Pension funds—among the world’s largest asset owners—play a unique role in the financial sector’s climate transition. Given their long investment horizons, they are particularly exposed to both transition and physical climate risks that threaten asset values and returns.
Unlike other institutional investors, which often focus on short-term performance, pension providers have a fiduciary duty to address long-term systemic issues and act in their beneficiaries’ best interests. In many jurisdictions, this obligation includes setting credible climate targets, implementing internal changes to strategy, governance, and process, and actively supporting the decarbonization of the real economy.
Pension funds’ role in financing the climate transition is drawing sharper focus as the limits of public finance become clearer amid volatile markets, fiscal constraints, and rising climate risks. At the same time, sustainability disclosure rules and fiduciary standards are evolving across jurisdictions, creating both opportunities and uncertainty for long-term investors.
To reach their full potential for climate action, pension funds need support to overcome policy fragmentation, which continues to hinder their progress. Weak regulatory frameworks that prioritize short-term financial returns at the expense of long-term interest make it difficult for funds to integrate climate objectives into their own investment strategies and mandates with external managers.
This report presents an analysis of data from Climate Policy Initiative’s Net Zero Finance Tracker (NZFT) to explore the progress for the climate transition of 594 pension funds based in OECD countries, together representing USD 22.5 trillion in assets managed or owned. The report charts these funds’ progress across the three dimensions of Targets, Implementation, and Impacts to identify where pension funds are making meaningful progress and where further action is needed.
Key Takeaways
1. Pension funds are ramping up climate targets and implementation
Funds improved their target-setting, most notably for mitigation, with more detailed specifications of baselines and the sectors and asset classes covered. However, significant gaps remained in 2024, particularly for climate investment targets.
2. Pension funds remain materially exposed to fossil fuels
Tracked pension funds’ energy portfolios are concentrated in companies expanding their fossil fuel operations. Analysis of 96 entities with USD 310 billion invested in the energy sector found that expansionist fossil fuel companies account for 55% (USD 169 billion) of their energy holdings, and non-expansionist companies account for 8% (USD 24 billion), the other 38% was in clean energy. The activities of expansionist companies are misaligned with the International Energy Agency’s net-zero scenario.
3. Climate-aligned pension funds match or surpass financial peers
NZFT data indicates that once funds start embedding climate into their governance and investment processes, they tend to score as highly, or higher, on climate-related indicators than other tracked financial institutions. In addition, pension funds tend to have larger clean technology exposures within their energy portfolios, with 38%, compared to just 26% of other financial entity types.
4. Targets, implementation measures, and transition plans matter
NZFT data show that these elements are more than symbolic commitments: they are associated with measurable shifts in portfolio allocation. Funds that have adopted climate targets, implementation measures, and transition plans hold a higher share of clean energy than those that have not.
5. Robust, mandatory policy frameworks are essential to embedding climate goals in pension fund strategies
Pension funds have stronger targets and implementation where they have clear regulatory guidance, such as in the Netherlands, Denmark, and the UK. Meanwhile, fragmented or voluntary regimes leave funds less able to act on climate change. Regulators must move from permitting climate action to requiring it, explicitly clarifying climate risk management as part of fiduciary duty.
6. The relationship between pension funds and asset managers is key to driving climate change
The world’s largest pension funds are uniquely positioned to drive climate impact at scale by influencing their asset managers. European funds consistently outperform peers on stewardship policies and disclosure, while many in North America and Asia lag, often due to legal or political constraints on ESG integration. Pension funds are steering delegated capital toward net zero by tightening engagement and mandate terms (including climate-aligned voting), terminating mandates when managers fall short, or reallocating/internalising assets to increase direct control and reduce risk.
Recommendations
The report also outlines recommendations to guide policymakers, asset owners/managers, pension funds, and civil organizations in maximizing pension fund climate investments, summarized as follows:
| Pillar 1 – How policymakers can create an enabling environment |
|---|
| I. Align fiduciary duty and market signals with net zero |
| II. Build the governance, standards, and stewardship architecture |
| III. Enable scale, flexibility, and capacity for climate investment |
| Pillar 2 – How pension funds and asset managers can use their relationship as a lever for change |
|---|
| Pension funds can… |
| I. Set expectations and select aligned managers as ex-ante controls |
| II. Conduct ongoing monitoring and engagement |
| III. Determine specific climate-related engagement and escalation processes to ensure alignment towards net zero |
| Asset managers can… |
| IV. Design climate-aligned investment solutions |
| V. Use stewardship as a strategic differentiator |
| Pillar 3 – How pension funds can move forward independently |
|---|
| I. Embed net-zero in strategy, governance, and portfolios |
| II. Drive change across the pensions and financial ecosystem |
| III. Increase transparency and public understanding |
.
| Pillar 4 – How other actors can create a supportive ecosystem for policymakers, pension funds, and asset managers |
|---|
| I. Support improved data and reporting |
| II. Provide independent scrutiny of what works in practice |
| III. Support collective action and accountability |
Please see the report for full findings and recommendations: