A view from the US: partnership, not product, is key to successful sustainable allocations

There is a structural misalignment in capital deployment in the institutional sustainable finance markets. Asset allocators who are still “in” on addressing climate and sustainability related risks and opportunities seek to allocate capital at scale, in alignment with their public commitments and fiduciary objectives. 

Asset managers and general partners, however, have been buffeted by widespread outflows from retail and wealth-channel products and C-suite fears of headline risks due to political polarization. Many have retrenched by restructuring specialist teams and closing or reorienting funds.

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How are motivated allocators supposed to deploy capital effectively and in alignment with their fiduciary obligations when facing a shrinking product set and managers’ potentially reduced capacity to support their objectives?

In the face of a veritable Hydra of rising risks - from climate impacts, nature loss, and accelerating income and wealth inequality, overlaid with polarised politics making it ever more challenging to meaningfully address these risks in a coordinated fashion - partnerships between allocators and their appointed external managers will be essential to navigating a fragmented future.

Over the course of a recent week of meetings in London, including group convenings and a number of bilateral meetings with managers and allocators, this trend toward bespoke partnership models surfaced repeatedly. It is worth taking seriously.

What partnership means in practice

In practice, partnership models bring an expanded set of capabilities into the allocator-manager relationship, and require asset managers to think horizontally to create value that resonates within a client’s perspectives and mission, rather than solely vertically by deploying capital in alignment with the client’s mandate. These models reflect an intentionality on both sides of the mandate to uncover greater long-term alignment and value, and the methods used to create such value will vary greatly.

One manager described its approach as “actively seeking to co-create” novel investment strategies alongside allocator clients, rather than selling off-the-shelf products, which is a frequent feature of partnership strategy. Customisation is not a new concept, of course, and bespoke separately managed accounts carry embedded costs for both sides. What is changing is the orientation of such structures and the rationales behind them.

Incorporating sustainability, impact considerations or other systemic issues into a given mandate likely requires that a manager take the intellectual capital and processes developed for efficiently allocating capital and reorient them towards applications that align with the client’s broader interests.

Some illustrative examples: Managers might contribute to clients’ total portfolio thinking on systemic risk. They may collaborate on stewardship priorities and engagement with portfolio companies, or make in-house climate and impact experts available to co-develop research advancing novel investment ideas. In such partnership-focused mandates, the allocation mandate itself is but one component of a broader working relationship.

Managers offering robust and flexible partnership structures, rather than negotiated product variants, are likely to define a growing share of institutional mandates at meaningful scale, in both public and private markets.

Allocators are partnership-curious too

This shift is not driven by managers alone. Allocators are similarly seeking to focus their relationships on a smaller set of key partners, particularly for sustainability and impact-oriented mandates. At the Global Government Funds Roundtable, a sovereign fund described its plan to reduce private market manager relationships by 15%. The numerical shift is modest, yet the strategic question behind it is not.

Elsewhere I met a senior representative of a superannuation fund who has moved into a partnership-focused role, tasked with developing how the fund engages its private market managers to create value for members. Allocators contemplating this kind of deepening are weighing factors well beyond the immediate investment strategy: scalability into future strategies and asset classes, client service capabilities, regional and global reach, and the depth of the manager’s research and intellectual capital. The questions are about the institution, not just the product.

Why now?

Three forces are converging.

First, political backlash, particularly the wave of anti-ESG legislation across US states, has made alignment and trust between allocators and managers more consequential. Allocators in restrictive environments need partners who understand the legal and fiduciary terrain they are operating in and who can effectively articulate the fiduciary rationale for addressing long-term risks and opportunities.

Second, allocators have grown more sophisticated in articulating what they actually want. Sustainability and impact priorities are increasingly expressed as specific portfolio outcomes, not adjectives. That clarity creates an opening for managers who can engage at the level of those outcomes, and a true challenge for those who cannot.

Third, the sheer volume of data and analytics now available to investment decision makers means that allocator overwhelm is a real risk. Having trusted experts who can help interpret information in the context of portfolio outcomes is genuinely valuable to allocators facing an ever-growing set of risks and opportunities.

Opportunities, and risks

For those of us focused on mobilising capital at scale to address sustainable development, climate, and nature challenges, the shift toward deeper alignment between allocators and managers is a welcome development. It supports the kind of fiduciary practice these challenges require, yet partnership models can also fragment in predictable ways.

On the allocator side, dedicated sustainability and stewardship staff are sometimes excluded from the structuring of partnership agreements, particularly for strategies not explicitly framed as sustainability mandates. That is a missed opportunity to surface risks and identify value, and it can lock in misalignments that bubble up years later.

On the manager side, firms that do not proactively probe a client’s sustainability views, even where the mandate is conventional, may find themselves out of step with that client’s evolving priorities. These conversations are not always comfortable, but long-term alignment requires that both client priorities and manager capabilities are surfaced and tested.

A fiduciary frame

In our work at Oakledge Advisors with public pension funds and other intentional allocators, we increasingly find that the most defensible path through politically and legally constrained environments is rigorous, fiduciary-grounded engagement; not advocacy, and not avoidance. Partnership models, when structured well, support that approach. They give fiduciaries the relationships and the analytical depth needed to navigate systemic risk thoughtfully, including in jurisdictions where the politics of sustainable investing have become contested. Serving as a bridge to translate allocator needs into asset manager capabilities is a key element of what Oakledge has been designed to do.

The traditional product-driven model, on either side of the sustainability conversation, is increasingly inadequate to the task. The allocators and managers who recognise this, and who are willing to do the work of building robust relationships to support real partnerships, will be better positioned to serve beneficiaries in a fragmenting world.

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