Building greener portfolios for a greener future

SUMMARY

We believe that investment portfolios can help deliver a better environment. And we think the possibilities extend well beyond assets directly involved with climate technologies.


At Citi, we’re committed to helping protect the environment for ourselves and future generations.

This includes financing and facilitating many activities, such as renewable energy and clean technology to accelerate the transition to a sustainable, low-carbon economy.

We’re also enabling clients to allocate their investment portfolios to incorporate environmental considerations alongside potential financial returns.

But while there’s rapidly growing desire to create “greener” portfolios, many investors may not be aware of the breadth of possibilities here.

Building greener investment portfolios

Mention “green” investments to someone and it may be shares in clean energy–related companies that first comes to mind.

However, there’s much more to investing through an environmental lens than owning securities issued by solar panel producers or wind power turbine makers.

Much more.

Indeed, you could build an entire portfolio – incorporating many asset classes within your investment objectives 1– that seeks to align with environmental benefits.

Follow the leaders

One way of doing so might be to invest in environmentally conscious companies.

These are companies from every industry group – consumer discretionary, financials and technology, and so on – rather than just firms whose businesses directly focus on solutions that deliver environmental outcomes.

What marks these companies out is how they operate. 

For example, they may be ahead of their peer group when it comes to reducing their carbon footprint, lowering waste pollution and using land and water responsibly.

As well as prioritizing environmentally conscious practices within their own organizations, they might insist on similar standards among their suppliers.

Investing in environmental leaders opens up a much wider range of potential opportunities than simply allocating to the likes of clean energy firms.

A portfolio consisting of both “classic” green companies and environmental leaders could potentially achieve broad diversification across geographies and industries.

We believe such an allocation could potentially increase returns and mitigate risks over time. But why might this be?

Put simply, companies that think and act sustainably may make investments in their business operations and practices that could be beneficial in the long run.

Over the past two business cycles, the proverbial “going green” has been elevated from “nice to have” to a business imperative. Taking a long-term view and seeking to mitigate physical and transitional risks are desirable behaviors.

Physical risks are risks directly from weather events that pose a threat to a company’s assets. Transition risks are those resulting from future policy initiatives to transition to a greener economy.

Environmentally conscious firms are likelier to take more effective steps to protect their own operations from disruptions arising from, say, extreme weather events.

Over time, we think having a culture of responsible and prudent risk management could result in outperformance over companies that are less mindful.

Improvers as well as leaders

A further possibility is investing in companies that are improving their environmental profile.

While they may still be far from becoming environmental leaders, these companies are on a clear path to becoming greener.

This approach may add exposure to some more less obvious companies.

For example, an “improver” could be an oil & gas company that is making progress to enhance its carbon capture adoption, or reducing its business’s reliance on fossil fuels and shifting toward renewable alternatives.

Some of today’s highest emitters, such as utility companies, are poised to be tomorrow’s greatest facilitators in an energy transition. This story of transition may be where value lies today.

One drawback of buying improvers, of course, is investing in companies that are still heavily – albeit progressively less so – involved in areas deemed unsustainable.

Public equity strategies that deeply integrate ESG data into every aspect of the investment process, including company engagements and proxy voting may be effective ways to invest sustainably, while also benefiting from the liquidity and diversification benefits that public equities offer.

Greening an entire allocation

The principles of investing in environmental leaders and improvers can equally be applied to an entire portfolio rather than just the equity portion.

Within fixed income, this could mean owning bonds issued by companies applying similar rationale as above.

Increasingly, certain municipal bonds and corporate bonds are issued to finance environmental projects, such as green infrastructure - see Diversify your fixed income with sustainable bonds.

Perhaps less widely understood are the possibilities among alternative asset classes.

In recent years, there’s been a proliferation of potential opportunities for suitable investors.

In real assets, more direct exposure might come from investing in clean energy infrastructure or affordable housing.

Equally, though, developers of many other properties – from offices to hotels to multifamily residences – are accounting for sustainability in their building processes, which can help to build a broader -based real estate exposure.

Similarly, the private equity landscape contains funds that focus on, say, climate technology or the circular economy and other more generalist funds that prioritize investments in environmental leaders or improvers.

Going green isn’t without risk

It is important to recognize that sustainable companies are not without risks of their own.

Environmentally focused companies may face risks associated with their investments as some technologies are still in the development phase.

Long-term, companies that fail to adapt to environmental challenges may face greater physical risk, or fail to mitigate face greater transition risk, and may see their own operations disrupted.

Building portfolios that exclude certain industries – such as fossil fuels – can sometimes see short-term performance suffer. The powerful rally in many oil & gas companies in 2022 was a case in point. This may also contradict an effort to ensure energy access is secure.

ESG attributes should go hand in hand with fundamental analysis to ensure both financial and nonfinancial metrics are considered in the investment process.

Invest in our Planet

The need for action to protect our planet has never been more pressing.

For investors, the ways of doing so have never been more numerous.

SUSTAINABLE INVESTING

Our approach

Investing with purpose is the natural evolution of our years customizing portfolios for clients. Sustainable investing is where investors seek varied financial and sustainability outcomes depending on their investment objectives. It encompasses four main approaches, including socially responsible investing (including ethical investing), ESG integration, thematic investing, and impact investing.

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