Integration of Sustainability Risk
Article 3(1) of SFDR requires all financial market participants to publish on their websites information about their policies on the integration of sustainability risks in their investment decision-making process. “Sustainability risk” is defined in SFDR as “an environmental, social or governance event or condition that, if it occurs, could cause an actual or a potential material negative impact on the value of the investment”.
Citi Investment Management (CIM) provides portfolio management services. Where it provides these services through Citibank Europe Plc Luxembourg branch that entity will be a financial market participant under SFDR.
Although SFDR does not apply to all legal entities through which CIM acts, CIM operates a global investment decision-making process and, therefore, CIM embeds the consideration of financially material sustainability risks in that process no matter where it provides portfolio management services in the world. Ultimately, CIM’s goal in taking account of these risks – and in integrating them across the organisational, governance and risk management aspects of investment decision-making process – is to support long-term investment returns for its clients.
CIM integrates sustainability risk into its investment selection process in one of the following ways, depending on the asset class concerned.
For equities and fixed income, it obtains an environmental, social and governance (ESG) risk rating, where available, from an ESG specialist third party data provider. The ESG risk rating reflects the investee company’s exposures to material ESG risks and the company’s preparedness and track record in managing its exposures to these issues. It is considered by the analyst team alongside other financial metrics (such as historical performance, expected performance, valuation, and credit rating) to reach an assessment of the merit of the investment.
For ETFs, it obtains an ESG risk rating, where available, from an ESG specialist third party data provider. The third party data provider’s methodology to assess ESG risk relies on individual scores attributed to the environmental, social and governance risks for each underlying investment of the ETF, aggregated at the ETF fund level.
The resulting ESG score is then used as a proxy for assessing sustainability risk. Where a score is unavailable, the approach is to consider SFDR categorisation of the relevant sub-fund(s). Generally, funds classified as Article 6 products under SFDR are considered to have high sustainability risk, whereas funds classified as Article 8 or 9 products are considered to have low sustainability risk. An ETF’s ESG score or sustainability risk profile is not an overriding factor in the selection process.
Rather, it is considered in the round alongside other factors (such as financial metrics, valuation data, projections, estimates and market position, amongst others) when determining whether it should be added to the investment platform.
For third party mutual funds, the CIM due diligence teams assess the level of sustainability risk in a fund via a proprietary methodology. This methodology seeks to capture and quantitatively weight responses to a set of due diligence questions regarding sustainability risk that are raised with the relevant manager.
Responses to such questions will allow CIM due diligence teams to assign a sustainability risk rating to the particular fund. Similar to the process for ETFs, equities and fixed income, this rating is then considered in the round and in an integrated way with other traditional financial metrics when assessing whether to add a particular strategy to the CIM platform.
CitiFocus strategies, which represent CIM’s high conviction strategies, are subject to further qualitative analysis and approval, which again considers the sustainability risk profile of the strategy in an integrated way with other factors.
CIM also conducts ongoing monitoring in respect of the above instruments and products which have been added to its investment platform. As part of this process, CIM assesses whether there have been any material changes in the sustainability risk profile associated with the asset, alongside other matters.
For hedge funds, where this is suitable for a particular mandate, CIM will use a hedge fund of funds managed by Citi’s specialist teams, the underlying funds of which are also selected by Citi’s specialist teams.
Citi’s specialist teams consider sustainability risk in their investment decision-making process by implementing a two-tier assessment covering both the third-party manager and the fund.
At manager level, the relevant investment research and operational due diligence teams will assess how far sustainability risk is embedded into the organisation, its governance, the day-to-day running of the fund, and the manager’s investment decision-making process.
At fund level, the investment research team will assess the extent to which the manager has integrated sustainability risk into its investment decision-making process for the fund. The manager level and fund level sustainability risk assessments are then combined to produce an overall sustainability risk profile.
As part of Citi’s specialist teams’ approval process for including third party funds in its investment universe, the overall sustainability risk profile of the manager and the fund is considered along with other factors, including the depth and breadth of experience within the investment team, a consistent and disciplined investment approach, track record, market opportunity, and other risk factors. Accordingly, sustainability risk is considered in the round on an integrated basis, along with these other factors, which collectively drive an overall assessment of the fund.
Citi’s specialist teams also review managers of third-party funds on a periodic basis. As part of these reviews, they assess whether there have been any material changes to the sustainability risk profile associated with the fund or third party manager, and where this is the case, may escalate matters internally to determine any appropriate action.
Third party data providers: As the use of third-party data is embedded in CIM’s investment research and decision-making process for ETFs, equities, and fixed income investments, CIM takes care in selecting data providers.
CIM undertakes due diligence both before entering a business relationship with the data provider and annually thereafter, which assesses the data provider’s performance against CIM’s key selection criteria.
Amongst other things, as part of CIM’s selection criteria, CIM requires that the data provider be a leading ESG data provider in the industry, have expansive global company, sovereign and agency coverage, and use a broad range of data sources.
CIM reviews its processes on a regular basis to make sure they are informed by industry practice. The processes described above are no exception and as CIM recognises that the integration of sustainability risk is an evolving and dynamic area. As such, this section may be edited from time to time to ensure it accurately reflects CIM’s practices.
