By Toby Belsom, Director Investment Practices, PRI and Catie Wearmouth, Investment Practices Consultant, PRI

With the publication today of two more case studies – from BlackRock and Morgan Stanley – in our strategic asset allocation (SAA) series, we’ve taken the opportunity to step back and review the work that the PRI has published on SAA over the last 12 months. Based on this work, which includes 13 case studies, we can start to see a pattern emerging in signatories’ approaches to incorporating ESG factors into SAA. 

From our workshops last year, it was clear that there were no established frameworks for, and little coverage about, what it means to incorporate ESG factors into SAA processes in practice. However, the case studies do point to emerging practices in three areas – the most obvious being for practitioners to incorporate long-term ESG issues such as climate change or governance practices into expected asset return calculations and modelling. Data can enable the identification of these issues or traits as standalone factors and sit alongside other considerations within an SAA model. It is also a reflection that the relationships between asset classes and returns are always changing. For example, tobacco stocks are no longer the default option for dividend in an income portfolio. Yet whether ESG issues can be considered a factor, in the same way as value, momentum or quality, is still up for debate.

Emerging practices

  1. Climate resilience could be a key factor in driving returns between asset classes: this type of approach is the focus of seven out of 13 of the case studies.
  2. The next group of approaches focuses on asset owners – many of whom do not have a specific approach to SAA. For this group, including ESG factors into mandate design, trustee training and asset manager selection might be the first step.
  3. The most challenging approach is around the concept of a ‘sustainability budget’ whereby asset allocators look to explicitly include real-world outcomes into considerations around asset allocations and the shape of portfolios. A ‘sustainability budget’ might sit alongside a risk budget in this context.

While these approaches don’t constitute a framework, the case studies do have a set of repeating features or steps to developing a process to optimising an SAA framework.

Approach to optimisation framework


Identifying the evidence

  • Providing evidence to support decisions
  • Modelling ESG factors
  • Incorporating ESG ratings
  • Identifying and assessing companies, issuers, sectors or countries in climate transition assessments


Testing the evidence

  • Applying the evidence to build different multi-asset portfolios or asset class mixes
  • Testing different expected returns
  • Building different scenarios
  • Identifying pricing impact of physical risk and climate transition


Refining and recalibrating

  • Optimising objectives
  • Understanding unintended consequences
  • Testing under different economic and liquidity scenarios


Applying a set of values

  • Identifying a clear philosophy
  • Using normative or value-based exclusions


Constructing a portfolio

  • Shaping a portfolio based around evidence and utilising:
    • new understanding of asset return expectations or forecasts
    • a different understanding of risk: incorporating ESG aspects in risk assessment
    • reflection of a value set


Monitoring impacts



  • Monitoring for unintended return consequences
  • Engaging on systemic issues that contribute to market-wide returns or risk reduction, such as governance practices
  • Monitoring for real-world impact:
    • Improvement towards targets such as CO2 emissions
    • Tracking changes in ESG performance across sectors or assets
  • Communicating steps and results

These case studies provide the basis for the framework. It will be a challenge for asset managers reviewing multi-asset portfolios and for asset owners setting out investment mandates to think about the asset mix. Is the data reliable and available? Can ESG issues really be considered a factor? Is there a sufficient evidence base to support inclusion across portfolios – not just ESG mandates? Can this type of approach be extended to tactical asset allocation?

Asset allocation decisions are key to determining long-term multi-asset portfolio returns. These decisions need to reflect different ESG trends and how they might affect asset class returns and correlations. Not including ESG factors that have a material impact on the long-term returns of asset classes through SAA would seem perverse. SAA decisions can also result in capital flows to real outcomes such as helping finance global objectives such as the Paris Agreement or the Sustainable Development Goals. The good news is that we are starting to see how a framework might be delivered to achieve these goals, but it will require practitioners to build on these ideas to deliver in the real world.



This blog is written by PRI staff members and guest contributors. Our goal is to contribute to the broader debate around topical issues and to help showcase some of our research and other work that we undertake in support of our signatories.

Please note that although you can expect to find some posts here that broadly accord with the PRI’s official views, the blog authors write in their individual capacity and there is no “house view”. Nor do the views and opinions expressed on this blog constitute financial or other professional advice.

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