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SI Forum

Sustainable Investing

Sustainable Investing Forum 2022

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Sustainable investing continues to extend its reach into the mainstream. The geopolitics of today that has caused food and energy scarcity has also quickened the pace of change towards finding longer-term solutions, and brought on a slew of investment opportunities. Asia is well positioned to lead the transition towards sustainable development and contribute to the global sustainability agenda.

These were among the hot-button topics discussed at the Citi Global Wealth Sustainable Investing Forum in August 2022, which was attended virtually by our clients and prospects in Asia.

There were three separate – but interlinked – panels with speakers including Citi subject matter experts and professionals, global industry leaders and investors discussing the importance of sustainable investing, greening our world and the sustainable transition in Asia.

“Not only do sustainability challenges pose risks which have material financial impact but also present opportunities for investors to invest in innovations driving environmental and social progress across the globe,” said Angel Ng, Head of Asia, Citi Global Wealth.

Institutional investors like GIC, one of the world’s largest sovereign wealth funds, is committed to integrating sustainability in their investment process and operations with the view that it is an investment issue.

“Companies with strong sustainability practices will offer prospects of better risk-adjusted returns over time. This relationship will continue to strengthen as markets price in the externalities.” said Ms. Liew Tzu Mi, Chief Investment Officer for Fixed Income and Chair of the Sustainability Committee at GIC.

Greening the world is an unstoppable trend and presents investment opportunities from renewable energy and electric vehicles to agriculture.

“There's a long period of significant investment needed in redundant energy supplies, clean energy, if we're going to reduce fossil fuel output in carbon emissions. We have simultaneously been reminded how geopolitical risk can limit this vital resource of energy. I would consider it again as a good long term investment component.” said Steven Wieting, Citi Global Wealth’s Chief Investment Strategist and Chief Economist.

Apart from companies along the energy transition value chain, investors can watch out for companies that focus on food security such as agricultural yield optimization, precision agricultural technology, crop protection and seed company suppliers.

“Decarbonization is at the point of no turning back. That's being pushed by policies and pulled by demand for investors and we're finding lots of investment opportunities.” said Wendy Agnew, Senior Portfolio Manager, Citi Investment Management.

The availability and quality of ESG data is critical for sustainable investing. Linda-Eling Lee, Global Head of ESG and Climate Research, MSCI advised investors that “Increasingly ESG data is available to help investors navigate the system confusion with names and labels and is focusing on what they prioritize as their sustainability objective.” There is no one size fits all solution.

The last panel discussion shifted to Asia, the center of many sustainability challenges and the manufacturing heart of the global economy.

“The APAC region is home to five of the ten largest carbon 50 countries in the world, accounting for over 45% of global emissions…..A lot of the global leaders in developing and producing green technologies are actually right here. If Asia doesn’t get the transition right, the world isn’t going to.” said Emily Woodland, Managing Director and APAC Head of Sustainable Investing at Blackrock. She added that Asia was crucial to the global transition journey.

Although the adoption of sustainable investing in APAC is lower than the global average, it is growing faster than other regions.

Population growth, urbanization and the pandemic have led to an increase in plastic waste. When asked about why plastic waste should be seen as an investment opportunity, Regula Schegg, Circulate Capital Managing Director in Asia explained tackling plastic waste brings both environmental impact and economic value. ‘95% of our plastic packaging is used once and then it's thrown away. However, there's tremendous opportunity to capture the value of plastic because the recycling industry is out there. There is more demand of recycled material than there is supply.’ said Ms Schegg.

Ms. Schegg added in the last three years High Net Worth Individuals (HNWIs), family offices and funds have all taken an interest or have considered investments in renewables and recycling. That in itself represents a mindset shift and the belief that investors can do well while doing good.

Our speakers emphasized throughout the forum that investors do not need to compromise financial returns to make sustainable investments. As IFC’s Regional Industry Director for Manufacturing, Agribusiness and Services, Rana Karadsheh-Hadad said: “Sustainable investments are actually not just sustainable for the environment…but it's sustainable for your balance sheet.”

Ignoring sustainability is a portfolio risk. The sustainable investing landscape continues to evolve and expand. There are now a variety of sustainable investment solutions across investment approaches, asset classes and themes to help investors pursue simultaneous societal change and competitive financial returns.

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(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).

