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

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.