For much of the past decade, investor climate action has rested on a simple idea: if investors demand the right disclosures, set the right targets, allocate capital differently and engage hard enough with companies, markets can deliver economy-wide decarbonisation.
Our new report, What Can Investors Do About Climate Change?, co-authored with Dr Fernanda Gimenes, draws on five half-day workshops in New York, Amsterdam, London and Singapore, with more than 60 asset owners and asset managers representing around $40 trillion–$50 trillion in assets.
A recurring message from the workshops was blunt: investor agency has been overstated. Decarbonisation will be driven primarily by government policy and technology. Investors can support the transition, reinforce it and, in places, accelerate it. But they cannot substitute for policy through capital allocation, stewardship or portfolio decarbonisation targets alone.
Investors have not lost interest in climate change, but they are grappling with the credibility, feasibility and legitimacy of what they can realistically do about it.
From market-led to policy-led
A shift is needed from a market-led narrative to a policy-led, technology-enabled account of investor climate action.
The market-led narrative assumed that disclosure, net-zero targets, portfolio alignment and investor pressure could move companies, one by one, onto Paris-aligned pathways. Policy was acknowledged, but too often treated as a caveat rather than the organising principle.
That has created problems. Top-down portfolio targets have encouraged portfolio emissions reductions that look good on paper but do little to change real-world emissions. Stewardship asks have pressured boards to pursue strategies they believe would be commercially damaging. Investors have faced accusations of both greenwashing and political overreach.
A policy-led narrative starts from a different place. It recognises decarbonisation will be determined primarily by government policy, technology development and the resulting economic incentives. Investors remain important, but their role is supporting and reinforcing, not defining.
Policy-led does not mean policy-only. Investors can help make the transition investible, ensure climate risks and opportunities are priced correctly, support credible policy, engage companies within commercial constraints and direct capital and expertise where they can be catalytic. Investors remain important, but their role is supporting and reinforcing, not defining. Once framed in this more realistic way, the next question is where principal responsibility for driving climate action should sit within the investment chain.
Why asset owners must lead
Asset owners are more likely to frame climate change as a long-term, system-level risk affecting portfolio outcomes and beneficiary interests over decades. Asset managers, by contrast, usually operate within client mandates, shorter performance horizons and diverse client preferences. In the US, they also face acute political and legal sensitivities.
Asset managers will not lead climate action without clear expectations and incentives from asset owners. This is not a criticism of asset managers, but an institutional reality. Asking managers to deliver system-level climate stewardship while judging them primarily against short-term performance creates a gap between public climate ambition and day-to-day incentives.
If asset owners want managers to act differently, climate expectations need to move from aspiration into mandate design, manager selection, evaluation and resourcing. Informal signalling is not enough.
But clearer expectations from asset owners need to be combined with a different kind of climate objective: less generic, less portfolio-level by default and more closely tied to each investor’s actual agency.
Set investor-specific climate objectives
The problem with many climate targets is the assumption that economy-wide decarbonisation pathways can be translated into portfolio emissions targets or company-level alignment metrics, irrespective of policy, technology and commercial reality. This creates an appearance of alignment without a credible mechanism for real-world change.
Instead, investors should begin with their own points of leverage: the sectors, asset classes and geographies in which they invest; the policy gaps, technology or financing barriers they understand; and the commercially viable decarbonisation or resilience investments that may not yet be happening.
Only then should they choose among the tools available to them, such as policy advocacy or engagement and voting. These choices should be filtered by contribution, materiality, efficacy and comparative advantage. What is the investor trying to achieve? Why is it material? Is the chosen lever likely to work? And is this investor well placed to use it?
This is more complex to operationalise and measure than setting a single portfolio decarbonisation target. But in this case, simple has become simplistic. A more nuanced approach produces focused objectives grounded in a theory of change and linked to the investor’s agency, resources and ability to influence.
This has direct implications for stewardship. If objectives need to be grounded in investor agency, then engagement with companies also needs to be disciplined by what boards can realistically do.
Stewardship works but within limits
A consistent workshop theme was that stewardship remains central, but it should be framed around what investors can realistically influence. Investors cannot force boards to pursue strategies they believe would be commercially damaging.
The more credible role is to push companies towards high-impact actions that sit within, or close to, the current field of economic viability, while supporting policy that shifts that field over time. Methane abatement is a useful example: high climate impact, often relatively low cost, operational rather than requiring wholesale strategy change, and increasingly measurable.
Seen in this light, a more realistic climate agenda is not a weaker one. It is a more targeted one, focused on the places where investors really can make a difference.
Where investors could do more
A more realistic account of investor agency does not mean a smaller agenda. It means focusing effort where each investor has genuine leverage.
If investors accept that policy is the central lever for transition, staying largely absent from climate-related policy advocacy means forgoing one of their strongest tools.
Policy engagement can operate at different levels: sustainable finance rules such as disclosure and labelling; policies that make the transition investible, from grid infrastructure to offshore wind, blended finance and sector transition plans; and, more contentiously, broader economy-wide climate policy such as carbon pricing. Investors can start where they have a clear stake, expertise and legitimacy: the policies that support investment.
Asset owners can embed climate expectations into mandates and manager selection. If climate is a material system-level concern, it should sit within the core governance of manager appointments, benchmarks, reporting and evaluation.
Asset owners wanting to take an ambitious stance on policy influence will likely need to prioritise selection of an asset manager that is philosophically aligned with their views on climate change at a firm-wide level.
Ensuring integration of climate into core investment processes and supporting capital flows to climate solutions, especially in emerging markets, sit well with the core role of investors, but require investment in new expertise in climate science and its implications.
Finally, coalitions require a reset so that collaboration is more focused and purpose-built: some for policy influence, some for standards and learning, some for specific issues such as methane, and some for company-specific strategic engagement led by portfolio managers.
Climate leadership in 2026
None of this is a call for retreat. It is a call for realism.
Even where governments retreat or policy momentum weakens, investors are not powerless. But climate leadership in 2026 is not about louder claims or ever more elaborate frameworks. It requires courage to stay engaged, honesty about the limits of investor power, curiosity about where intervention actually works, and commitment to treat climate change as a structural risk rather than a passing theme.
Investors still matter on climate. But to remain credible and effective, they need to stop acting as if they can lead the transition and start asking how they can best support it.
Tom Gosling is professor in practice in the Financial Markets Group at LSE and director of the Initiative in Sustainable Finance.
Hans-Christoph Hirt is a senior adviser to LSE, and adjunct professor at IMD. He also holds a number of trustee and advisory appointments.
