Longfellow Investment Management | LIM

Responsible Investment Policy

LIM’s investment philosophy is rooted in the belief that outperformance can be achieved by consistently focusing on both risks and opportunities within a portfolio. In our view, avoiding sectors and securities with heightened risk characteristics should reduce volatility and lead to strong risk-adjusted returns over a market cycle. A key component of LIM’s fundamental fixed income credit research process is integrated ESG analysis. We believe this enhances our ability to identify and evaluate potential risks and opportunities often overlooked in traditional credit research. Our analysts consider ESG factors most material to a specific industry or issuer in their analyses, which combine our proprietary LIM ESG scoring framework and relevant qualitative information to help inform our decision-making process.

LIM has documented its fixed income ESG integration since 2014. Our Responsible Investment Policy governs all aspects of our approach, including ESG integration, engagement and stewardship, and customized client solutions. It has been adapted over time to reflect our expanding capabilities as well as evolving regulatory dynamics, with oversight provided by LIM’s Chief Investment Officer. Material changes to our Responsible Investment Policy require approval by LIM’s Board of Managers, reflecting our commitment at the highest level to ensuring our approach aligns with the responsible investment principles of our firm.

Key tenets of our Responsible Investment Policy

Policy Oversight &
Governance

ESG Approach By
Asset Class

Proprietary ESG
Scoring Framework

Firm
Compliance

Engagement &
Stewardship

Customized
Solutions

Industry
Advancement

Sustainability
Outcomes

Proxy
Voting

ESG Integration in Non-Corporate Fixed Income

Municipals

ESG analysis of municipal bonds considers four key factors: use of proceeds, infrastructure quality, governance, and pension contributions. LIM primarily uses qualitative information in its analysis derived from annual filings, bond documentation and discussions with the issuer.

Securitized

ESG analysis of securitized investments considers three key factors: the issuer (sponsor), the servicer, and the underlying assets (collateral). LIM primarily analyzes qualitative information derived from company filings and bond documentation., quantitative information is also considered where available (e.g., LEED ratings, FICO scores).

Government

ESG analysis of government bonds considers three key factors: use of proceeds, mission/purpose, and governance. While LIM primarily invests in Treasuries for duration and liquidity management, there are several government-affiliated agency issuers that support individuals and communities. Examples include USAID bonds or Small Business Association (SBA) loans.

Engagement Policy

LIM’s engagement approach seeks to ensure that our investment team can gather all useful information available to make appropriate investment decisions. LIM’s analysts regularly engage management teams on material concerns (both traditional and ESG-focused) identified in our research process. In corporate credit, ESG-focused engagement typically targets disclosure and areas for improvement relative to peers. If a company does not provide adequate disclosure around ESG considerations that, in our view, are likely to impact current or future valuation, we advocate for increased transparency.

Where appropriate, LIM’s analysts will also encourage issuers to consider adopting more sustainable business practices. This may occur when our proprietary ESG score shows a deteriorating trend over a multi-year period, which can lead to questions about management’s commitment to sustainability initiatives that we deem material – particularly relative to industry peers. Our Engagement Policy describes the various ways in which we identify and facilitate engagement opportunities across asset classes. Beyond corporate credit, we advocate for greater data availability from structured products and municipal issuers, and we adhere to ESG criteria established by third-party advisors when voting proxies for equity holdings.

Principles for Responsible Investment (PRI) Framework

LIM has been a signatory to the PRI since 2014, which serves as evidence of our ongoing commitment to incorporating ESG factors in our investment decisions and contributing to a more sustainable global financial system. Each year, PRI assesses signatories based on their responses to an intensive survey of their responsible investment practices relative to peers.

Task Force on Climate-related Financial Disclosure (TCFD) Framework

As a supporter of the TCFD since 2019, LIM continues to promote accurate, decision-useful disclosure of climate-related information. This includes reporting on the climate risks and carbon emissions associated with our own business operations. Additional details regarding our research and firmwide efforts are published annually in our Sustainability Report.

