Citibank Europe Plc - Portfolio Management

Article 3(1) of SFDR requires all financial market participants to publish on their websites information about their policies on the integration of sustainability risks in their investment decision-making process. 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 Investment Management (CIM) provides portfolio management services. Where it provides these services through Citibank Europe Plc Luxembourg branch that entity will be a financial market participant under SFDR.

Although SFDR does not apply to all legal entities through which CIM acts, CIM operates a global investment decision-making process and, therefore, CIM embeds the consideration of financially material sustainability risks in that process no matter where it provides portfolio management services in the world. Ultimately, CIM’s goal in taking account of these risks – and in integrating them across the organisational, governance and risk management aspects of investment decision-making process – is to support long-term investment returns for its clients.

CIM integrates sustainability risk into its investment selection process in one of the following ways, depending on the asset class concerned.

For equities and fixed income, it obtains an environmental, social and governance (ESG) risk rating, where available, from an ESG specialist third party data provider. The ESG risk rating reflects the investee company’s exposures to material ESG risks and the company’s preparedness and track record in managing its exposures to these issues. It is considered by the analyst team alongside other financial metrics (such as historical performance, expected performance, valuation, and credit rating) to reach an assessment of the merit of the investment.

For ETFs, it obtains an ESG risk rating, where available, from an ESG specialist third party data provider. The third party data provider’s methodology to assess ESG risk relies on individual scores attributed to the environmental, social and governance risks for each underlying investment of the ETF, aggregated at the ETF fund level.

The resulting ESG score is then used as a proxy for assessing sustainability risk. Where a score is unavailable, the approach is to consider SFDR categorisation of the relevant sub-fund(s). Generally, funds classified as Article 6 products under SFDR are considered to have high sustainability risk, whereas funds classified as Article 8 or 9 products are considered to have low sustainability risk. An ETF’s ESG score or sustainability risk profile is not an overriding factor in the selection process.

Rather, it is considered in the round alongside other factors (such as financial metrics, valuation data, projections, estimates and market position, amongst others) when determining whether it should be added to the investment platform.

For third party mutual funds, the CIM due diligence teams assess the level of sustainability risk in a fund via a proprietary methodology. This methodology seeks to capture and quantitatively weight responses to a set of due diligence questions regarding sustainability risk that are raised with the relevant manager.

CitiFocus strategies, which represent CIM’s high conviction strategies, are subject to further qualitative analysis and approval, which again considers the sustainability risk profile of the strategy in an integrated way with other factors.

CIM also conducts ongoing monitoring in respect of the above instruments and products which have been added to its investment platform. As part of this process, CIM assesses whether there have been any material changes in the sustainability risk profile associated with the asset, alongside other matters. 

For hedge funds, where this is suitable for a particular mandate, CIM will use a hedge fund of funds managed by Citi’s specialist teams, the underlying funds of which are also selected by Citi’s specialist teams.

Citi’s specialist teams consider 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 Citi’s specialist teams’ 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.

Citi’s specialist teams also review managers of third-party funds on a periodic basis. As part of these reviews, they 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.

Third party data providers: As the use of third-party data is embedded in CIM’s investment research and decision-making process for ETFs, equities, and fixed income investments, CIM takes care in selecting data providers.

CIM undertakes due diligence both before entering a business relationship with the data provider and annually thereafter, which assesses the data provider’s performance against CIM’s key selection criteria.

Amongst other things, as part of CIM’s selection criteria, CIM requires that the data provider be a leading ESG data provider in the industry, have expansive global company, sovereign and agency coverage, and use a broad range of data sources.

CIM reviews its processes on a regular basis to make sure they are informed by industry practice. The processes described above are no exception and as CIM recognises that the integration of sustainability risk is an evolving and dynamic area. As such, this section may be edited from time to time to ensure it accurately reflects CIM’s practices.

Article 4(3) of SFDR requires certain financial market participants to publish on their websites a statement on their due diligence policies with respect to the principal adverse impacts (PAIs) of investment decisions on sustainability factors.

Principal adverse impacts (PAIs) are defined by SFDR as the most significant negative impacts of investment decisions on sustainability factors relating to environmental, social and employee matters, respect for human rights, anti‐corruption and anti‐bribery matters.

Sustainability factors are defined by SFDR as environmental, social and employee matters, respect for human rights, anti-corruption, and anti-bribery matters.

This requirement applies to Citibank Europe Plc acting through its Luxembourg branch when it provides portfolio management services through CIM.

