Citi Personal Wealth Management

Introduction to
Sustainable Investing

Invest sustainably to build a portfolio that reflects your worldview

Sustainability is increasingly a key consideration for investors. Sustainable investments has the potential to deliver risk adjusted returns comparable to those of traditional investments, but with the additional satisfaction of alignment with environmental and/or social goals.1

The term ‘Sustainable investing’ has, over the past two decades, evolved into a collective descriptor for a range of approaches. Each approach has its own financial and sustainability objectives and is available across traditional and alternative asset classes.

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

Socially Responsible Investing (SRI)

Values-based exclusions of companies or sectors.

Investment mandates will explicitly state the intent to exclude exposure by sector, industry or product using values-related criteria. For example, a socially responsible mutual fund may exclude tobacco or controversial weapons.

ESG Integration

The use of environmental, social and governance (ESG) metrics to identify investments with appealing risk and return characteristics.

Investment processes will incorporate ESG data to identify risks and opportunities that are considered material, integral drivers of investment performance. For example, an ETF where the manager has considered the carbon footprint of the underlying companies in the fund to reduce emissions related risks.

Access exposure to investments aligned to sustainable themes such as climate change or access to healthcare. The United Nations Sustainable Development Goals outline possible applicable themes.

Investments demonstrate alignment to sustainable themes through their business lines as demonstrated by their current and future revenue exposures. For example, a mutual fund that invests in renewable energy companies and is aligned with an environmental theme.

Impact

Investment selection based on measurable impact in a particular environmental or social area.

Investment mandates not only state intent, but also manage to a desired sustainable outcome by providing measurable metrics alongside a financial return. To be considered impact, the outcome must be incremental meaning it would not have occurred had your capital not been allocated to the investment. For example, a real estate development fund focused on providing solutions to the housing affordability crisis.

Navigating this space

Ready to begin? Here are four key considerations to get you started.

1. Establish your objectives

The first step in your sustainable investing journey is to establish your sustainability objective. That understanding coupled with your financial goals can help you invest with your specific purpose. Some important questions to consider:

  • Which sustainable investing approaches most resonate with you?
  • What sectors do you want to avoid in the portfolio?
  • What businesses would you be proud to support?
  • What causes would you like to support and where?

There is no right or wrong way to build a sustainable investment portfolio. Establishing your financial and sustainability goals at the outset can help to establish criteria to measure your progress over time.

2. Consider mutual funds

Mutual funds are a way to distribute your investment across multiple companies and sectors. They are actively managed strategies, and the managers may offer good stewardship practices that align with your sustainability goals. Investors should take into consideration the manager’s record in actively participating in proxy votes and other forms of engagement with companies. Many investment platforms offer mutual funds that employ one or more of the sustainable investment approaches described above. Before you invest in a mutual fund that is billed as “sustainable,” “socially responsible,” “ESG,” or a myriad of other sustainable descriptors, due diligence is key. Otherwise, you might find yourself invested in companies or sectors that don’t represent your views.

3. Research individual companies

Start by reading a company’s financial and sustainability disclosures by referencing documents such as its annual report, sustainability report, and investor relations website. Focus on gaining an understanding of the company’s management of its most relevant ESG risks and opportunities, those that have the most impact on its business strategy. The Sustainability Accounting Standards Board (SASB) can serve as a reference for which specific environmental and social issues are most material. SASB has specific standards for 77 specific industries. These can be used as a starting point to guide your resource efforts. Don’t simply accept a company’s story at face value, dig a little bit deeper – learn more about the competitive landscape, seek out whether there are pending legal issues or risks. Although researching individual companies can be time-consuming, it is the best way to ensure that your investments are furthering values that you care about.

4. Ongoing monitoring

Regular monitoring is important to ensure your investments remain aligned with your sustainable and financial objectives.

Common terms

ESG: Environmental, Social, Governance data. This data is generally reported by companies on an annual basis. Increasingly, ESG scores are produced by companies that use real-time data and news to enhance self-reported data.

Environmental Factors (E of ESG): Environmental factors within ESG criteria in the context of investing include but are not limited to the environmental footprint of a company or country (e.g., energy consumption, water consumption), environmental governance (e.g., an environmental management system) and environmental product stewardship (e.g., cars with low fuel consumption).

Social Factors (S of ESG): Social factors within ESG criteria in the context of investing include, but are not limited to, worker rights, safety, diversity, education, labor relations, supply chain standards, community relations, and human rights.

Corporate Governance / Governance Factors (G of ESG): Governance factors within ESG criteria in the context of investing refer to the system of policies and practices by which a company is directed and controlled. They include but are not limited to transparency on Board compensation, independence of Boards and shareholder rights.

ESG Ratings: Ratings reflecting performance of a company, country, or fund with regards to environmental, social and governance (ESG) factors. ESG ratings enable investors to gain a quick overview of the sustainability performance. Numerous rating providers have emerged ranging from MSCI and Sustainalytics, to specific niche providers focused on single issue areas. Here again, research is key. Methodologies differ, ratings are subjective, and we do not advise that they be used in isolation.

Green, Social and Sustainability Bonds: These bonds either use proceeds to address environmental or social objectives, such as the construction of affordable housing, or are tied to key performance indicators, for example, carbon footprint and societal benefit.

Greenwashing: A marketing strategy that misrepresents an organization’s environmental or sustainable practices. Companies may seek to boost their public image while their actual contributions are insufficient.

Sustainability Accounting Standards Board (SASB): An organization which aims to establish industry-specific standards for the recognition and disclosure of material environmental, social and governance impacts by U.S. public companies.

Sustainability Index or Benchmark: A tool to measure the value of a section of the stock market like the traditional S&P 500 Index. It is computed from the prices of stocks selected by applying a sustainable investment approach. Investors may use this tool to describe the market and to compare the return on specific investments.

United Nations Sustainable Development Goals (SDGs): The United Nations created the Sustainable Development Goals with the aim to end poverty, protect the planet and ensure prosperity for all by 2030. The 17 goals are interconnected, with achievement of one enabling progress in others. These goals can serve as a framework to direct capital to the changes you are most passionate about.


1. CIO Strategy Bulletin Special Edition, March 21, 2021, Why Ignoring Sustainability is a Portfolio Risk, Figure 1