Citi said ‘green chip’ stocks could emerge as asset management evolves to invest in dual return equity products that provide financial performance together with change in specific environmental, social and governance goals.
Sandy Kaul, global head of business advisory services at Citi, gave a presentation at the Sustainability, ESG and Alpha summit hosted by Citi Institutional Client Group.
She provided an overview of a survey, From Evolution to Revolution: How ESG is Transforming the Investment Management Industry, based on 105 interviews in March across $53.7 trillion of total assets under management.
Kaul said: “ESG has the potential to reshape asset management and re-inject skill.”
She continued that the majority of firms incorporate ESG today either through negative screening, by excluding certain stocks, or integration by using blended ESG scores.
In the next 12 to 36 months Kaul expects a move away from blended ESG scores towards targeting of specific E, S or G risks which can be measured and tracked using non-financial data.
“Banking is ahead of asset management in taking steps that affect the allocation and cost of capital,” Kaul added. “For example, last year US banks cut lending to the private prison industry.”
Thematic ESG funds will emerge in a shift away from generalized ESG and address specific pre-financial risks in a more targeted manner and improve the link between investor allocations and desired changes in corporate behavior. For example, a fund may choose to track clean water usage.
ESG products
Beyond 2025 securities will be reclassified as equity products will provide two sets of returns – the first related to financial performance and the second related to the overall change in relevant non-financial ESG performance indicators.
Kaul said: “Green chip stocks will deliver both financial returns and high ESG scores. Brown chips will deliver high financial returns but low ESG scores and a company could have a different rating for each goal.”
Investors may choose brown stocks in order to use their capital to influence behaviour.
This approach will begin in equities but move into fixed income. “We are already seeing the seeds of change in the bond market,” added Kaul.
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She gave the example of BNP Paribas issuing a bond in which the French bank pledged to plant a tree for every €1,000 sold. Enel issued a bond in which the coupon increases if the Italian energy company does not meet its target for increased use of clean energy.
“We expect this approach to get great traction in the private asset market as performance indicators can be written into the contract language for bonds and loans,” added Kaul.
CEO chat
Michael Corbat, chief executive of Citi, said at the summit that he expects the creation of more innovative ESG products.
“We were lead manager of the first ESG SPAC,” he added.
Sustainable Opportunities Acquisition, a blank check company, raised $300m on the NYSE in May to buy environmentally sustainable industrial businesses.
Citi was one of the lead managers of the European Investment Bank’s €1bn bond in June which will be used to fund research, development and deployment of innovative low carbon technologies; electric rail infrastructure and rolling stock; and electric buses. The EIB said the issue attracted more than €6bn of demand.
Corbat continued that the pandemic has been a dress rehearsal for the impact of climate change.
Citi announced a new five-year 2025 Sustainable Progress Strategy in July which included a goal to finance $250bn of climate solutions globally. The bank had previously set a $100bn goal in 2015 which was met last year, more than four years ahead of schedule
“Now is the time to double down,” added Corbat. “The industry has to recognise that our track record has not been great and we have a long way to go.”
He continued that two years ago the bank analysed its gender pay gap and then set representation goals for women and US minorities.
“You are what you measure,” Corbat said. “ You need to come to terms with painful facts in order to make progress.”
This month Corbat announced that he plans to retire from Citi in February next year. He will be succeeded by Jane Fraser, currently Citi’s president and chief executive of global consumer banking.
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