Chapter 08 · Finance, data & evidenceSustainable Finance & Investment
Asset allocation
Definition
The process of deciding what proportion of a portfolio to invest in different asset classes — stocks, bonds, cash equivalents and alternatives such as real estate or commodities — based on the investor's goals, time horizon and risk tolerance. It is distinct from diversification, which spreads investments within asset classes.
References
Definition; distinction from diversification and rebalancing; risk-management role.
Allocation across broad investment types by goals, horizon and risk tolerance; relationship to diversification.
Overview
What it means
Asset allocation is considered the dominant determinant of long-run portfolio risk and return. In sustainable finance, allocation decisions are where climate and sustainability commitments become concrete: setting targets for green bond shares, capping fossil-fuel exposure, or allocating to transition and impact strategies all operate at the asset-allocation level.
How it is used
Institutional investors set strategic asset allocations reviewed periodically, then rebalance to targets. Sustainability-linked policies — such as net-zero portfolio targets — are implemented by adjusting allocations across asset classes, sectors and regions, alongside stewardship and selection decisions.
Why it matters
Because allocation steers capital at the largest scale, it is the point where investor commitments (net zero, SDG alignment) translate into real-economy financing. Misallocation — for example continued exposure to assets at risk of stranding — is where climate financial risk concentrates.