(a) information about CIM’s policies on the identification and prioritisation of principal adverse sustainability impacts and indicators;

CIM has formulated a policy on how it will identify and prioritise the PAIs and indicators (a ‘PAI policy’). This policy was approved by the Citibank Europe Plc (Luxembourg Branch) governing body on 24 February 2023. This section summarises certain key provisions of the PAI policy.

In addition to the mandatory PAIs applicable to CIM, CIM has selected additional PAIs for each type of investments within its financial products, based on the observation of the largest coverages in terms of availability amongst the universe of voluntary PAIs (as listed in Commission Delegated Regulation (EU) 2022/1288) related to our entire universe of investments.

CIM has identified PAIs in respect of its portfolio management activities conducted through Citibank Europe Plc, Luxembourg Branch by collecting data on the PAIs, where available, which may include data from third-party providers. As the use of third-party data is embedded in CIM’s investment process, CIM takes care in selecting data providers.

The PAIs will only be assessed as set out below.

• For ESG Focus Portfolios and GTP, certain PAIs are considered through the application of exclusion criteria that map across to the themes covered by those PAIs (wholly or partly). Additionally, ESG Focus Portfolios apply screening processes capturing investments that identify as exhibiting favourable ESG ratings which may be influenced by or linked to PAIs.
• For MACS ESG Portfolios (which invest in Article 8 and 9 funds), in relation to any Article 9 funds which are selected for inclusion in the ESG MACS Portfolios, as Article 9 funds are required to take into account principal adverse impact indicators, the underlying third-party fund manager shall be required under SFDR to consider the mandatory PAI indicators in its investment decision making process for sustainable investments. The portfolio therefore indirectly considers such PAI indicators by investing in these funds. However, as there is no minimum allocation to Article 9 funds, CIM cannot commit to indirectly considering principal adverse impacts on sustainability factors.

CIM does not currently prioritise specific principal adverse impacts at the entity level (but may do so at strategy level in relation to certain portfolios only).

CIM reviews its processes on a regular basis to make sure they are informed by industry practice. The PAI policy is no exception, recognising that the identification and prioritisation of PAIs is an evolving and dynamic area. As such, this section may be edited from time to time to ensure it accurately reflects CIM’s practices.

 (b) a description of the principal adverse sustainability impacts and of any actions in relation thereto taken or, where relevant, planned;

SFDR requires CIM to collect data on, and in turn annually disclose certain quantitative metrics in relation to various PAI indicators in respect of its portfolio management activities conducted through Citibank Europe Plc, Luxembourg Branch. It also requires CIM describe the actions it has taken or plans to take in respect of those indicators.

This is a form of ex-post quantitative reporting in respect of portfolio management activity conducted during the previous reference period. This report also includes metrics published in the previous year. The present statement is the consolidated statement on PAIs on sustainability factors of Citibank Europe plc (Luxembourg Branch) (“CIM”). This statement covers the reference period from 1 January 2023 to 31 December 2023 and can be found below:

(c) a summary of CIM’s engagement policies made under Article 3g of Directive 2007/36/EC;

CIM’s portfolio management team are continuously monitoring companies and holdings to ensure that they remain appropriate and aligned with their investment mandates. CIM engages with investee companies through our proxy voting preferences, which may direct votes to issues aligned to some sustainability matters.

Meetings may be held with companies to discuss specific results or events as well as more informal dialogue incorporating site visits and other research initiatives.

These meetings may cover a range of topics from corporate strategy, risk management, corporate governance, board composition and remuneration issues. CIM does not specifically engage with investee companies on matters related to PAIs, but the topics discussed at such meetings may map across to the themes covered by certain PAI indicators in the SFDR rules, wholly or partly.

Third party managers utilised in investment strategies may engage with investee companies on matters relating to environmental, social, and corporate governance (ESG) developments as well as enhancements or clarifications to company analysis or process improvements.

If CIM were to become aware of any material issues, either financial or non-financial, it would review the investment thesis to see if this had affected the investment rationale.

(d) CIM’s adherence to responsible business conduct codes and internationally recognised standards for due diligence and reporting and, where relevant, the degree of their alignment with the objectives of the Paris Agreement.

Currently, CIM does not adhere to specific sustainability-related conduct codes or internationally recognised sustainability-related standards for due diligence and reporting.

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 2020 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 by attracting, retaining and motivating the best talent available to execute the 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.”