Key points
- With over USD 73 trillion in global assets, pension funds have significant financial influence on accelerating the transition to a low-carbon economy or prolonging the status quo of fossil fuel dependency.
- About USD 15 trillion of pension fund assets have been delegated to third-party asset managers (AMs), making these companies key players in pension fund investment decisions.
- Climate change poses systemic risks to pension investments. Failing to address the risks could lead to a 33% loss in pension returns by 2050, threatening the future income of pension fund members. Conversely, clean energy supply presents a $60 trillion investment opportunity.
- 200 major pension funds have begun divesting from fossil fuels in an effort to fulfil their fiduciary duty and act in the best interests of their members. However, AMs’ investment decisions for the pension funds they manage often do not reflect these concerns.
- Momentum is building among pension funds to hold AMs more responsible for the decisions they make on investing pension assets. Some major funds have recently pulled over USD 100 billion from managers like BlackRock and State Street because their climate strategies did not align with the funds’ long-term interests.
Why pensions matter to financial markets
Pension funds are significant players in the global financial system, holding over USD 73 trillion in assets globally between public and private funds, with the top 300 pension funds managing a combined USD 24.4 trillion at the end of 2024.
This immense capital gives them substantial power to influence financial flows and drive the transition to a low-carbon economy by investing in climate solutions. However, pension funds also have the power to maintain the status quo by continuing to invest in fossil fuels, deforestation and other activities which harm the climate.
Pension funds are critical tools for climate action due to their scale and long-term investment horizon.
Why climate change matters for pension funds
Pension funds are vehicles for long-term investments, designed to provide their members with income years or decades into the future. This makes them particularly vulnerable to climate change on a number of levels:
- Physical risks such as the impacts of extreme weather events are already being experienced but are expected to escalate in the longer term. This means that investment decisions taken now may well become exposed to climate risks, such as sea level rise, that are not yet apparent.
- Transition risks such as policy changes to mitigate climate change, which can in turn mean that some carbon-intensive assets such as coal power plants become obsolete before the end of their planned operating lives (known as stranded assets), while increasingly cheap new technologies such as renewables undercut ‘traditional’ energy sources.
- Liability risks from potential litigation resulting from climate damage can lead to both financial and reputational damage.
Taken together, the interrelated nature of these risks poses a systemic risk to the global financial system, including to the value of pension funds, as climate impacts increase.
The economic impacts of climate change are already being experienced. A 2024 study for the International Chamber of Commerce found that extreme weather events cost the global economy more than USD 2 trillion between 2014 and 2023, with USD 451 of this occurring in the final two years of the study period. As climate change accelerates, these costs are also expected to increase. Estimates vary, but a recent study found that a permanent 1°C of global warming reduces world GDP by over 20% in the long run.
The economic implications of climate change for pension funds in the longer term could be severe. A recent study by Ortec Finance, a financial modelling company, found that pension funds could lose 33% of their returns by 2050 in a high global warming scenario based on current trajectories.
How climate change matters for pension holders
There are two main types of pension funds. Defined contribution (DC) pensions are private pensions where employees determine their level of contribution and the market determines their returns. Employers may contribute to these pension funds, but the primary savers are employees. Defined benefit (DB) pensions are set up and paid into by the employer to guarantee a set income for staff after retirement, normally based on final salary or length of service. Businesses rather than individuals pay into these schemes.
DC pensions are increasingly replacing DB pensions in many developed economies, directly exposing individuals to financial risks linked to how their pension funds’ investments perform. The financial impacts of climate change may therefore adversely affect the level of income that people receive from their DC pension.
DB pension holders are, in theory, more shielded from direct financial exposure, since pension fund payouts are set at specific, predefined levels. However, the funds themselves remain just as exposed to the financial risks of valuation loss due to climate change. If their assets do not generate sufficient returns, these funds risk being unable to pay out promised pension levels.
Understanding how ESG fits in pension funds’ fiduciary duty
The primary aim of pensions is to provide a level of income in later life. Most pension funds (asset owners) have a legal and ethical ‘fiduciary duty’ which can include the obligation to act in the best interests of their members. Environmental, Social and Governance (ESG) issues are playing an increasing role in many asset owners’ decision-making, in part because of the need to fulfil their fiduciary duty to provide their members with income over long timescales despite the threats posed by climate change.
