Citibank Europe Plc - Investment and Insurance Advice

Article 3(2) of the Sustainable Finance Disclosure Regulation (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 (EU) through Citibank Europe Plc (CEP) and its EU branches, and it will be a financial adviser for the purposes of SFDR in relation to these activities.

CPB integrates sustainability risk into its investment selection and monitoring processes. Sustainability risk is considered alongside other factors, including performance, market risk, liquidity and investment strategy. The approach is proportionate and tailored depending on the asset class, product structure and availability of ESG data.

CPB applies a consistent framework to integrate sustainability risk across investments, with adaptations where required. Investments may undergo quantitative and qualitative screening and ESG ratings (where available) can be used as a key input and proxy for sustainability risk. Sustainability risk is assessed alongside financial and operational factors, including performance, volatility, liquidity and strategy. Sustainability risk is not considered in isolation and investment decisions are based on a holistic assessment of risk and return, incorporating ESG considerations alongside other criteria. The depth of assessment depends on the availability and quality of ESG data, as such where ESG data is limited or unavailable, sustainability risk may not be fully assessed. Approved investments are subject to periodic review and material changes to sustainability risk may result in internal escalation or removal from approved lists.

For structured products referencing underliers that are: equities, cash fixed income products, exchange-traded funds (ETFs), mutual funds, CDS referencing bonds or loans of a ‘Reference Entity’ and preference shares referencing an underlying asset that is an equity/ies (and any baskets thereof), CPB considers sustainability risk at two-tiers: firstly at the level of the obligor(s) and secondly, where relevant and possible, at the level of the underlier(s):  

At obligor level, a selection and approval process of issuers is undertaken by CPB which includes consideration of sustainability risk of the applicable issuer, any guarantor and/or, for secured orphan-SPV issued notes, any other entity identified in the applicable prospectus which may fund that issuer’s obligations under the notes. This is assessed through the proxy of an ESG score obtained from a third-party provider, where available, for any such entity or its parent company (as required). CPB consider such sustainability risk as one of several factors that are considered together in selecting issuers for inclusion in CPB’s list of approved issuers. 

At underlier level, the following methodology is used:

• For equities, cash fixed income products, ETFs and mutual funds, the same methodology applied where they are traded as cash products. The approach for cash fixed income products includes any identifiable bond collateral in respect of secured structured products.
• For CDS referencing bonds or loans of a ‘Reference Entity’, CPB considers the ESG rating of the Reference Entity at the point of selection of that Reference Entity for the product.
• For preference share underliers, which themselves reference an underlying asset that is an equity/ies, a two-tier assessment is undertaken of the ESG score of (i) the preference share issuer, where available, or its parent company (as required) and (ii) the equity/ies referenced by the preference share, using the same methodology as set out for equities above.

For OTC derivatives referencing underliers that are: equities, cash fixed income products, exchange-traded funds (ETFs), mutual funds, or CDS referencing bonds or loans of a Reference Entity, CPB integrates sustainability risk only at the level of the underliers (where possible) because CPB’s OTC derivatives trading model requires clients to trade with the relevant CPB legal vehicle which holds their account and thus there is no approval or selection of the contractual obligor, as such, as part of CPB’s investment advice.  The assessment of the sustainability risk of the underlier(s) is the same as for structured products above.

In respect of Exchange Traded Options, CPB has determined that Central Counterparties (CCP) are interposed to mitigate risk as intermediary of exchange trade instruments and margin collection purposes. The primary risk for CPB clients is the underlier. Therefore, CPB has determined that the CCP should not be in scope of sustainability assessment as an obligor.  For the methodology to be applied to the underlier, please refer to relevant sections above. In CPB’s advisory process, sustainability risk is already incorporated into investment selection and monitoring, so no separate assessment is conducted prior to providing advice. However, in some cases a sustainability risk assessment cannot currently be performed. This applies to certain ETFs on CPB’s list where ESG ratings are unavailable—particularly synthetic ETFs and those covering Fixed Income, Alternatives, Money Markets, and Commodities—as well as to issuers not included in CPB’s lists.

For structured products and OTC derivatives linked to underliers such as foreign exchange, interest rates, inflation, commodities (including emission allowances), indices, and preference shares referencing indices (or baskets of these), CPB do not carry out a sustainability risk assessment in respect of the underlier.

This is due to several factors, including:

• Limited market data
• Inconsistent sustainability disclosure requirements for underlying assets
• A lack of standardized assessment methodologies (leading to potential subjectivity)
• Challenges in evaluating the direct and indirect impacts of sustainability risks on certain underliers (e.g. inflation)
• Absence of reliable proxies for these asset classes.