2022 Perspectives for the Public Sector

Citi Perspectives for the Public Sector 9 be useful to work with a custody provider that has the tools and ESG expertise to help asset owners hone their approach. Such a provider can also help public pension funds to develop a pragmatic, nuanced investment policy that enables the generation of green alpha from assets that might be ruled out of bounds if a simplistic negative screening approach is applied. Similarly, an experienced provider can help public pension funds to create a framework for communication so they can justify their investment decisions (to their pensioners and the broader public) from an ESG perspective. It is essential for public pension funds to keep abreast of developments in the ESG investment world. Historically, ESG investment has been predominantly focused on equities. This is rapidly changing, with an increased emphasis on bonds and private assets. These changes will further increase the complexity of portfolio construction by widening the choices available to asset owners. As the ESG asset universe broadens, public pension funds may need additional expertise and insights relevant to these asset classes, as well as capabilities to manage the transition of their portfolios. There is no one-size-fits-all approach when it comes to ESG portfolio construction and management. Defining your ESG objectives is the first step. Uncovering new opportunities as the emphasis shifts from negative exclusion and risk avoidance to the achievement of positive outcomes and the pursuit of alpha through ESG is critical. Pragmatically transitioning your portfolio, while retaining the focus on the level and resilience of returns and monitoring and reporting progress to stakeholders follows. The COVID pandemic highlighted the profound interconnectedness of the world we live in and the impossibility of solving problems alone. This also has an analogue in the investment management world. The evolution of portfolio construction to more effectively manage to desired ESG outcomes, alongside the pursuit of traditional financial objectives, is highlighting the need to develop partnerships with a network of experts to enhance and supplement one’s own capabilities and expertise. Citi is uniquely positioned to partner with public pension funds and other asset managers in optimizing portfolios, transitioning investments and measuring and monitoring portfolios. 1 Source: Citi Business Advisory Services’ analysis based on “2002 The Yale Endowment”, Investments.Yale.edu/reports, https://static1.squarespace.com/static/55db7b87e4b0 dca22fba2438/t/578e42d3e58c629352d75f9f/1468941012036/Yale_Endowment_02.pdf and index return data from Bloomberg. For more information please see Citi Business Advisory Services’ paper, From Evolution To Revolution: ESG Considerations Beginning To Re-Shape Investment Management, based on interviews of the leaders of firms controlling over $50 trillion of assets. For a fuller discussion of the evolution of portfolio construction approaches, and the dynamics and future direction of the pension industry, please see Citi Business Advisory Services’ paper, The Industry Moves from an Era of Incremental to Exponential Change, based on over $35 trillion of interviews.