Responsible Investing 2.1 - A Top-Down Multi Asset Perspective

Abstract

Many large institutional asset owners (in particular pension funds and sovereign wealth funds) have started to move into alternative asset classes over the past few years or so and today represent key players in these markets. With their market power, they are the ones who finally determine the rules of the game. Parallel to the diversification process that was driven by financial risk and return considerations and triggered by the experience of bursting stock market bubbles, the same group of asset owners began to embrace Responsible Investing ideas, not least triggered by the debate around the effects of climate change on the value of their investments. Today they are the main protagonists of the Principles for Responsible Investment, the UN PRI. The challenge that these investors – often characterised as ‘universal owners’ – face, is that they pressed ahead with their move into alternatives without having established a systematic and consistent multi asset approach and now need to fill the gap that has emerged retrospectively. To do so we propose a combination of the concepts of ‘strategically aware investing’ (SAI), a term introduced by RI legend Matthew Kiernan, and which in our interpretation describes the idea of integrating ESG information in order to enhance the quality and added value of financial analyses and investment decision processes, and of ‘Impact Investing’, which calls for a systematic consideration of non-financial investment impacts. As a result we present the main features of a strategic asset allocation (SAA) process for the entire RI portfolio (including the alternative asset classes) and an ‘enhanced passive’ investment process (including tactical asset allocation (TAA) and selection) for the conventional asset classes that make up 70% of our model portfolio. Besides helping to address some of the perceived contradictions of Responsible Investing as it is practised today (e.g. related to cases like BP), our approach is rich in implying changes to the current status quo.