Integration of Sustainability Risk
Article 3(2) of 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 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, cash fixed income products 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. For the avoidance of doubt, equities include depositary receipts and ‘cash fixed income products’ excludes fixed income structured products and OTC derivatives which are separately addressed below. 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 cash 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 structured products referencing underlyers 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 underlyer(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 underlyer level, the following methodology is used:
- For equities, cash fixed income products, ETFs and mutual funds, the same methodology for those instruments above. 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 underlyers, 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 underlyers 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 underlyers (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 underlyer(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 underlyer. 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 underlyer, please refer to relevant sections above.
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 (principally in relation to synthetic ETFs and ETFs with Fixed Income, Alternative, Money Markets and Commodities strategies) 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 structured products and OTC derivatives referencing underlyers that are: foreign exchange, interest rates, inflation, commodities (including emission allowances), indices and preference shares referencing an index (and baskets of such underlyers) , it is not currently possible to carry out a sustainability risk assessment (or in some cases to make a definitive assessment of the relevance of sustainability risk) for a combination of reasons including the lack of market data, the lack of consistent regulatory requirements of providers of underlying assets to disclose sustainability information, an absence of any consistent methodologies for assessing sustainability risks (which can lead to potentially subjective assessments of sustainability risk), market challenges in analysing the relevance or the potential direct and indirect impacts of sustainability risk on certain underlyer(s) (e.g. inflation), and the inability to apply any suitable and consistent proxies for these asset classes.
In relation to the sub-funds of Red Arc Global Investments (Ireland) ICAV on which CPB provides investment advice, these sub-funds are not subject to the methodology set out for alternative funds above. Instead, CPB has considered the fund manager’s assessment that sustainability risk is not relevant to the funds’ strategies and has adopted the same approach.
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
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:
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.
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 1 December 2021.