Asset Managers vs. Asset Owners and Their Impact on Climate Action
Asset owners and asset managers (a.k.a. Portfolio managers) are key players in the public pension system. Although these roles are often confused, understanding their differences is essential for effectively integrating climate action into investment strategies. Let's use an analogy to break down the definitions and explore why this is important for the public pension system and responsible investing.
What Is an Asset Manager?
An asset manager is a professional or firm that manages investments on behalf of asset owners. Their job is to implement investment strategies, select specific securities (stocks, bonds, real estate, etc.), and make decisions that achieve the asset owner's mandate. Asset managers are hands-on professionals who handle the day-to-day tasks of managing portfolios, ensuring that the investment choices align with the strategic vision outlined by the asset owners.
For public pension systems, this could mean choosing investments that provide the necessary returns to support retirees while considering factors like climate risk, social responsibility, and long-term sustainability.
What Is an Asset Owner?
An asset owner is an institution or individual that invests capital to achieve specific financial goals. Examples of asset owners include public pension funds, sovereign wealth funds, insurance companies, and individual investors. Asset owners are the decision-makers who set the overarching goals and strategies for how their capital should be allocated to ensure that the investments meet their long-term financial objectives.
In the context of public pensions, asset owners are the fiduciaries—often boards of trustees or financial officers—who determine how to balance risk, return, and social or environmental considerations. They are responsible for ensuring that pension funds are managed in the best interests of beneficiaries, which increasingly includes considering the impact of climate risk and sustainable investment strategies.
A Simple Analogy: Property Owner vs. Property Manager
To better understand the distinction between asset owners and asset managers, let's use an analogy of a property owner and a property manager:
Imagine you own a large apartment building. In this scenario, you are the asset owner. You decide how you want the building to be managed: the types of tenants you want, the rent levels, and how much you want to invest in maintenance or upgrades. These decisions align with your personal or business goals, whether maximizing income, maintaining long-term property value, or keeping operating costs low. To run the day-to-day operations, you hire a property manager. The property manager is responsible for executing your vision—collecting rent, hiring contractors for repairs, screening tenants, and handling all the details. The property manager follows the strategy you've outlined but is not the one setting the overall direction for the property.
In the financial world, this same division of responsibilities exists. The asset owner determines the broader strategy—such as prioritizing investments in sustainable or low-carbon sectors—while the asset manager implements that strategy by making specific investment decisions within those guidelines.
Why it Matters
This distinction between asset owners and managers is vital for advancing responsible investing and climate action. Here's why:
Fiduciary Duty and Long-Term Value: Pension funds have a fiduciary responsibility to manage assets in a way that secures the long-term well-being of their beneficiaries—including millions of workers who rely on pension funds for retirement security. As the world faces mounting climate risks, it's increasingly clear that business-as-usual investment strategies that ignore climate change are financially risky. Asset owners who recognize the importance of integrating environmental, social, and governance (ESG) factors into investment strategies are better positioned to mitigate those risks and ensure more resilient, long-term returns.
Climate Risks and Sustainability: Climate change poses significant risks to investment portfolios. With nearly $6.2 trillion in assets as of year-end 2024, public pension funds have significant influence over corporate practices. They can drive capital toward companies actively mitigating climate risks and contributing to an ethical transition, motivating various industries to integrate climate resilience into their business models.
Asset Owners Lead the Charge: While asset managers implement investment strategies, asset owners drive change. Asset owners, such as pension fund boards and trustees, must prioritize climate-resilient investments and advocate for responsible, ethical investing. If asset owners align their goals with climate justice principles, they can leverage their collective influence to push asset managers to prioritize sustainable investment strategies.
The Power of Partnership in Responsible Investing
Public pension funds are uniquely positioned to lead the charge in integrating responsible investment principles into investment decisions. Asset owners can drive the financial sector toward a more equitable and climate-resilient future by prioritizing long-term sustainability and leveraging their influence. They can work with asset managers to fulfill their fiduciary responsibilities. And in doing so, they can ensure the financial security of workers and retirees for generations to come.
