A New Focus for Investor Climate Commitments

Investors representing many trillions of dollars of client or beneficiary assets have signed on to net-zero targets to limit global warming to 1.5°C. And industry practitioners have developed sophisticated frameworks to help investors identify specific actions in support of these targets. But many investors harbor some fundamental concerns with respect to net-zero investing. Among them are concerns about fiduciary duty, the limited ability of investors to influence climate outcomes, and the legitimate role of investors versus government in addressing externalities. 

“A New Focus for Investor Climate Commitments” explores these concerns and points to ways in which investor climate commitments can be made more robust and more effective and, perhaps, secure even wider support. It finds that investors seeking to have a material impact on climate change must, as a first-order matter, consider their relationship to the process of policy development, including corporate lobbying. Second, direct actions with investee companies should focus on objectives where investors realistically have influence and which companies can realistically deliver. This approach should lead to a more limited but also more focused, achievable, and therefore impactful set of objectives for investors who are concerned about climate change.

The Motivation behind Investors’ Net-Zero Commitments

Asset owners who have signed up to net-zero commitments are driven by the concept of “universal ownership.” This theory suggests that large investors holding stakes across the entire economy have an incentive to eliminate systemic risks, such as climate change, because these risks could negatively affect the entire economy and, in turn, their portfolios. For these investors, limiting global warming is not just a moral imperative but a financial one: Addressing climate risks benefits their long-term financial returns. But asset managers have more diverse motivations. While some are influenced by universal owner theory, others are driven by pressure from their clients, many of whom have also committed to net-zero targets.

The Glasgow Financial Alliance for Net Zero (GFANZ) was launched on 3 November 2021 with significant global attention. GFANZ is a global coalition of financial institutions that have committed to steering their investments and practices toward achieving a net-zero economy by 2050, aligned with the Paris Agreement’s goal of limiting global warming to 1.5°C. Collectively, more than 450 organizations across 45 countries have committed $130 trillion to this cause. These organizations include asset owners, asset managers, and banks. In addition to GFANZ, other coalitions, such as Climate Action 100+, which represents $68 trillion in assets under management, have made similar commitments.

Despite widespread support, however, these initiatives have faced backlash, particularly in the United States. Critics argue that by collaborating on climate action, coalition members are violating antitrust laws. They are also accused of compromising fiduciary duties by pursuing political or nonfinancial goals with other people’s money. Some initiatives, such as the Net-Zero Insurance Alliance, have even dissolved under such pressure, while others, such as Climate Action 100+, saw some investors withdraw when demands for emission reductions became more assertive.

At the same time, there are growing concerns about whether voluntary commitments will truly lead to real-world emission reductions. A 2024 report by the Transition Pathway Initiative, for instance, found that while many companies have made net-zero commitments, only a small percentage have concrete strategies to meet those goals.

Investors’ Net-Zero Concerns and Challenges

Many investors have concerns about how to marry net-zero commitments with their fiduciary duty, particularly in limiting warming to 1.5°C. According to the author, these concerns fall into four main categories:

• Economic impact: Some investors worry that aggressively pursuing a 1.5°C target may harm the economy and, by extension, portfolio returns. Climate change poses the threat of long-term economic damage, but the short-term cost of mitigation may be disruptive.

• Limited influence: Investors have limited ability to influence climate outcomes. Capital allocation and engagement with companies have shown only modest impacts, and there are doubts about whether investors can meaningfully contribute to system-wide climate change.

• Achievability of 1.5°C: With current policies and actions, limiting warming to 1.5°C seems increasingly unlikely. Some investors feel that aligning portfolios with such an ambitious target may be impractical or lead to costs and risks for clients and beneficiaries.

• Role of governments: Many investors believe that addressing climate change is the responsibility of governments, not investors.

Notwithstanding these concerns, the author reasserts the case that long-term investors do have a financial interest in helping prevent the levels of climate change we are likely to see if current policies are not strengthened. Therefore, for many investors, climate targets will remain appropriate. But analysis of the common investor concerns gives insight into how the targets should be set.

Focus on Impact

Given these challenges, the author recommends that investors reevaluate their climate commitments and focus on areas where they can have the most impact. Climate change cannot be addressed without an appropriate government policy framework. Rather than setting overly ambitious and perhaps unachievable goals for themselves, investors’ priority should be to focus on supporting stronger climate policies and engaging with governments to ensure the necessary regulatory frameworks are in place.

While investors cannot substitute for government action, they can play a key role in influencing policy development. Investors should focus on making their voices heard in policy debates, particularly when policies face opposition from industries resistant to change. They can also engage with companies to ensure that corporate lobbying activities align with their public climate commitments.

In terms of direct action, the author believes investors should aim for specific, realistic goals that acknowledge their limited influence over companies. Investors cannot force companies to decarbonize when it is not commercially viable for them to do so. For example, telling oil and gas companies to cut production has been shown not to work. But investors can engage with them to reduce methane emissions, which has outsized environmental impact compared with the costs. Investors should also focus on supporting the development of climate solutions, such as technologies that address key decarbonization challenges, looking at where they can use their specific expertise to help unblock genuine barriers to decarbonization.

In summary, “A New Focus for Investor Climate Commitments” explains that while investor coalitions, such as GFANZ and Climate Action 100+, have made considerable progress in rallying financial support for climate action, they face serious challenges. Investors must strike a balance between ambitious climate goals and their fiduciary duties to clients. By focusing on achievable outcomes, including supporting stronger climate policies, and engaging with companies in ways that align with long-term financial value creation, investors can play a meaningful role in addressing climate change. However, they must also acknowledge that government action is essential for a successful transition to a low-carbon economy. When balancing climate action with fiduciary duty, investors need to push for the world as they wish it to be while investing for the world as it is.

The Paper’s Author

Tom Gosling, Senior Visiting Fellow, London School of Economics Law School, and Executive Fellow, London Business School Department of Finance