How Climate Change is Reshaping Asset Management

Asset managers control trillions of pounds in global capital, giving them enormous power to direct investment flows, influence how companies behave, and shape the future of our economies and societies.

The industry's scale is remarkable. In 2024, global assets under management (AuM) hit a record US$128tn—a 12% jump from the previous year.

However, this growth brings significant challenges. Investors, regulators, and the public are demanding much greater accountability and transparency, particularly around environmental, social, and governance (ESG) issues.

Read the full story in the August 2025 edition of Sustainability Magazine.

Climate Change: No Longer a Future Risk

Climate change, biodiversity loss, and resource scarcity aren't distant threats anymore—they're real factors that directly affect how much assets are worth, what returns they generate, and whether investments will remain viable long-term.

Today's asset managers routinely carry out detailed analyses of potential investments. They don't just look at financial numbers; they also examine companies' environmental impact, assessing exposure to risks like climate change, resource depletion, and pollution.

"We all know that avoiding the worst impacts of climate change is crucial for the stability and prosperity of global markets," explains Heather Zichal, Global Head of Sustainability at JPMorganChase.

"We also know that a successful transition to a low-carbon economy can drive economic growth, lower future energy bills, create jobs, reduce pollution, and help drive technology innovation."

This approach isn't just about avoiding risks—it's about seizing new opportunities. Companies leading environmental innovation, such as Tesla in electric vehicles and Ørsted in renewable energy, have delivered substantial returns for investors.

The Social Side of ESG

Whilst environmental issues often dominate ESG discussions, social factors are equally important. These include labour practices, human rights, diversity and inclusion, product safety, and community engagement.

Poor social performance can damage reputations, trigger regulatory fines, and even create systemic risks that affect entire markets.

Why Governance Matters More Than Ever

Governance has always been central to asset management, but sustainable finance has significantly broadened its scope. Today, governance covers not only oversight and compliance but also ethical investment decisions, stakeholder engagement, and transparency.

Strong governance structures are essential for managing ESG risks, ensuring accountability, and fostering long-term value creation.

Regulatory developments have reinforced governance's importance. The UK's Financial Reporting Council's revamped Stewardship Code now requires asset managers to report not just on policies but on activities and outcomes, particularly regarding ESG factors.

Aligning with Global Sustainability Goals

Asset managers are increasingly aligning their investment strategies with broader sustainability goals, such as the United Nations Sustainable Development Goals (SDGs) and the Paris Agreement on climate change.

The SDGs provide a comprehensive framework for tackling global challenges, from poverty and inequality to climate action and biodiversity.

According to the United Nations Conference on Trade and Development, the investment gap to achieve the SDGs in developing countries alone is about US$2.5 trillion annually.

The Net-Zero Asset Owner Alliance: Leading by Example

The Net-Zero Asset Owner Alliance exemplifies collective action. This group of asset owners has committed to transitioning their portfolios to net-zero carbon emissions by 2050, in line with the Paris Agreement.

"Mitigating climate change is the challenge of our lifetime," says Oliver Bäte, CEO of Allianz, a founding member.

"Politics, business, and societies across the globe need to act as one to rapidly reduce climate emissions. We, as asset owners, will live up to our responsibility and, in dialogue with the companies in which we invest, steer towards low-carbon business practices."

A Powerful Coalition

The NZAOA is one of the most ambitious and influential coalitions in the global financial sector's response to climate change. Established in 2019 by leading institutional investors—including Allianz, CDPQ, and SwissRe—in partnership with the United Nations Environment Programme Finance Initiative (UNEP FI) and the Principles for Responsible Investment (PRI), the Alliance has rapidly grown.

Today, it encompasses 87 members across 18 countries, collectively representing more than US$9.5 trillion in assets under management.

Science-Based Targets

The NZAOA's core mission is aligning members' investment portfolios with Paris Agreement goals, specifically aiming to limit global warming to well below 2°C, and ideally to 1.5°C, above pre-industrial levels.

What sets the Alliance apart is its insistence on science-based interim targets. Members must set and publicly disclose five-year decarbonisation targets:

• 22% to 32% reduction in portfolio emissions by 2025
• 40% to 60% reduction by 2030

These targets cover not just direct emissions (Scope 1 and 2) but also financed emissions (Scope 3), reflecting the indirect climate impact of investment activities.

Transparency and Accountability

The NZAOA's Target-Setting Protocol (TSP) provides a robust methodology for members to calculate and report their progress, whilst maintaining flexibility for evolving best practices and standards, such as those from the Science-Based Targets initiative (SBTi).

Transparency and accountability are central—members must report annually on their progress, ideally following the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD), now part of the International Sustainability Standards Board (ISSB).

Beyond portfolio management, the Alliance actively advocates for systemic change. It engages with investee companies to promote stronger climate governance and disclosure, and lobbies policymakers for measures such as carbon pricing and eliminating fossil fuel subsidies.

Through collaboration with other initiatives under the Glasgow Financial Alliance for Net Zero (GFANZ), the NZAOA helps set industry standards and catalyse broader market transformation.

Managing ESG Risks Effectively

Effective risk management lies at the heart of sustainable asset management. ESG risks—ranging from environmental disasters and regulatory changes to social unrest and governance failures—can significantly impact financial performance and reputation.

Asset managers must embed ESG risks into their risk management frameworks, using scenario analysis, forward-looking metrics, and active engagement with investee companies.

Social risks, such as poor labour practices or community opposition, can disrupt operations and erode value. Governance failures, including fraud or lack of board oversight, can lead to regulatory sanctions and loss of investor confidence.

The Greenwashing Challenge

Stakeholder engagement and consumer trust are critical in developing sustainable investment products. The surge in demand for ESG and sustainable finance has brought concerns over greenwashing—where companies or funds misrepresent their environmental credentials.

The alignment of investment strategies with global sustainability goals, coupled with robust risk management and a commitment to transparency, will define the next era of asset management.

"Forward-thinking companies could be positioned to help their clients grow their wealth by focusing on navigating the risks and opportunities these social and environmental challenges create for investors' portfolios," says Marina Severinovsky, Head of Sustainability, North America at Schroders.

"This is why we believe in the durability of these themes and consider that the long-term driving forces that are observable now will continue to have a global impact for years to come."

Read the full story in the August 2025 edition of Sustainability Magazine.