Integration of Sustainability Risk
Article 3(1) of the European Union’s Sustainable Finance Disclosure Regulation (Regulation (EU) 2019/2088 of the European Parliament and of the Council of 27 November 2019 on sustainability-related disclosures in the financial services sector (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, we embed the consideration of financially material sustainability risks in that process no matter where we provide portfolio management services in the world. Ultimately, our 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 our 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 the 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 us 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 our platform. CitiFocus strategies, which represent our 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.
We also conduct ongoing monitoring in respect of the above instruments and products which have been added to our investment platform. As part of this process, we assess 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, we will use a hedge fund of funds managed by Citi Private Advisory, LLC, the underlying funds of which are selected by Citi Private Bank’s alternative investments team. Find an outline of how that investments team considers sustainability risk in their investment decision-making process.
Third party data providers: As the use of third-party data is embedded in our investment research and decision-making process for ETFs, equities, and fixed income investments, we take care in selecting data providers. We undertake due diligence both before entering a business relationship with the data provider and annually thereafter, which assesses the data provider’s performance against our key selection criteria. Amongst other things, our selection criteria require 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.
At CIM, we review our processes on a regular basis to make sure they are informed by industry practice. Our Sustainability Risk Standard is no exception, recognising that the integration of sustainability risk is an evolving and dynamic area. As such, we may edit this page from time to time to ensure it accurately reflects our practices.
No Consideration of Sustainability Adverse Impacts
This disclosure is made for the purposes of Article 4(1)(b) of SFDR.
CPB does not consider the adverse impacts of investment decisions on sustainability factors at the present time when acting as a portfolio manager for its clients. “Sustainability factors” are defined by SFDR as environmental, social and employee matters, respect for human rights, anti-corruption and anti-bribery matters.
We are currently considering the sufficiency and accuracy of the data available to us in respect of the investments that we manage and we intend to publish our approach on or before 30 June 2021.
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 our commitment to address global challenges through our 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”.
Find more information on CEP’s remuneration policies.
In particular, see Section 2 (risk) and Section 16 (remuneration) of the document titled “Pillar 3 Disclosures 31 December 2019 Citibank Holdings Ireland Limited and its Operating Entity, Citibank Europe Plc”, which among other things, notes the following:
“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 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.”
This page was last updated on 10th March 2021.
- Citi US Equity ESG Focus Portfolios
- Citi Global Equity ESG Focus Portfolios
- Citi Fixed Income ESG Focus Portfolios