The evolving climate change investing strategies of asset owners

Asset owners who control substantial capital in the financial system through pension funds, endowments, foundations, and individual holdings can play a crucial role in driving investments in climate change mitigation, according to a new Yale School of the Environment study.

The study, led by Emil Moldovan ’24 MESc, found that owners of large asset portfolios are recognizing the need to consider the environmental impacts of  investment decisions and aligning portfolio goals with global efforts to limit climate change. However, perceived risk, lack of training in the climate investment sector, and aligning investments with portfolio goals are presenting challenges.

“There are a lot of bottlenecks to climate action right now. I don’t want to say any one bottleneck is any bigger deal than other bottlenecks, but the one I am focusing on is money and institutions that manage money. What are the underlying constructs that determine what happens in investing in climate action?” said Moldovan, who worked as a senior specialist at Deloitte Consulting.

To reach net zero goals by 2050, low-carbon investments must rise to more than $5 trillion annually by 2030, according to the International Monetary Fund.

Moldovan and his team conducted more than 60 interviews with asset owners and managers of more than $750 billion in assets and their stakeholders for the study, which was published in NPJ Climate Action. The team examined what influenced climate investment decisions, including legal constructs, fiduciary responsibilities, and climate expertise. They also reviewed influence from asset owners, legal beneficiaries, such as employees and pensioners, and stakeholders, such as environmental groups or advocacy organizations. The assets owners and portfolios included retail investors, high-net-worth family offices, foundations, corporations, pensions, endowments, and trusts.

Using a structured framework — the Four Stages of Organizational Change — the team examined how asset owners perceive and respond to climate change challenges. The stages include perception, evaluation, enactment, and feedback.

“The study is unique in that it tests asset owners as nuanced individuals interested in and beholden to a wide variety of factors that determine their position on climate-friendly investing,” said Todd Cort, study co-author and a lecturer in sustainability at YSE.

The researchers found that investors are responding to both hard and soft powers controlling the portfolio, including legal mandates that provide leeway to invest in climate solutions and demand from stakeholders who want to see more of these investments.

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“More often than not, there is a presumption that fiduciary duty translates to maximization of return at the expense of environmental impact, but the paper exposes this as untrue. Fiduciary duty is incredibly nuanced,” Cort said. “In fact, we should be treating the maximization of return as one consideration of a fiduciary that is consistent with other goals. The actual duty will always be a mix of priorities from asset owners. Moreover, the paper makes it evident that this flexibility in fiduciary duty allows for climate investing in a variety of circumstances.”

Among the study’s key findings is that while investors are starting small with low-risk allocations or carveouts, there is a growing trend of asset owners increasingly aligning financial returns with environmental goals.

To speed investment, the authors proposed several key interventions, including training financial advisors who may be struggling to operationalize climate investments; extending investment time horizons to support sustainable choices; and engaging beneficiaries and stakeholders on what actions are available to them to influence asset owners.

“We drew a map of how people who are interested in climate change can interface with asset owners. Different people will be able to see themselves in that map and understand the actions that are available to them, given their unique positioning,” Moldovan said.

The study was co-authored by YSE’s Jennifer Marlon, senior research scientist; Anthony Leiserowitz, JoshAni-TomKat Professor of Climate Communication; and Matthew Goldberg, a research scientist at the Yale Program on Climate Change Communication.