SUMMARY
Armed with the insight that we derive from our conversations with you and our analyses of your objectives and needs, we deliver portfolios and products customized to your worldview and financial objectives.
The pace of sustainable investing has risen over the past decade to record levels.
According to PwC, growth in ESG funds is expected to outpace the broader industry, reaching a projected $33.9 trillion in AUM by 2026.1 Sustainable investor motivations vary. While some seek to minimize risk associated with issues such as climate change and/or the competitive returns sustainably operated companies stand to generate, others want to invest in innovations driving environmental and social progress across the globe. A growing amount of investors seek both.investor motivations vary.
Our personalized approach is rooted in our commitment to sustainability and extensive expertise in investment advisory, which we pair with a high level of service. Armed with the insight that we derive from our conversations with you and our analyses of your objectives and needs, we deliver portfolios and products customized to your worldview and financial objectives.
Drivers of sustainable investing
Investments that seek dual objectives
Sustainable investments seek varied financial and sustainability outcomes depending on their investment objectives and processes.
Sustainable investment has evolved from being a primarily exclusionary approach, to one focused on identifying companies that can effectively manage ESG risks and opportunities. The integration of ESG data can provide a more complete analysis of a company or security, potentially leading to strong risk-adjusted returns and subsequent value creation.
Sustainability serves both as a competitive advantage as well as a source of risk mitigation. In our view, companies that encompass ESG ideals or positive attributes are better positioned to deliver competitive risk-adjusted returns over time.
At some point in the not-too-distant future, a significant proportion of costs, or negative externalities, incurred outside one’s company, such as environmental damage, nature and biodiversity loss, or social upheaval, might be forced onto companies’ books.
Widespread adoption of the United Nations Sustainable Development Goals
The United Nations Sustainable Development Goals (SDGs) serve as a roadmap for governments, philanthropists and investors to determine how and where to deploy their capital.
The SDGs help investors see where their capital is most needed and identify the interconnected, follow-on impact of each investment.
For instance, an investment in a minority and/or women owned real estate development fund that creates affordable housing may contribute to multiple SDGs.
It may also offer space for community services, such as childcare, that help remove the barriers to gainful employment faced by parents without resources (SDG 1, 5, and 10).
Additionally, when less of a household’s budget must go toward housing, more resources are available for nutritional food and health services (SDG 11).
Availability of solution-based innovations
The need for solutions that will enable the planet to become sustainable is generating investable innovations across technology, infrastructure, and science.
The urgency for solutions is magnified by secular trends that will present challenges beyond our current ones – chiefly that the global population will swell to nearly 10 billion in 2050.2
Some of the innovations in the works today could well prove revolutionary. Many target the need for drinkable or agriculture-safe water, protection of the environment, renewable energy sources, and the provisioning of healthcare, nutrition, and education to those who lack it.
Regulatory focus
Increasing regulatory focus on the impact of sustainability risks, such as those posed by climate change, are shifting how companies operate.
The Task Force on Climate Related Financial Disclosures (TCFD) was established to improve and increase disclosures on governance of climate-related risks and opportunities. The “risk and opportunities” are important elements of the TCFD focus. New sustainability reporting requirements in various stock exchanges and the EU Sustainability-Related Disclosure Regulations (SFDR) enable investors to make more informed decisions about the companies with which they choose to own or engage with. For instance, they can help them better assess whether sectors and businesses are making sufficient preparations to transition to clean energy. Companies across many industries are adapting their operations or facing possible displacement.
Our platform and capabilities
Citi Global Wealth Investments offers discretionary portfolios, traditional investments, alternative investments, and tailored exposure to capital markets to enable clients to pursue their financial and sustainability objectives through multi-asset class portfolios or single strategy investments.
The term “Sustainable Investing” has, over the past two decades, evolved into a collective descriptor for a range of approaches. Each approach has its own financial and sustainability objectives and is available across traditional and alternative asset classes.
A single investment product can also combine multiple approaches to help you target exposure specific to what resonates with you.
(SRI) relies on values-based exclusions of companies or sectors. Investment mandates will explicitly state the intent to exclude exposure by sector, industry or product using values-related criteria. Common exclusions include tobacco, fossil fuels and weapons.
Uses Environmental, Social and Governance (ESG) metrics to identify investments with potentially attractive risk and return characteristics. Investment mandates will incorporate ESG risks and opportunities that are considered material, integral drivers of investment decisions into their investment process. Managers of ESG integration strategies may directly engage with portfolio companies and / or use their proxy votes to help drive positive ESG outcomes.
Access exposure to investments aligned to sustainable themes such as climate change or access to healthcare. The SDGs outline possible applicable themes. Companies seek alignment to sustainable themes through their business lines as demonstrated by their current and future revenue exposures.
Selection is based on measurable impact in a particular environmental or social area. Investment mandates not only state intent, but also manage to a desired sustainable outcome by providing measurable metrics alongside a potential financial return. To be considered impact, the outcome must be incremental, meaning it would not have occurred had your capital not been allocated to the investment.
| Socially responsible | ESG integration | Thematic | Impact | |
|---|---|---|---|---|
| Objective | Reflect client’s values through company and/or sector exclusions | Integrate ESG metrics to identify investments reflecting strong business practices and fewer ESG risks | Access investments aligned to key sustainability themes (e.g., U.N. Sustainable Devlopment Goals with positive ESG outcomes) | Invest in strategies designed to deliver a measurable and incremental impact |
| Financial objective | Seek out competitive risk-adjusted returns within values constrained investments universe | Seek out competitive risk-adjusted returns | ||
| Sustainability objective | Values alignment | Promote ESG principles | Seek exposure to solution-based innovations | Drive positive outcomes and create value for the investor and impacted stakeholders |
| Implementation | Exclude investments based on products/services | Select investments that reflect ESG objectives | ||
| Select investments that offer products/services that align with an environmental, social or governance goal | ||||
| Invest in sustainable themes | Invest in strategies with intentional and measurable impact | |||
| Example | Avoid tobacco or arms manufacturers in investment portfolio | Select a mutual fund that invests in companies with the best ESG footprints in their sectors and engages with portfolio companies to drive improvement | Invest in a structured investment linked to the performance of a gender lens index | Invest directly in a sustainable plastics company to drive a solution that requires additional capital to bring to fruition |
Navigating sustainable investment options
There are multiple routes to sustainable investing.
