Climate in the fine print: Contracts as catalysts for net zero finance

Ruby Carver, Sector Relationship Manager, The Chancery Lane Project

Note: The views expressed on these pages are the opinions of their respective author(s) only and do not necessarily reflect the views and opinions of UKSIF.

This website should not be taken as financial or investment advice or seen as an endorsement or recommendation of any particular company, investment or individual. While we have sought to ensure information on this site is correct, we do not accept liability for any errors.

Climate in the fine print: Contracts as catalysts for net zero finance

Ruby Carver, Sector Relationship Manager, The Chancery Lane Project

As the global economy races to limit warming to 1.5°C, the financial sector stands at a crossroads. Institutional investors and asset managers, who collectively control over $100 trillion in capital, have the power to accelerate or hinder the transition to a net-zero economy. Yet, despite growing climate commitments, recent retreats from net-zero alliances by some of the world’s largest asset managers reveal a sector grappling with complexity, regulatory uncertainty and shifting political winds.

To overcome these challenges, a powerful but underused lever lies in the legal contracts that underpin financial and commercial transactions. Embedding climate-aligned clauses directly into contracts and investment agreements offers a practical, enforceable and scalable means to drive real-world decarbonisation, moving beyond disclosure and pledges to binding action.

Harnessing contracts to drive climate action?

Contracts are the backbone of the global economy, yet most legal agreements remain silent on climate obligations. This gap represents a missed opportunity. Unlike voluntary ESG disclosures or broad investment policies, contracts create legally binding frameworks, duties and incentives that encourage all parties to work collaboratively toward shared climate goals. By embedding climate considerations into agreements, contracts help align interests, manage risks, and support the achievement of mutual objectives in line with global climate commitments.

Practically speaking, contracts can also be updated quickly and flexibly, allowing climate ambitions to ratchet up over time in line with evolving science and market standards, an approach reflected in TCLP’s model clauses, which are designed to align with the latest regulatory and industry benchmarks. This stands in contrast to slower legislative processes.

Bridging the accountability gap

Institutional investors and asset managers face increasing pressure to integrate climate risks into their fiduciary duties. Regulatory frameworks such as the UK’s forthcoming Green Taxonomy and mandatory climate-related financial disclosures are raising the bar for transparency and accountability.

Embedding climate clauses in investment agreements, such as shareholder agreements, loan contracts, and green bond documentation, can bridge this gap. These clauses ensure that investee companies commit to science-based targets, report transparently on progress and implement decarbonisation strategies that align with the Paris Agreement. This approach turns passive risk management into active stewardship, enabling investors to influence corporate behaviour and incentivise emissions reductions across the value chain.

From passive management to active control

The evolving relationship between asset owners and asset managers is no longer just an internal industry issue; it’s a systemic risk with real-world consequences. Pension funds, insurers, and sovereign wealth funds manage trillions in long-term capital on behalf of beneficiaries whose futures depend on a stable climate and resilient global economy. Yet, too often, asset managers fall short of the climate ambition their clients expect.

The cracks are beginning to show. Leading asset owners, including Brunel Pension Partnership and Scottish Widows, are increasingly vocal about the gap between asset managers’ climate rhetoric and their actual delivery on net zero alignment. This tension is now surfacing where it matters most: in mandates and capital flows. For example, Dutch pension fund PME is reconsidering a €5 billion mandate with BlackRock over climate concerns, while New York City’s public pension funds have made it clear they will no longer tolerate managers without credible transition plans.

While some asset managers point to options like green indices or client-directed voting as evidence of progress, this approach falls short of what’s needed. Asset owners have both the responsibility and the leverage to drive systemic change and contracts are their most underused tool. By embedding binding climate requirements into mandates and investment agreements, asset owners can set enforceable expectations, shape corporate behaviour through their managers and finally align financial stewardship with planetary stewardship.

A systemic approach for a systemic challenge

The financial sector’s systemic impact requires systemic solutions. Recent reviews of over 230 institutional investors globally show that climate transition plans are now common practice, with a growing number of investors voluntarily developing and implementing them as a core part of risk management.

By embedding climate obligations into contracts across the investment ecosystem, including with suppliers, developers, and financiers, investors can create enforceable networks of climate commitments that collectively drive systemic change. These contractual mechanisms help align incentives, reduce greenwashing risks and provide measurable milestones for climate progress.

A path forward

Embedding climate considerations into legal contracts offers institutional investors and asset managers a powerful, practical lever to advance climate action. It moves the sector beyond rhetoric and disclosure towards binding commitments that can be monitored, enforced and scaled across the economy. The next wave of climate leadership will be contractual: asset owners using their influence and capital to demand transparency, accountability, and real-world impact from their managers.

Note: The views expressed on these pages are the opinions of their respective author(s) only and do not necessarily reflect the views and opinions of UKSIF.

This website should not be taken as financial or investment advice or seen as an endorsement or recommendation of any particular company, investment or individual. While we have sought to ensure information on this site is correct, we do not accept liability for any errors.