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Sustainable Investing

Citi Global Wealth’s approach to Sustainable Investing

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From our many conversations with our global clients at Citi Global Wealth, it appears there is an increasing number of them who are passionate about driving positive societal change through their investment portfolios.

The positive societal change that our global citizen clients seek to drive takes many forms. These include contributing to action against climate change, enabling the adoption of clean energy, and using natural resources more responsibly. Some of them aim to bring about a fairer and better world by enhancing access to education, employment, and to the most basic needs such as clean water, food and healthcare. particularly for vulnerable communities in the developing world. Others yet aspire to raising corporate standards in areas such as transparency and accountability, as well as in management and workforce diversity.

We understand that sustainability means different things to different people. At Citi Global Wealth, we call our approach to sustainability "Investing with Purpose." Our platform of sustainable investments integrates sustainability considerations into investment portfolios while pursuing competitive risk-adjusted returns. Investing with Purpose enables clients to pursue their sustainable and financial objectives through core, opportunistic or thematic investments.

Below are some top-of-mind questions investors have around sustainable investing:

 

What is sustainable investing?

Sustainable investing is when investors incorporate sustainability risks and opportunities into investment decision-making. It encompasses four main approaches, including Socially Responsible Investing (SRI), Environmental, Social and Governance (ESG) Integration, Thematic investing, and Impact investing.

SRI includes values-based exclusions of companies or sectors to reflect investors' values. ESG integration is the use of ESG metrics to identify investments with appealing risk and return characteristics. Thematic investing provides exposure to investments aligned to sustainable themes such as climate change, biodiversity or social equality. Impact investing focuses on investments with intentional, incremental and measurable environmental and/or social impact.

A single investment product can, and frequently does, combine more than one of these approaches.

Learn more about sustainable investing and how to navigate the space

 

Can a sustainable investing strategy be profitable?

There is a widespread perception that applying ESG criteria means sacrificing performance. We disagree. Sustainability issues are business and investment issues. Not only do sustainability challenges pose risks which could have material financial impact but they also present opportunities to invest in innovations that drive environmental and social progress across the globe.

Within sustainable investing, there is a wide range of solutions that offer various levels of financial outcomes depending on their investment objectives and asset classes. For example, some impact solutions are designed to be concessionary to address the funding gap of underrepresented areas left by mainstream capital while others capture fast-growing areas that offer competitive risk-adjusted returns.

Similar to traditional investments, it is important for investors to evaluate the opportunities with multiple lenses and understand their investment objectives and processes.

 

What are the risks of sustainable investments?

Sustainable investments are exposed to the same risks as other traditional investments. However, greater regulatory oversight and transparency is critical for investors to feel confident about sustainable investing. This includes understanding the ESG score behind an investment as it may not tell the full story; a deep fundamental analysis of a company or a portfolio manager's investment process is therefore essential.

 

What are some examples of implementation options for sustainable investing?

Sustainability is a lens that can be applied across asset classes in a portfolio through core, opportunistic or thematic investments.

Exclusions of sectors or companies that may conflict with investors' values may overlay the entire investment portfolio.

ESG integration strategies can help to ensure investments are made in companies that operate with high ESG standards. This may apply to a fund that invests in companies with the best ESG footprints in their sectors and engages with portfolio companies to drive ESG improvement.

Thematic and impact investing can further align a portfolio to a specific set of outcomes. A capital market thematic solution example would be investing in secondary green, social or sustainability bonds that have a specific use of proceeds towards environmental and/or social outcomes. Impact investments are more common in the private market, for example through investing directly in a sustainable agricultural technology company to drive a solution that demonstrates measurable positive impact and which requires additional capital to bring it to fruition.

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to prepayment risk. When interest rates fall, an issuer may choose to borrow money at a lower interest rate, while paying off its previously issued bonds. As a consequence, underlying bonds will lose the interest payments from the investment and will be forced to reinvest in a market where prevailing interest rates are lower than when the initial investment was made.

(MLP’s) - Energy Related MLPs May Exhibit High Volatility. While not historically very volatile, in certain market environments Energy Related MLPS may exhibit high volatility.

Changes in Regulatory or Tax Treatment of Energy Related MLPs. If the IRS changes the current tax treatment of the master limited partnerships included in the Basket of Energy Related MLPs thereby subjecting them to higher rates of taxation, or if other regulatory authorities enact regulations which negatively affect the ability of the master limited partnerships to generate income or distribute dividends to holders of common units, the return on the Notes, if any, could be dramatically reduced. Investment in a basket of Energy Related MLPs may expose the investor to concentration risk due to industry, geographical, political, and regulatory concentration.

Mortgage-backed securities ("MBS"), which include collateralized mortgage obligations ("CMOs"), also referred to as real estate mortgage investment conduits ("REMICs"), may not be suitable for all investors. There is the possibility of early return of principal due to mortgage prepayments, which can reduce expected yield and result in reinvestment risk. Conversely, return of principal may be slower than initial prepayment speed assumptions, extending the average life of the security up to its listed maturity date (also referred to as extension risk).

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MBS are also sensitive to interest rate changes which can negatively impact the market value of the security. During times of heightened volatility, MBS can experience greater levels of illiquidity and larger price movements. Price volatility may also occur from other factors including, but not limited to, prepayments, future prepayment expectations, credit concerns, underlying collateral performance and technical changes in the market.

Alternative investments referenced in this report are speculative and entail significant risks that can include losses due to leveraging or other speculative investment practices, lack of liquidity, volatility of returns, restrictions on transferring interests in the fund, potential lack of diversification, absence of information regarding valuations and pricing, complex tax structures and delays in tax reporting, less regulation and higher fees than mutual funds and advisor risk.

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Diversification does not guarantee a profit or protect against loss. Different asset classes present different risks.

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MARKET SPECIFIC DISCLOSURES

Market Specific Disclosures

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This communication is for general information only, is not intended as a recommendation or an offer or solicitation for the purchase or sale of any products or services and should not be relied upon as financial advice. The information herein
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