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

The PRI’s annual signatory reporting clearly shows incorporating ESG issues into asset selection has become increasingly widespread. Innovators who explicitly recognise that sustainability issues are fundamental to asset returns are no longer outliers. Climate resilience, governance structures, supply chain issues or resource efficiency are now commonly discussed as key themes when picking assets. It is also no longer the remit of just equity or fixed income investors. Private markets and hedge funds increasingly reference ESG issues in investment approaches and marketing literature too.

However, there is a missing piece in the jigsaw – where are the asset allocators?

For asset owners, asset allocation plays such a fundamental role to determining long-term returns that ignoring these sustainability issues – where the impacts affect economies, businesses and society over decades – just does not make sense.

The two most important events in capital markets over the last decade – COVID-19 and the financial crisis – have also increased the focus on and debate around how society and regulators think about capital markets and investing. As is evident from industry discussions and developments around initiatives such as the EU Taxonomy, the Paris Agreement and the Sustainable Development Goals (SDGs), society and various regulators are pressing fund managers to consider outcomes at a portfolio or asset allocation level, not just picking individual assets. This needs to be a new frontier across all investment processes.

Yet, for those involved in asset allocation or building multi-asset portfolios, established frameworks do not exist and there is little coverage about what it means in practice. Yet practice is emerging. That’s why the PRI has recently collated a series of signatory cases studies outlining a range of approaches to strategic asset allocation (SAA).

ProviderCase study overview

Aberdeen Standard Investments (ASI)

Discusses the implications of improving corporate governance standards in Japan on expected equity returns and allocation to this asset class


Incorporating the potential impact of climate-related risks on long-term returns on different asset classes, and subsequent modelling


Developed a 1.5°C aligned strategic asset allocation framework, modelling various climate scenarios


Incorporates climate change scenarios as an input into the asset liability modelling (ALM) conducted on clients’ portfolios


Undertaking training and awareness of the SDGs as an input or tool for SAA construction


Modelling weightings and tilts based on ESG performance and climate ‘resilience’, and the impact that has on returns


Incorporating climate change in its long-term macro scenarios for the development of its default model used for all clients

Ortec Finance

Utilising modelling tools to forecast the financial impact of climate change on physical assets and economic growth to help identify opportunities and risks within the SAA process

Schroders I

Outlined incorporating a ‘sustainability budget’ alongside the risk budget and governance budget when considering ESG issues in the context of multi-asset portfolio construction

Schroders II

Developed a three-step framework to incorporate climate change into its long-term return assumptions

Scott Trust

Setting portfolio-level targets relating to climate objectives, with implications for benchmark selection

These case studies outline emerging thought within the industry and display a range of approaches to incorporating climate and ESG risks more broadly, as well as the SDGs, into building multi-asset portfolios and SAA. Placed alongside our workshops at PRI in Person, and our discussion paper on the topic, we can identify some fascinating trends.

Expected asset returns and modelling

Decisions around asset allocation are largely informed by historic asset class returns. A theme that emerged during our workshop and highlighted in these case studies is how well these correlations will work in the future and whether consideration of ESG issues improves understanding of expected returns from specific asset classes. This was the first step in many of the approaches in the above case studies, with six out of 11 exploring how environmental issues might be incorporated into scenario analysis, and the impact of this on long-term returns.

The PRI’s work with Vivid Economics and Energy Transition Advisors on the Inevitable Policy Response provides the basis for a similar challenge. How should abrupt policy change, triggered by political, social or climatic events, resulting in a structural break in the correlation between historic and future expected returns, be incorporated into portfolio construction?

And this is not just about environmental issues. One of the case studies outlined changing governance standards in Japan and how this had informed modelling around expected returns.

‘Sustainability budget’ and real-world outcomes

This workstream does not just touch on improving risk-return outcomes. In our discussion paper we outline the concept of incorporating real-world outcomes into capital allocation across asset classes and within multi-asset portfolios. This is a theme that is increasingly mentioned at a policy level by some central bankers, with discussions around the concept of a fiscal ‘sustainable budget policy’. Mirroring these discussions, some of these case studies touch on the need for a new framework – possibly a ‘sustainability budget’, alongside a risk budget, so that real-world outcomes might be incorporated into SAA decision making.

Selecting and learning

For a variety of reasons, many asset owners do not have a specific approach to SAA, or they rely on advisers. For this group, technical discussions around ESG issues and expected returns or asset allocation might not be the appropriate route. Mandate design, trustee training and asset manager selection might be the first step instead. Through mandate design and manager selection, asset owners can influence the shape of multi-asset portfolios and encourage managers to start to think systematically about real-world outcomes. One building block to this, outlined in the case studies, is a process of education and awareness-raising among asset owner decision makers.

The SAA process is fundamental to influencing portfolio returns that could be affected by macro themes such as changing technology, regulation, demography and climate-related risks and opportunities. How these themes are incorporated into SAA practices is a key challenge for both asset owners, asset managers and advisers – but a challenge with significant opportunities. At an asset class level, better understanding of correlations between expected returns and emerging risks and opportunities can improve financial outcomes. Through SAA, allocating capital towards financing real-world outcomes can make critical contributions to the SDGs and Paris Agreement. Post COVID-19, there is an enormous gap between the actual and required investment needed to meet these global initiatives. Utilising the SAA process to increase allocation to remedying this is key to unlocking some of these challenges.



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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