TCFD Disclosures from our latest Sustainability Report

Core Element	Goal	Recommended Disclosure	LIM Disclosure
Governance	Disclose the organization’s governance around climate-related risks and opportunities.	a) Describe the board’s oversight of climate-related risks and opportunities.	Both our Board of Managers and Advisory Board are responsible for LIM’s strategic initiatives – which incorporate and assess climate-related risks and opportunities across our portfolios and firm operations.
		b) Describe management’s role in assessing and managing risks and opportunities.	As fiduciaries, portfolio managers are responsible for ensuring proper risk management of investment activities on an ongoing basis, including climate-related risks. LIM conducts climate change scenario analysis at our investment strategy levels each year. Emerging elevated climate change risks from the analysis are further analyzed and addressed amongst portfolio managers and research analysts. LIM leadership relies on our building facilities manager to ensure adequate measures are in place to mitigate climate-related risks to our leased office space. LIM’s operations and technology staff monitor risks associated with LIM’s operations.
Strategy	Disclose the actual and potential impacts of climate-related risks and opportunities on the organization’s businesses, strategy, and financial planning where such information is material.	a) Describe the climate-related risks and opportunities the organization has identified over the short, medium, and long term.	From an investment perspective, we view our ability to properly assess and manage climate risks in credit portfolios as a strategic advantage. We believe management of ESG risks, including climate-related risks, is part of our fiduciary duty and our depth of knowledge may help attract and retain clients. These investment risks and opportunities can span across the short, medium, and long term. From a firm perspective, LIM has identified no material short-term climate-related risks to our sustainability. In the medium term, LIM recognizes that stricter regulations of GHG emissions may present increased costs to the firm due to price increases in areas such as energy, travel, and technology spending. Over the longer term, LIM sees physical risks of climate change, such as sea level rise and the increased frequency of natural disasters, as potential impediments to our normal operations in our Boston office.
		b) Describe the impact of climate-related risks and opportunities on the organization’s businesses, strategy, and financial planning.	LIM considers climate-related risks in its operations and business strategy as well as in its portfolio construction and management for clients. Our fixed income analysts and PMs have repeatedly made buy and sell recommendations that incorporate climate-related risk exposure in securities. At the firm level, we measure our GHG emissions in an effort to reduce our operational climate transition risks and overall carbon footprint. We also moved to a LEED Gold certified office space in 2020.
		c) Describe the resilience of the organization’s strategy, taking into consideration different climate-related scenarios, including a 2°C or lower scenario.	LIM is well-positioned to operate through several climate scenarios. In an accelerated transition scenario, we expect clients and prospects to place increasing pressure on our portfolio managers to lower the emissions profile of client portfolios or target investments that enable a low carbon transition. Our integrated ESG analysis in fixed income, as well as our value-aligned investment capabilities, will enable LIM to meet the evolving needs of our clients. While our client portfolios face climate risk, climate change does not pose a significant threat to our ability to manage portfolios.
Risk Management	Disclose how the organization identifies, assesses, and manages climate-related risks.	a) Describe the organization’s processes for identifying and assessing climate-related risks.	Investment professionals use a variety of data and news sources to evaluate climate-related risks in portfolios. LIM also performs a climate change analysis each year. LIM considers climate-related risks within its proprietary ESG score. For additional details, please see pages 19-20 of our 2023 Sustainability Report.
		b) Describe the organization’s processes for managing climate-related risks.	Portfolio managers will make decisions about whether climate-related risk exposures are suitable for client portfolios. These risks are included in our assessment of fundamentals, valuation, and volatility.
		c) Describe how processes for identifying, assessing, and managing climate-related risks are integrated into the organization’s overall risk management.	Portfolio-level climate risk exposure analysis is performed annually on high-risk fixed income holdings and is implemented into LIM’s credit rating score, which also incorporates valuation and volatility considerations. Climate-related risks are also included in LIM’s proprietary ESG score where material, which contributes to overall portfolio risk management.
Metrics & Targets	Disclose the metrics and targets used to assess and manage relevant climate-related risks and opportunities where such information is material.	a) Disclose the metrics used by the organization to assess climate-related risks and opportunities in line with its strategy and risk management process.	In our investment process, we measure climate-related risk exposure by quantifying ESG risk in a proprietary score that includes GHG intensity and climate risk management factors. We periodically review portfolio holdings for vulnerability to physical risks of climate change. LIM does not set explicit targets for climate metrics within portfolios but can consider such targets upon the request of clients. At the firm level, LIM measures its GHG emissions and is considering solutions that would enable us to set suitable reduction targets that are aligned with a 2-degree scenario including reduction measures and offsets.
		b) Disclose Scope 1, Scope 2, and, if appropriate, Scope 3 GHG emissions, and the related risks.	LIM’s full year 2022 emissions estimates total 182 mTCO2e. Scope 3 metrics exclude financed emissions. For additional details, please see page 15 of our 2023 Sustainability Report.
		c) Describe the targets used by the organization to manage climate-related risks and opportunities and performance against targets.	Our proprietary ESG score emphasizes historic and potential future trends of data rather than focusing on absolute levels. As such, we seek companies that continue to make positive strides in reducing their carbon footprint. This includes assessing the suitability of net zero targets issued by our fixed income portfolio holdings and determining whether more dramatic business model changes could be required. While we have not set absolute targets at the firm level, 2022 marks the second year of monitoring and measuring LIM’s carbon footprint in accordance with accepted estimation resources used by the EPA and other reputable sources. Our overall objective remains to improve from our baseline level each year. On an absolute level, our 2022 emissions increased 8% vs. 2021 due to reengaging in business-related travel. In response, LIM took another milestone step on our path to reducing our emissions. Our ESG team recommended that LIM offset 100% of its 2022 emissions through the purchase of carbon offsets. This recommendation was accepted by LIM’s Board of Managers. We look forward to providing additional details in subsequent reports.

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