The future security of pension funds will be eroded if returns are undermined by economic decline. But the implications of this are greater than just financial security. Adequate pensions can help avoid the stress and mental health issues associated with financial insecurity in later life as well as helping people avoid social isolation. In addition, the ability of older people to spend pension income contributes to economic growth.
However, it is possible for pension funds to use their power in financial markets to reduce future climate-driven risks while also delivering for their members. S&P Global estimates that up to USD 60 trillion in cumulative investment will be needed in clean energy supply between now and 2050, presenting real financial opportunities while also reducing climate emissions. Investing in sustainable technologies makes strategic sense as they can produce higher dividends with lower risks.
It is clear that pension funds increasingly recognise their role in shaping investment in future energy systems. As of the end of 2025, 200 pension funds across Europe, North America and Australia have begun to move away from fossil fuel investments, according to the Disinvestment Database. Although only one fund (Nest Foundation Collective in Switzerland) has no investment in the fossil fuel industry, 125 other funds have made binding commitments to divest fossil fuels from their portfolios by a specific deadline. A further 74 funds have set a binding deadline to move away from some types of fossil fuels.
Pension funds and asset managers
Pension funds delegate some or all of their investment decisions to asset managers (AMs), giving AMs significant control over how pension funds’ vast capital is deployed. The relationship between the two is crucial for effective climate action.
Like pension funds, AMs have a duty to manage the funds they are responsible for in a way that meets their clients’ financial goals and upholds their own fiduciary duty to the asset owners. AMs can influence the companies they invest in through voting at Annual General Meetings, direct engagement or choosing not to invest at all.
However, AMs’ positions on sustainability may not always reflect the position of asset owners, including pension funds. AM companies take different levels of action on decarbonisation, with many continuing to invest in companies which develop or use fossil fuel resources. This means investment policies on climate change do not always reflect the climate values or risk tolerance of their asset owners.
For example, a review by Reclaim Finance of 30 top US and European AMs found they had invested at least USD 16.9 billion in bonds issued by fossil fuel developers between January 2024 and June 2025. Only two of these AMs have committed to stop most of their new investments in oil and gas producers’ bonds.
Pension funds need to demand that their AMs adopt robust stewardship strategies that push companies toward a low-carbon transition, rather than merely using ‘engagement’ as a cover for continued fossil fuel investment. In an effort to align expectations on this, 35 pension funds have signed a letter setting out how they expect AMs to develop urgent strategies to address climate change.
How are people making pensions work for the climate?
Individual members of large pension schemes cannot typically vote on investment decisions or directly influence AMs. However, collective voices and public campaigns have forced shifts in pension funds’ policies and asset allocation, as well as their regulatory focus.
A key example is the Make My Money Matter campaign in the UK, which mobilised people around the message that, in terms of cutting carbon, greening one’s pension is 21 times more powerful than switching energy, giving up flying, and going vegetarian combined. By raising awareness of the influence pension funds could have over climate action and ranking the performance of individual pension fund companies, the campaign helped get a commitment to meaningful net-zero targets from more than 60 pension funds representing more than GBP 1.5 trillion.
Recent actions by pension funds
The momentum is building behind pension funds holding AMs to account for their positions on climate change. Recent developments have removed over USD 100 billion from AMs because of the mismatch between pension funds and AMs on climate change and stewardship:
- The New York City Comptroller has recommended that three of the city’s pension funds move their funds away from BlackRock, Fidelity and PanAgora because they do not meet the requirements of New York’s Net Zero Implementation Plan. In total these AMs are responsible for around USD 43 billion in assets across the three funds.
- The Dutch pension fund PFZW has also removed EUR 14.5 billion (USD 17 billion) in assets from BlackRock management, as well as EUR 15 billion from UK-based Legal & General, on the grounds that the AMs were not acting in PFZW’s best interests with regards to climate change risk.
- Another Dutch pension fund, PME, has removed its EUR 5 billion (USD 5.9 billion) mandate from BlackRock, also on the grounds that the AM was no longer acting in PME’s best interests, including on climate risk
- In the UK, The People’s Pension has removed GBP 28 billion (USD 37.4 billion) in assets from State Street’s management and placed the money with other asset management companies that prioritise sustainable investments.
- State Street has also lost the DKK 3.2 billion (USD 500 million) mandate of Akademiker pension fund in Denmark.
- In the UK Now:Pensions has stopped investing in AMs altogether to ensure that there is consistency across its portfolio on stewardship issues, particularly fossil fuel investments.
