This discussion paper explores the potential ways in which environmental, social and governance (ESG), or sustainability issues in general, can be embedded into strategic asset allocation (SAA) decision-making processes. 

It aims to highlight the links between an asset owner’s goals to incorporate ESG factors into investment policies and processes, and what this could mean for SAA frameworks. It includes a discussion on aligning ESG aspirations more broadly, and specifically in terms of climate change, as well as aligning them with the UN’s Sustainable Development Goals (SDGs), which are increasingly being incorporated into investment policies by much of the PRI’s signatory base. 

The paper provides the basis for wider discussions and interactions across the PRI’s signatory base that the PRI intends to lead over the course of 2019/20, including: boards; chief investment officers and investment committees of asset owners; fiduciary managers; investment consultants, and multi asset managers. Following this outreach, the PRI intends to publish a guidance document in 2020 detailing key insights and actions, to support signatories in their efforts to embed ESG into SAA decision-making frameworks.

The key insights emerging from this exploration, thus far, suggest that current industry-wide practices do not sufficiently recognise the importance of ESG factors, including climate change and the SDGs, as part of the core SAA decision-making frameworks.

Embedding ESG into SAA frameworks

Embedding ESG into SAA frameworks

The paper sets out a number of opportunities to embed ESG into SAA frameworks that warrant further discussion, including:

Setting objectives

  • This includes setting the primary risk/return objective, as well as considering an additional third dimension objective regarding the maximisation of positive ‘real world impact’.

Reviewing SAA targets and ranges

  • This includes the impact of ESG risks and opportunities based on long-term capital market assumptions across asset classes, including undertaking scenario analysis that, in turn, impacts on SAA targets and ranges.

Reviewing the opportunity set

  • Widening the potential investment universe to capture ESG opportunities and mitigate risks through asset, region, sector and sub-asset class allocation to assets that have unique ESG features or characteristics.

An illustrative example

  • The PRI-supported Inevitable Policy Response to climate change programme of work is presented as an illustrative example of how SAA processes could be adapted in practice.

The discussion paper explores each of these areas in further detail. It is not, however, intended to act as a guidance document but rather to stimulate wider discussion on these topics on how PRI signatories might evolve SAA frameworks to more fully reflect their ESG aspirations going forward.