Create an Asset Allocation Strategy to Transition Away from Risk
An effective asset allocation strategy is essential for mitigating risk and ensuring long-term financial stability. It can help investors transition from high-risk in thier portfolio, such as investments in companies exposed to climate-related vulnerabilities, to more sustainable, resilient investments.
So, what is strategic asset allocation? It's a complex but essential term for how your pension balances the risk and returns across all its investments when it builds the whole portfolio.
Ways an "asset allocation strategy" can strengthen a pension's ability to handle climate risk:
Climate risk analysis will be a core consideration for the fund's "strategic asset allocation," performance reviews, and asset management decisions.
Companies' "transition readiness" is taken into account when making investment decisions, which is critical to understanding just how sustainable and climate-resilient a company is! (This helps determine how well-positioned a company is to move into a low-carbon economy by assessing its energy production, carbon-efficient technology, and natural resource management, such as energy, water, and waste.)
A fund can maximize economic opportunities by committing to investing a percentage of its portfolio in companies that address climate mitigation and energy sector transitions.
Some pension systems develop a "Net Zero" or decarbonization plan. The key here is to move beyond general "Net Zero pledges" to actionable, accountable plans by setting:
Criteria and direction for external asset managers to decarbonize across all asset classes.
Investment strategies that pursue companies embracing climate mitigation and transition readiness.
A timeline for implementation to phase in all of its assets to be managed by firms using a Net Zero approach or another concrete framework and metrics for assessing and reducing climate risk.
You can create an asset allocation strategy to transition away from risk. Get started by:
Conducting a climate risk assessment to evaluate the impacts on your investments. This includes extreme weather events and transitional risks such as policy changes. Understanding your current portfolio's risk exposure is crucial in creating a risk-aware asset allocation strategy.
Defining the goals of your asset allocation strategy, including risk reductions and long-term financial growth and stability.
Diversifying to manage investment risk, allocating funds to renewable energy projects in alignment with a gradual global shift toward cleaner energy sources.
Using ESG criteria to screen potential investments and engage with the companies you invest in to encourage better environmental practices and transparency.
Creating an asset allocation strategy to transition away from risk is essential for protecting your investments in a world increasingly affected by climate change. Effective strategies are data-driven, include time-bound accountability checks along the timeline, and focus on the highest-risk and most impactful transition priorities.
Discover more tools for driving real solutions to climate and economic challenges. Explore the Investing in Our Future: A Guide for Climate-Conscious Pension Strategies for clarifying examples of real-world policy solutions and pathways that some state pensions have taken to better tackle the climate crisis' risk to their workplaces, communities, and financial security– along with practical guidance for you to explore those possibilities in your state.
ABOUT CLIMATE FINANCE ACTION
Climate Finance Action (CFA) is a women-led, 501(C)3 non-profit organization equipping stakeholders and decision-makers to leverage the transformative power of publicly-held capital for real-world climate solutions to ensure a just transition to an inclusive economy in favor of people and the planet. With a focus on collaboration, education, and strategic partnerships, CFA has facilitated groundbreaking dialogues, developed comprehensive educational materials, and engaged with numerous stakeholders— educating 8,000+ union leaders and members and advising over 40 state treasurers and pension staff working towards policy reform.