Additionally, the underlying collateral supporting non-Agency MBS may default on principal and interest payments. In certain cases, this could cause the income stream of the security to decline and result in loss of principal. Further, an insufficient level of credit support may result in a downgrade of a mortgage bond's credit rating and lead to a higher probability of principal loss and increased price volatility. Investments in subordinated MBS involve greater credit risk of default than the senior classes of the same issue. Default risk may be pronounced in cases where the MBS security is secured by, or evidencing an interest in, a relatively small or less diverse pool of underlying mortgage loans.

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.

Asset allocation does not assure a profit or protect against a loss in declining financial markets.

The indexes are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance.

Past performance is no guarantee of future results.

International investing entails greater risk, as well as greater potential rewards compared to US investing. These risks include political and economic uncertainties of foreign countries as well as the risk of currency fluctuations. These risks are magnified in countries with emerging markets, since these countries may have relatively unstable governments and less established markets and economics.

Investing in smaller companies involves greater risks not associated with investing in more established companies, such as business risk, significant stock price fluctuations and illiquidity.

Factors affecting commodities generally, index components composed of futures contracts on nickel or copper, which are industrial metals, may be subject to a number of additional factors specific to industrial metals that might cause price volatility. These include changes in the level of industrial activity using industrial metals (including the availability of substitutes such as manmade or synthetic substitutes); disruptions in the supply chain, from mining to storage to smelting or refining; adjustments to inventory; variations in production costs, including storage, labor and energy costs; costs associated with regulatory compliance, including environmental regulations; and changes in industrial, government and consumer demand, both in individual consuming nations and internationally. Index components concentrated in futures contracts on agricultural products, including grains, may be subject to a number of additional factors specific to agricultural products that might cause price volatility. These include weather conditions, including floods, drought and freezing conditions; changes in government policies; planting decisions; and changes in demand for agricultural products, both with end users and as inputs into various industries.

The information contained herein is not intended to be an exhaustive discussion of the strategies or concepts mentioned herein or tax or legal advice. Readers interested in the strategies or concepts should consult their tax, legal, or other advisors, as appropriate.

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

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The information in this document has been obtained from reports issued by CGMI and CGWI. Such information is based on sources CGMI and CGWI believe to be reliable. CGMI and CGWI, however, do not guarantee its accuracy and it may be incomplete or condensed. All opinions and estimates constitute CGMI and CGWI's judgment as of the date of the report and are subject to change without notice. This document is for general information purposes only and is not intended as a recommendation or an offer or solicitation for the purchase or sale of any security or currency. No part of this document may be reproduced in any manner without the written consent of Citibank N.A. Information in this document has been prepared without taking account of the objectives, financial situation, or needs of any particular investor. Any person considering an investment should consider the appropriateness of the investment having regard to their objectives, financial situation, or needs, and should seek independent advice on the suitability or otherwise of a particular investment. Investments are not deposits, are not obligations of, or guaranteed or insured by Citibank N.A., Citigroup Inc., or any of their affiliates or subsidiaries, or by any local government or insurance agency, and are subject to investment risk, including the possible loss of the principal amount invested. Investors investing in funds denominated in non-local currency should be aware of the risk of exchange rate fluctuations that may cause a loss of principal. Past performance is not indicative of future performance, prices can go up or down. Investment products are not available to US persons. Investors should be aware that it is his/her responsibility to seek legal and/or tax advice regarding the legal and tax consequences of his/her investment transactions. If an investor changes residence, citizenship, nationality, or place of work, it is his/her responsibility to understand how his/her investment transactions are affected by such change and comply with all applicable laws and regulations as and when such becomes applicable. Citibank does not provide legal and/or tax advice and is not responsible for advising an investor on the laws pertaining to his/her transaction.

Citi Research (CR) is a division of Citigroup Global Markets Inc. (the "Firm"), which does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

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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 has not taken account of the objectives, financial situation or needs of any particular investor. Any person considering an investment should consider the suitability of the investment having regard to their objectives, financial situation and needs, and should seek independent advice before making an investment decision. You should obtain and consider the relevant product terms and conditions and risk disclosure statement, and consider if it’s suitable for your objectives, financial situation or needs before making any investment decision. Investors are advised to obtain independent legal, financial and taxation advice prior to investing. Investments are not deposits, are not protected by the Deposit Protection Scheme in Hong Kong and are subject to investment risk including the possible loss of the principal amount invested.

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