Asset owners as sustainability leaders: ingredients for success

Building the conditions for a positive cycle of sustainability

Effective governance incentives and a motivated regulator can be the catalyst for a positive cycle of sustainability, where mandatory reporting by asset owners (such as pensions scheme trustees) drives improvements in investment manager and corporate behaviour in a bid to attract more investment flows. This was the subject of the first piece in this brief series of notes.

Globally, that cycle remains at an early stage and recent geo-politics has shown how easily it can be slowed by conflicting incentives. Changing political narratives as 2024 turned to 2025 drove sharp falls in many clean energy and ESG focussed funds, some dropping as much as 20% in a few months and individual companies like Orsted A/S seeing falls well beyond that. The investment narrative itself also switched to one of an ‘ESG backlash’. Many investors reduced their pressure on sustainability initiatives and many companies delayed plans to transition to a more sustainable basis (or at least became less vocal about their moves).

Although the practical impact of this political narrative appears to have been surprisingly limited, with 2025 estimated by the IEA to have seen the highest investment in renewable energy so far, it has undoubtedly slowed the process of the transition to a more sustainable economy. At this stage, it therefore seems appropriate to look further into the necessary conditions that should be put in place to support a successful transition to a sustainable economy.

Finance flows - an active and functional market for sustainability-linked credit

The driver of the transition will ultimately be changes made at a corporate level to deliver the needs of the modern economy in a more efficient, less harmful and zero-carbon way. This change in systems, products, marketing, delivery, staffing and supply chains requires investment. A surprisingly large amount of this may be funded by cashflow and cash on hand (Bloomberg NEF estimates just under half of all renewable investment came from internal funding) but the vast majority of external funding needs will be met by the credit market.

The principal underpin of a successful sustainability transition therefore must be an active and functional market for sustainability-linked credit (green/sustainable bonds, sustainability-linked loans and project finance). There are significant variances in the regional scale of this market currently (led by some margin by European borrowers) but sustainable issuance was 11% of the total global corporate bonds in 2024 according to S&P, indicating how important this funding source has become. Over time, we can expect this market to mature, with mitigation borrowing (investment to reduce the impact of physical climate change) and emission-reduction borrowing (transition finance aimed at lowering existing emissions rather than investing in new solutions) becoming increasingly common.

However, the impact of finance providers goes beyond direct lending, with investors and secondary markets also responsible for driving corporate behaviour. Asset owners are the ultimate arbiters of corporate strategy and to engineer a successful transition it is critical that they encourage forward-looking behaviours and investment practices. A focus on short-term returns and under-investment in climate solutions is only possible for those investors who routinely cycle their holdings and feel they have an above average grasp of timing the market. All others need to maintain a focus on rewarding the behaviour that will make companies more profitable in the long run by making them more resilient to climate and market changes.

Consumer and government support for sustainable products

Companies can invest in a sustainable future but without buyers for their products, they will quickly have to change course. That is where customer willingness to pay a ‘green premium’ is one leg of this critical path, whether that is motivated by a desire to support the transition, because the products themselves are more durable, or because customers want to future-proof their supply chains. Surveys consistently find consumers are willing to make this investment, with positive responses from even American consumers routinely in the majority, which may be surprising given the political narrative.

In some circumstances, consumer demand can take a back seat if the government is willing to bridge the gap. The positive impact on specific technologies of government support has been amply demonstrated by China’s current dominance in battery and solar power.

Government support does not always have to be financial, however; consistency of approach across investment cycles, an enabling regulatory environment (for example on planning rules), and thoughtful, flexible responses to the impact of emerging technologies (rather than excessive course corrections) can all be hugely supportive of the system-wide changes that otherwise must be executed in spite of rather than because of government policy.

Quicker construction of sustainable power and transport infrastructure

Power and transport represent the two largest sources of emissions globally. So a sustainable transition can only be enabled through building and maintaining the correct infrastructure. We have reached a point in the transition where low-emission technology options exist for many sectors of the economy. “Development and delivery" of these more sustainable solutions has become one of the primary bottlenecks for the vast majority of companies, with clean electricity, connection to grids, alternative fuels and low-carbon transport consistently highlighted as slowing their transition.

The recognition that this is a system-wide issue is filtering into policy. However, the necessary rapid change will require more effective government investment in these critical systems or, potentially, significant deregulation. The general trend towards greater government involvement in much of global industrial policy suggests it is more likely to be the former rather than the latter, so pressure on governments to deliver will continue to rise.

Incentives for staff at asset owners

One final, critical building block is the fundamental drive to execute a transition.

While a "will to progress" is frequently articulated in corporate reporting, its translation into operational reality remains inconsistent and often poorly implemented. Where this is the case, asset owners looking to promote a sustainable transition should view themselves for what they are: owners and therefore, collectively, the ultimate arbiters of corporate behaviour. As gatekeepers, their role is to ensure senior management is technically capable and culturally prepared for the systemic shifts required.

The most effective lever for this gatekeeping is the control of corporate rewards. For management to prioritize long-term resilience over short-term corporate earnings, their compensation must be explicitly linked to the delivery of the transition, particularly as short-term share prices might suffer from prioritising corporate investment over shareholder returns. Highlighting this need to corporate boards and supporting effective renumeration packages should therefore be a top priority for asset owners.

Asset owners then also need to monitor these packages to ensure they drive good behaviour in practice. While the integration of ESG metrics into executive pay is becoming more common, with KPMG reporting in 2025 that nearly 80% of major global companies now use some form of sustainability-linked pay, the quality and transparency of these metrics vary wildly. More rigorous reporting that highlights the specific proportion of senior management pay based on quantifiable ESG delivery is therefore required. This is something pensions trustees can then integrate into their own member reporting, bringing us full circle on this positive-reinforcement journey.

The sustainability transition underpinned

The move to a more sustainable global economy is underway and has its own momentum which has proven robust even to extreme political rhetoric. However, for those jurisdictions looking to exploit the transition to grow their economy, ensuring the building blocks are in place is a critical step. Which countries are forging ahead into this brave new world is something we will look at in the next of these notes.

Authors

Michael Bushnell

Michael is Head of Sustainability Advisory at Mercer and a Visiting Fellow at the Centre for Business, Climate Change and Sustainability.