SFDR requires that information provided in a pre-contractual disclosure in respect of a portfolio which promotes environmental and/or social characteristics be published on a website.
This disclosure is made for these purposes by the CIM division of Citibank Europe plc, in relation to clients of its Luxembourg branch. This disclosure relates to the MACS ESG Core Model Portfolios.
The model portfolios promote environmental or social characteristics but do not have a sustainability investment objective. They use a reference benchmark appropriate to the market and segment of investments selected by the portfolio manager, but the benchmarks are not designated for the purpose of attaining the environmental or social characteristics promoted by the portfolios.
What are the environmental and/or social characteristics promoted by the portfolios?
- The portfolio management team invests in funds and ETFs that fall within the scope of:
- Article 8 of SFDR – i.e. funds that promote environmental and/or social characteristics, provided that the companies in which the investments are made follow good governance practices; or
- Article 9 of SFDR – i.e. funds with “sustainable investment” as their objective. Under SFDR, this means “an investment in an economic activity that contributes to an environmental objective … or an investment in an economic activity that contributes to a social objective … provided that such investments do not significantly harm any of those objectives and that the investee companies follow good governance practices …”.
- Whilst the manager is responsible for categorising the funds as Article 8 or Article 9, CIM undertakes a further categorisation using a proprietary framework known as “Investing with Purpose” (“IwP”) and only funds which meet the IwP criteria of "ESG Integration" can be selected for investment. See below for a description of the IwP framework and the criteria for "ESG integration".
How are those characteristics met?
- The model portfolios are designed using Citi Private Bank’s (CPB) best thinking in strategic asset allocation, tactical asset allocation and fund selection. The portfolios promote environmental and social characteristics via CIM’s proprietary selection of funds which integrate comprehensive ESG analysis into their overall investment process. The strategic asset allocation continues to be set and weighted according to CPB’s Adaptive Value Strategies (AVS) reference models, and the tactical positioning utilises the insights of the CPB Global Investment Committee.
- The investment process uses a positive screen to define an investment universe for the portfolios by identifying funds categorized as Article 8 or Article 9 under SFDR and which are also categorized as “ESG Integration” under the IwP Framework. CIM’s Investment Manager Research Team (“IMR team”) are responsible for the identification and categorization of such funds through their due diligence process.
- The IMR team identifies the SFDR fund categorization (as Article 8 or Article 9) using data provided by a third party data provider who obtains the SFDR fund categorization directly from the underlying fund manager.
- The IMR team categorizes each fund according to the IwP framework. The framework specifies four ESG categories: (1) socially responsible; (2) ESG integration; (3) thematic and (4) impact. The IMR team maps each fund to these four categories based on the investment decision making process for security analysis, selection and risk management. The criteria for “ESG Integration” are that funds included in this category integrate ESG data and metrics with the goal of mitigating sustainability risk and generating additional alpha. An explanation of the IwP categories can be found in our Investing with Purpose guide.
The model portfolios are reviewed on a quarterly basis by the CIM portfolio management team to ensure that only Article 8 and Article 9 funds (including ETFs) are selected for and held in the portfolios. The IMR team review the investment process of the underlying funds on a quarterly basis except for passive ETFs which are reviewed annually.
What policy do we use to assess the good governance practices of investee companies?
- The portfolios only invest in funds that are UCITS funds. The good governance requirement applies to such funds to the extent that they take the form of a body corporate, and it is assumed that the requirement is met given the authorised and highly regulated nature of this type of fund structure.
- Beyond this, it is noted that Article 8 and 9 funds are themselves required to invest in companies which follow good governance practices, including with respect to sound management structures, employee relations, remuneration of staff and tax compliance. This provides additional comfort in respect of good governance.