"The Rise of Investor-Driven Climate Governance: From Myth to Institution?

Rami Kaplan, David L. Levy
First published: 23 February 2025

Funding: This research was supported by Grant No 0610218182 from the United States-Israel Binational Science Foundation (BSF) and The Climate Social Science Network.

ABSTRACT

Investor-driven climate governance (ICG) is premised on mobilizing finance to address climate change by leveraging investors to pressure companies to reduce emissions. Examining the rapid growth of ICG from an institutional political economy perspective, we argue that powerful financial and regulatory actors with varied interests coalesced to promote the discourse that climate risks equal financial risks, and to develop a finance-centered mechanism of climate governance. The flourishing field created market opportunities for other actors such as data vendors and accountants, and attracted activists seeking leverage on emitters. In turn, institutionalization exerted isomorphic pressure on financial firms to adopt ICG practices.

However, ICG practices of disclosure and emission commitments became increasingly decoupled from actions to reduce emissions due to the weak business case for decarbonizing investors’ portfolios and corporate operations; the core economic mechanism was largely a myth. This decoupling created contradictory forces: it erodes the legitimacy of the ICG discourse, but we also identified dynamic feedback loops that strengthen the field, potentially making the myth self-fulfilling. Overall, we conclude that the field’s momentum, interests of key actors, and feedback effects are likely to sustain the field, which is deeply institutionalized despite the current headwinds."

https://onlinelibrary.wiley.com/doi/10.1111/rego.70000

"Another business-led effort to fight climate change is unraveling.

On Aug. 27, 2025, the Net-Zero Banking Alliance suspended its activities after several major U.S. and European banks backed out.

While most observers are blaming the strong political backlash in the U.S. against climate change action and sustainable investing, we believe the banks didn’t need much of a push: These net-zero alliances never made much business sense and were not particularly effective at fighting climate change. Indeed, for us the puzzle was why they had flourished in the first place.

To examine their rise and fall, we recently conducted a research project that encompassed interviews with more than 80 executives from various financial institutions, activist organizations and oil and gas companies.
Powerful allies grasped climate risks

The Net-Zero Banking Alliance was founded in 2021. Members agreed to limit lending to carbon-intense sectors so that total greenhouse gas emissions from companies in the banks’ loan portfolios are close to zero by 2050.

This target aligned with the goals of the Paris Agreement but was not binding and lacked clear shorter-term targets and plans. Similar net-zero networks were established for insurance, asset management and other financial areas, all under the umbrella of the United Nations Environment Program’s Finance Initiative. Over the past 16 months, the insurance and asset managers’ alliances have also suspended their activities.

These net-zero alliances were built on the premise that climate risk equals financial risk and that the challenge requires a collective response. Their goal was to leverage the power of finance to push companies to decarbonize their products and processes.

Key financial regulators, central banks and a few of the largest asset managers propelled these alliances because they perceived that climate change poses serious long-term systemic risks to markets and economies around the world. Influential figures such as Larry Fink, the CEO of BlackRock, the world’s largest asset manager, and former Bank of England head Mark Carney, now the prime minister of Canada, lent legitimacy to these initiatives.

Some environmental groups also supported these alliances as a smart strategy to pressure companies on climate. Many other financial institutions then joined the net-zero bandwagon, but our research revealed that they didn’t do so because of concern about climate-related financial risks. Rather, they felt an array of pressure from peers, investors, activists, regulators and even their families.

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"Fossil fuels – too lucrative to abandon

While the political pressure in the U.S. has indeed been intense, the collapse of net-zero networks and the broader corporate retreat from climate commitments is largely due to the continued profitability of fossil fuels and the high costs and risks of deep decarbonization. Investors and banks, of course, want to keep on financing profitable companies and avoid pressuring their clients to take risky measures.

Oil companies such as BP and Shell that had relatively strong climate targets suffered financially as a result, prompting them to retreat from these targets and shift capital from renewable projects back toward fossil fuels. High energy prices in the wake of the Russia-Ukraine war made the sector even more lucrative. Low-carbon fuels and processes for industries such as aviation, steel and cement are still very expensive. "

https://theconversation.com/banks-retreat-from-climate-change-commitments-but-it...