Making ESG Second Nature in Asset Allocation

ESG is a growing imperative for investors of all types—from considering ESG when assessing individual issuers to modeling the impact of climate change on investment strategies. For multi-asset investors, there’s another ESG dimension to incorporate: translating organizational ESG objectives into an effective strategic asset allocation. This process may seem almost second nature when incorporating traditional risk/return considerations, but how can multi-asset investors commit it to muscle memory when it comes to ESG?

The Starting Point: Setting ESG Tone from the Top

It’s not uncommon for stakeholders in large organizations to have different views on the meaning of ESG and the importance of its pillars in defining organizational success. That’s understandable, and in fact, diverse perspectives can be a source of strength when making investment decisions.

Ultimately, though, leaders must reach consensus on tangible ESG objectives and expectations. This process requires answering weighty questions: How material a driver will ESG be to our investment success? How heavily should we weight ESG and financial considerations in our asset allocation? Are all ESG pillars equally important, or will our emphasis on individual pillars differ?