Integrating Transitions and Impact Measurement in Strategic Asset Allocation

Environmental and societal challenges are not addressed in strategic asset allocation (SAA), hampering investors to steer their investments toward a sustainable economy. This article develops an integrated SAA framework. In the framework, transitions are integrated in macroeconomic analysis and investments’ social and environmental impact are measured and integrated. Investors can perform risk–return-impact calculations for the investment portfolio. Responding to critiques on current impact measurement, we compare companies’ actual impacts against system thresholds of a sustainable economy. This measurement leads to the novel insight of this article: Investments’ impacts are endogenous to investor decisions because the impact indicates how investments can accelerate (or slow down) transitions. This implies that investors can better mitigate systemic risks and influence the stage of transitions. Building on the framework, we provide propositions that serve as the basis for future empirical research. Integrated SAA is an important way forward for institutional investors because it allows them to strategically measure and manage the real-world impacts of their investment portfolio.