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What if sustainability could be modeled like ALM?

By Mikael Fast Consultant

In the realm of pension investments, Asset and Liability Management (ALM) is a well-known and accepted practice. It serves as the guiding framework for pension investors to ensure that their assets align with future liabilities. ALM optimization, the process of balancing risk and return to meet these obligations efficiently, is a familiar concept in the world of pension fund management.

However, in today’s dynamic financial landscape, pension investors are facing a new imperative – the consideration of sustainability factors. These factors encompass a broad spectrum of issues, ranging from environmental concerns and social responsibility to governance and ethical practices. Instead of viewing sustainability as a disruptive force, I propose that it should be seamlessly integrated into pension investors’ existing toolboxes, much like ALM optimization today.

Just as ALM optimization is an integral part of pension fund management, I´m suggesting that pension investors should now also think about ASM (Sustainability = S). ASM optimization involves factoring in the risk, return, and sustainability elements to optimize a portfolio’s profile. Similar to the meticulous customization that occurs in ALM optimization, where each pension fund’s unique liability profile guides investment decisions, ASM optimization tailors investments to meet sustainability objectives that reflect the values and goals of each organization.

A thorough ASM optimization also requires objective ESG (Environmental, Social, and Governance) factor data from every listed company in the world. Fortunately, this is now available, and solutions like the one mentioned by IPE last week can be constructed.

In conclusion, just as ALM optimization has long been an accepted practice, we should welcome the addition of ASM to the pension investor’s toolbox. This approach expands upon the principles of ALM by incorporating sustainability considerations, aligning investments with the values and objectives of organizations and stakeholders. By seamlessly integrating sustainability into the investment process, pension investors can embark on a path towards responsible and sustainable investing, without the need for a separate, suboptimal approach.


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