, agency guaranteed MBS and high-quality corporate securities.

We utilize traditional financial and quantitative metrics analysis as well as qualitative assessments to identify ESG risks and opportunities and inform buy/sell/hold decisions. The Firm uses both internal and external resources to acquire data, information and analyses on sustainability factors facing our corporate universe.  GH&A collects historic and peer level data on our corporate securities including RobecoSAM, Sustainalytics Rank, ISS Quality Score, CDP Climate Score as well as Bloomberg ESG disclosure metrics.  The reports from these third-party providers assist the investment team in its overall evaluation process and provides a base to further study/research these securities for continued inclusion in our portfolio. Corporate securities are evaluated based on improving or declining adherence to PRI guidelines. If a security within our investment universe fails to maintain a positive ESG trajectory, it will receive diminished consideration for future investments.

ESG factors are addressed during the final phase of vetting investment ideas and potential holdings.

We first conduct our initial screening process of the universe of eligible issuers for portfolio inclusion and only invest in high-quality securities. Within the corporate sector, we screen for the largest issuers and companies rated A- or better by 2 of the 3 rating agencies. We then remove foreign companies/Yankees, alcohol, tobacco, gambling, and defense companies. After applying this screen, our investable corporate universe shrinks to approximately 80 issuers at the present time. All portfolios will hold either U.S. Treasuries, agency debentures, agency guaranteed MBS and/or high-quality corporate securities. For strategies that include corporate bonds, the corporate issue selection process incorporates a relative ranking of corporate issuers across the relevant ESG metrics for the relative industry within our high-quality universe. This ESG relative score is used to, not only identify issuers which maintain a high proprietary ESG internal score and trend, but, all things equal, initiate a positive screening methodology to discriminate among securities with comparable conventional relative values.

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

SSA

As stated in 10.1, our approach is fully integrated to each type of fixed income we invest in: SSA, Corporate (financial), Corporate (non-financial), and Securitized.

Corporate (financial)

As stated in 10.1, our approach is fully integrated to each type of fixed income we invest in: SSA, Corporate (financial), Corporate (non-financial), and Securitized.

Corporate (non-financial)

As stated in 10.1, our approach is fully integrated to each type of fixed income we invest in: SSA, Corporate (financial), Corporate (non-financial), and Securitized.

Securitised

As stated in 10.1, our approach is fully integrated to each type of fixed income we invest in: SSA, Corporate (financial), Corporate (non-financial), and Securitized.

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
SSA
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
SSA

Environmental

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.

SSA

The investment team monitors ESG risks on a daily basis and communicate material ESG events  regularly, including during our weekly investment meetings. The team also sits on an open trading floor, which cultivates continuous dialogue and communication on our universe of SSA securities and the integration of ESG factors in the investment process. We limit the securities we select for our portfolios to only high-quality issues. This includes U.S. Treasuries, agency debentures, 15- and 20-year agency-guaranteed MBS, and high-quality corporate securities. We do not invest in non-dollar denominated bonds, including Yankee bonds, high yield securities, credits rated below single “A” by two of the major rating agencies, zero-coupon debt, derivatives or leverage.

Corporate (financial)

The investment team monitors ESG risks on a daily basis and communicate material ESG events  regularly, including during our weekly investment meetings. The team also sits on an open trading floor, which cultivates continuous dialogue and communication on our universe of corporate (financial) securities and the integration of ESG factors in the investment process. We limit the securities we select for our portfolios to only high-quality issues. This includes U.S. Treasuries, agency debentures, 15- and 20-year agency-guaranteed MBS, and high-quality corporate securities. In the case of corporate bonds, we typically invest in issues that are in the index and have a minimum issue size of $1 billion with a quality rating of A- or better and a maturity of 10 years or less. We do not invest in non-dollar denominated bonds, including Yankee bonds, high yield securities, credits rated below single “A” by two of the major rating agencies, zero-coupon debt, derivatives or leverage.

Corporate (non-financial)

The investment team monitors ESG risks on a daily basis and communicate material ESG events  regularly, including during our weekly investment meetings. The team also sits on an open trading floor, which cultivates continuous dialogue and communication on our universe of corporate (non-financial) securities and the integration of ESG factors in the investment process. We limit the securities we select for our portfolios to only high-quality issues. This includes U.S. Treasuries, agency debentures, 15- and 20-year agency-guaranteed MBS, and high-quality corporate securities. In the case of corporate bonds, we typically invest in issues that are in the index and have a minimum issue size of $1 billion with a quality rating of A- or better and a maturity of 10 years or less. We do not invest in non-dollar denominated bonds, including Yankee bonds, high yield securities, credits rated below single “A” by two of the major rating agencies, zero-coupon debt, derivatives or leverage.

Securitised

The investment team monitors ESG risks on a daily basis and communicate material ESG events  regularly, including during our weekly investment meetings. The team also sits on an open trading floor, which cultivates continuous dialogue and communication on securitized issues and the integration of ESG factors in the investment process. We limit the securities we select for our portfolios to only high-quality issues. This includes U.S. Treasuries, agency debentures, 15- and 20-year agency-guaranteed MBS, and high-quality corporate securities. With mortgage-backed securities, we invest in agency guaranteed 15- and 20-year MBS and do not purchase any illiquid mortgage derivatives. We do not invest in non-dollar denominated bonds, including Yankee bonds, high yield securities, credits rated below single “A” by two of the major rating agencies, zero-coupon debt, derivatives or leverage.

12.3. Additional information.[OPTIONAL]


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