At Citi Global Wealth Investments, opportunities span discretionary managed portfolios and self-directed investments. The six steps below can help you navigate these options and determine which route to pursue.
Establish framework.
Return expectations
Risk tolerance
Liquidity needs
Preferences
Solidify vision.
Reflect on your worldview and values
Select areas of interest with investable opportunities and prioritize outcomes
A portfolio diagnostic evaluates your current portfolio relative to desired goals and inform investment decisions.
Evaluate sector/company ESG risk factor s and carbon emissions relative to benchmark
Assess exposure to controversial sectors/companies and desired sustainability themes
Discretionary and non-discretionary opportunities in the following asset classes:
Equities
Fixed income
Commodities
Alternative investments
Periodic assessments.
Provide regular insight into the portfolio’s ESG attributes against established goals
Measure impact of incorporating sustainability risk into overall portfolio
Revew impact reports/progress made by selected managers
Consider catalytic capital to complement your sustainable investment portfolio e.g., revocable grants & program related investments.1 Catalytic capital is investment capital with which the investor accepts reduced financial expectations in order to bring about a greater social or environmental impact.
1. Review your financial objectives
Our investment process begins by gaining an understanding of your return expectations and risk tolerance, as well as your liquidity, geographic, and currency preferences.
We then customize a long-term plan – or strategic asset allocation – comprising sustainable and/or traditional investments per your preference, to pursue your goals. By assembling an appropriate mix of equities, fixed income, cash, and other asset classes, you can potentially enhance your core portfolio’s returns and help manage risk.
2. Establish your sustainability objectives
Your sustainability objectives should reflect your worldview and values. The SDGs may help you narrow your objectives and prioritize them by their intended outcomes.
Important questions to ask yourself:
- What outcomes are most important to you, and are they regional or global?
- Are there specific thematic exposures that you would like to explore, e.g. water, gender, education, or alternative energy?
- What businesses would you be proud to support and why?
- Are there sectors or companies that you would like to avoid?
- To what degree should the impact of your investment dollars drive your decisions?
3. Evaluate your portfolio
The Global Investment Lab provides institutional-caliber analysis for your total wealth, including your holdings inside and outside Citi.
Our sophisticated proprietary modeling techniques help identify the intersection of your financial and sustainability objectives.
These analyses incorporate sustainability alignment, portfolio risk assessment, and portfolio insights as well as action ideas across all asset classes.
This enables us to uncover risk exposures and potential opportunities in your portfolio and build a plan of action.
4. Select and fine tune
After evaluation, it’s time to select the appropriate investments. In keeping with our customized approach, investment selection incorporates the factors exclusive to your own situation.
For example, some investors may incur different tax obligations that may require a stepped or partial transition for certain investments.
Here are a couple examples of how this may work:
A) An investor may be seeking to achieve a specific environmental goal such as financing renewable energy projects. This can be done through private investments that may require a long-term investment commitment or greater risk appetite. While this may be appropriate for some investors, others may seek out investments with shorter time horizons. These investors may choose to allocate their traditional fixed income holdings to green bonds with proceeds designated to financing a renewable energy transition.
B) An investor seeking to reduce the emissions associated with their portfolio may choose to avoid the fossil fuel sector. This could cause greater deviations from traditional benchmark performance due to the difference in sector composition. While this may be appropriate for a client who is not benchmark aware, an investor who is seeking performance in line with a traditional benchmark may instead choose a manager who owns fossil fuel companies with the lowest carbon emissions and actively engages with them to improve their environmental impact.
There are many ways to achieve your objectives. Please contact your financial representative to help you set your objectives and select the most appropriate investments for you.
The following are sample allocations of a fully sustainable investment portfolio:
This illustration is being shown as an example of reporting / analytical capabilities and does not reflect any actual client account, data or recommendation.
Source: Citi Global Wealth Investments Global Asset Allocation team, based on data as of 31 Oct 2022. Risk level 3 is designed for investors with a blended objective who require a mix of assets and seek a balance between investments that offer income and those positioned for a potentially higher return on investment. Risk level 3 may be appropriate for investors willing to subject their portfolio to additional risk for potential growth in addition to a level of income reflective of his/her stated risk tolerance. Please contact your financial representative for a copy of the CGWI Quadrant publication for further allocation information.
Full disclosures below.
5. Timely and disciplined review of results
Periodic assessments provide regular insight into the portfolio’s sustainability attributes against established objectives.
They can also evaluate the impact of incorporating sustainability risk into the overall portfolio. Impact and stewardship reporting from portfolio managers help gauge progress.
6. Philanthropic alignment
Investors also may apportion some of their capital to investments that place a higher value on social or environmental impact than on financial returns.
This often takes the form of philanthropic investments, revocable grants, donor-advised funds, and program-related investments.