Principal adverse sustainability impacts statement
Article 4(3) of SFDR requires certain financial market participants to publish on their websites a statement on their due diligence policies with respect to the principal adverse impacts (PAIs) of investment decisions on sustainability factors. “Sustainability factors” are defined by SFDR as environmental, social and employee matters, respect for human rights, anti-corruption, and anti-bribery matters.
This requirement applies to Citibank Europe Plc acting through its Luxembourg branch when it provides portfolio management services through CIM. CIM currently takes a principles-based approach to the identification and prioritisation of PAIs, and as set out below, is in the process of integrating a fuller PAI framework into its portfolio management business.
(a) information about CIM’s policies on the identification and prioritisation of principal adverse sustainability impacts and indicators;
CIM is currently formulating a policy on how it will identify and prioritise the PAIs and indicators (a ‘PAI policy’), with the intention of finalising such policy by 1 January 2023. This section summarises certain key provisions of the proposed PAI policy.
Although these provisions may evolve over time, the PAI policy will initially outline the identification and prioritisation of the PAIs as they relate to Citi’s environmental and social priorities. These include gender equality, affordable and clean energy, sustainable cities and communities and climate action. PAIs will be selected and prioritised where possible according to their compatibility with these priorities.
CIM intends to collect data on the PAIs from specialist ESG third party data providers, where available. As the use of third-party data is embedded in CIM’s investment process, CIM takes care in selecting data providers. See section above on the due diligence and criteria for the selection of CIM’s data providers. Where PAI data is not readily available from such third-party data providers, CIM shall use its best efforts to obtain the information using other means.
CIM reviews its processes on a regular basis to make sure they are informed by industry practice. The PAI policy will be no exception, recognising that the identification and prioritisation of PAIs is an evolving and dynamic area. As such, this section may be edited from time to time to ensure it accurately reflects CIM’s practices.
(b) a description of the principal adverse sustainability impacts and of any actions in relation thereto taken or, where relevant, planned;
SFDR will require CIM to collect data on, and in turn annually disclose certain quantitative metrics in relation to, various PAI indicators in respect of its portfolio management activities conducted through Citibank Europe Plc, Luxembourg Branch.
It will also be required to report on the actions it has taken or plans to take in respect of those impacts.
This is a form of ex-post reporting, of which the first quantitative report under SFDR is expected to be due on 30 June 2023 in respect of portfolio management activity conducted during the first reference period (being the calendar year 2022). Accordingly, CIM will collate PAI data in the course of the calendar year 2022 and update this disclosure in June 2023.
(c) a summary of CIM’s engagement policies made under Article 3g of Directive 2007/36/EC;
CIM’s portfolio management team are continuously monitoring companies and holdings to ensure that they remain appropriate and aligned with their investment mandates. The team may engage with management or investor relations of investee companies, but not other stakeholders, as CIM does not typically hold significant positions in companies it invests in. Meetings may be held with companies to discuss specific results or events as well as more informal dialogue incorporating site visits and other research initiatives.
These meetings may cover a range of topics from corporate strategy, risk management, corporate governance, board composition and remuneration issues.
Third party managers utilised in investment strategies may engage on matters relating to environmental, social, and corporate governance (ESG) developments as well as enhancements or clarifications to company analysis or process improvements.
If CIM were to become aware of any material issues, either financial or non-financial, it would review the investment thesis to see if this had affected the investment rationale.
(d) CIM’s adherence to responsible business conduct codes and internationally recognised standards for due diligence and reporting and, where relevant, the degree of their alignment with the objectives of the Paris Agreement.
Currently, CIM does not adhere to specific sustainability-related conduct codes or internationally recognised sustainability-related standards for due diligence and reporting.
Transparency of Remuneration Policies in Relation to the Integration of Sustainability Risks
Citi’s governance structures, policies and processes serve employee, client and community needs, promote a culture of accountability and ethical conduct across the firm, and support Citi’s commitment to address global challenges through its core business.
Citi is currently reviewing remuneration polices in line with relevant ESG requirements.
In the interim, find more information on Citi’s compensation philosophy.
In particular, see the section headed “Risk Management”.
In particular, see Section 2 (risk) and Section 16 (remuneration) of the document titled “Pillar 3 Disclosures 31 December 2020 Citibank Holdings Ireland Limited and its Operating Entity, Citibank Europe Plc”, which among other things, notes the following:
“Citibank Europe Plc (CEP) has in addition a robust and sound remuneration strategy in place, supported by effective employee compensation structures balancing strategic goals and behaviour. The CEP remuneration strategy promotes sound and effective risk management, and supports CEP’s strategy, objectives and the long-term interests of the organisation.”
“Citi’s compensation policies and practices are designed to support achievement of business strategy by attracting, retaining and motivating the best talent available to execute the strategy whilst ensuring an effective risk management framework and incentivising appropriate behaviours.”
“The Compensation Philosophy also sets out Citi’s commitment to managing risk, and management receives clear direction from the Personnel and Compensation Committee (P&C Committee) to use discretion in awarding incentive compensation consistently with risk mitigation principles.”
Portfolios Which Promote Environmental and/or Social Characteristics:
- Citi US Equity ESG Focus Portfolio
- Citi Global Equity ESG Focus Portfolio
- Citi Global Fixed Income ESG Focus Portfolio
- Citi MACS ESG Core Model Portfolios
- Citi Sustainable Multi-Thematic Equity Portfolio
This page was last updated on 22nd September 2021.