Integration of Sustainability Risk
Article 3(2) 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 advisers to publish on their websites information about their policies on the integration of sustainability risks in their investment advice or insurance advice. “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 Private Bank (CPB) provides investment and insurance advice in the European Union through branches of Citibank Europe Plc (CEP) in Ireland, Luxembourg, Spain and Italy. CEP (acting through these branches) will be a financial adviser for the purposes of SFDR in relation to these activities.
CPB recognises, in its approach to sustainability risk, that the relevance and materiality of sustainability risks will depend on a range of factors, including the nature of the product or investment. During the investment selection process, a tailored approach to integrating sustainability risk is taken, depending on the type of investment. This process is further outlined below.
For equities, fixed income and exchange-traded funds (ETFs) screening criteria are applied by specialist teams to develop lists of financial instruments which are assessed to be in line with CPB’s strategic themes. As part of the screening exercise to develop these lists (which includes a consideration of matters such as market capitalisation, total returns, credit rating, maturity, yield, assets under management and ETF manager experience (as applicable)) CPB obtains Environment, Social and Governance (ESG) ratings, where available. For equities and fixed income products, the ESG rating is obtained in respect of the issuer, and for ETFs, the rating is obtained in respect of the fund as a whole (as an aggregate of the ESG ratings of the underlying investments). The consideration of the ESG ratings, as a proxy for sustainability risk, is undertaken in an integrated way, to produce an overall assessment of each instrument and its inclusion in CPB’s lists. As such, the consideration of sustainability risk is one of multiple factors that are considered in the investment selection process.
For mutual funds, CPB implements a two-tier assessment covering both the investment management company and the specific investment strategy for a fund being considered for inclusion on its platform. These mutual funds form the universe of mutual funds in respect of which advisers operating through CEP may provide investment advice. CPB raises sustainability-risk related questions with fund managers, the goal of which is to understand how far sustainability risk is embedded into the manager’s investment decision-making process and how the same is identified and managed. The manager’s responses to these questions are assessed in quantitative terms to generate an overall sustainability risk score. This score is then included as an input in the broader due diligence review process, where it is considered in an integrated way alongside other factors, such as performance, price risk and process management. As such, sustainability risk is one of multiple factors considered together, before CPB determines whether a mutual fund should be added to its platform. CPB’s CitiFocus funds (which represent CPB’s high conviction investment strategies) are subject to additional assessment, during which the sustainability risk associated with the fund’s strategy will be subject to an in-depth qualitative review and approval process.
For alternative funds, Citi’s specialist teams integrate 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 the 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.
The specialist teams also review managers of approved third-party funds on a periodic basis. As part of these reviews, the specialist teams 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.
These funds form the universe of alternative funds in respect of which advisers operating through CEP may provide investment advice.
For insurance-based investment products (IBIPs), sustainability risk is not integrated into the insurance advice CPB provides, however sustainability risk is integrated at the level of the underlying investments. The process for this will vary depending on whether the IBIPs are linked to a range of underlying investments which are managed on an advisory or a discretionary basis. If managed on an advisory basis, the process is as outlined above; if managed on a discretionary basis more information can be found here.
In terms of the monitoring process, once investments are assessed and approved – for example, by being added to CPB’s lists or funds platforms – they are subject to regular review and monitoring by CPB’s specialist teams. Material changes in the investment’s performance against relevant selection criteria and in relation to sustainability risk are considered as part of this on-going process. Where necessary, CPB may remove an instrument from its approved lists or investment platform based on sustainability risk and other factors.
In CPB’s advisory process, as sustainability risk has already been integrated into the investment selection and monitoring processes outlined above, CPB does not separately carry out an additional sustainability risk assessment before providing advice. However, there are some instances in which it is not currently possible to carry out a sustainability risk assessment: this is the case as regards a number of ETFs on CPB’s ETF list for which CPB does not have an ESG rating and it is also the case in respect of issuers of instruments that are not included in CPB’s lists. This is because, whilst CPB has significant capabilities and expertise, the specialist teams are not currently equipped to assess sustainability risk in relation to the entirety of the equity, ETF and fixed income investment universe. CPB is actively considering how its processes and ESG ratings coverage might be enhanced going forward.
For foreign exchange products, it is not currently possible to carry out a sustainability risk assessment due to lack of market data. However, the market is evolving and CPB is monitoring developments.
CPB’s approach to sustainability risk is kept under review and its processes are being monitored on an on-going basis to ensure they are informed by industry practice in this evolving and dynamic area. As such, this page may be edited from time to time to ensure it accurately reflects CPB’s practices.
No Consideration of Sustainability Adverse Impacts
This disclosure is made for the purposes of Article 4 of SFDR.
CPB does not consider the adverse impacts of investment decisions on sustainability factors in its investment advice or insurance advice at the present time. “Sustainability factors” are defined by SFDR as environmental, social and employee matters, respect for human rights, anti-corruption and anti-bribery matters.
In terms of the reasons why CPB does not do so:
In order for CPB to be able to appropriately consider adverse sustainability impacts, and to rank and select financial products based on that information, firms who manage/provide the financial products in respect of which it provides investment or insurance advice would need to disclose their approach to such impacts.
As at the date of this statement, CPB has not had access to such information.
This is because:
(a) the requirement under SFDR for relevant firms to disclose such information did not become applicable until the date of this statement (10 March 2021); and
(b) in any case, relevant firms are entitled to “opt out” of this disclosure requirement if they wish (whether temporarily until 30 June 2021, or for smaller firms, permanently).
In terms of whether CPB intends to consider such adverse impacts in the future, CPB confirms it intends to closely monitor the industry position and update its approach in due course as the position evolves and further information is made available to CPB. CPB’s position in this regard is based on the following:Whilst CPB would expect further information on how firms consider adverse sustainability impacts to be published from 10 March 2021 and again from 30 June 2021, the information which they will be legally required to provide initially will be qualitative and will be limited to:
(a) information about their policies in relation to their identification and prioritisation of principal adverse sustainability impacts;
(b) a description of the principal adverse impacts and of any actions taken or planned in relation thereto;
(c) summaries of their shareholder engagement policies and
(d) references to their adherence to responsible business codes, internationally recognised standards for due diligence and reporting and, where relevant, their alignment with the objectives of the Paris Agreement.
Whilst CPB already considers (c) and (d) as part of its due diligence process in the selection of certain financial products, (a) and (b) are new regulatory requirements and as such, at this stage, CPB expects that any disclosure made by the firms whose financial products it provides investment or insurance advice on will be high level. In the circumstances, whilst CPB will consider this information if/when it is published, it is too early for CPB to be able to determine how it might use that information in order to rank and/or select financial products in respect of which it provide investment or insurance advice.
As a second phase of disclosure, CPB also expects that, in the future, firms will be required to disclose quantitative metrics against certain indicators in respect of the principal adverse sustainability impacts of their investment decisions. The precise scope of these indicators and disclosures has not been confirmed or embedded in legal requirements as at the date of this statement. In any event, it is anticipated that some of the data needed to make such disclosures may not be readily available at the time the second phase disclosures are made (for example, in respect of non-EU investee companies who are not required to make this information available). As such, CPB expects that firms’ positions in respect of the identification and prioritisation of adverse sustainability impacts will evolve rapidly over the next two years as the regulatory requirements are finalised and come into force, and the availability of data and methodologies to quantify adverse sustainability impacts improve.
In the circumstances, as noted above, CPB intends to keep a watching brief on the position and will update its approach to the consideration of sustainability impacts as the position evolves and further information is made available to CPB.
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”.
Find more information on Citibank Europe Plc’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:
“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 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 30 June 2021.