The State of OECD Pension Funds’ Climate Transition: Insights and recommendations from the Net Zero Finance Tracker – CPI
Pension funds are among the largest global asset owners, uniquely positioned to steer the financial sector’s shift toward a low-carbon future. With long investment horizons, they face both transition risks (the costs and disruptions of moving away from fossil fuels) and physical risks (climate-related damage to assets), which can threaten returns and asset values.
Unlike many other institutional investors who emphasize short-term results, pension providers carry a fiduciary obligation to address long-run systemic issues and act in the best interests of beneficiaries. In numerous jurisdictions, this duty includes establishing credible climate targets, revising strategy, governance, and processes accordingly, and actively supporting the decarbonization of the real economy.
As public financing becomes increasingly constrained amid volatile markets, fiscal pressures, and rising climate risk, pension funds’ role in funding the climate transition is coming into sharper focus. At the same time, evolving sustainability disclosure standards and fiduciary expectations create both opportunities and uncertainties for these long-term investors.
Unlocking the full climate action potential for pension funds requires overcoming policy fragmentation that still hampers progress. Weak regulatory frameworks that prize short-term financial gains over long-term interests make integrating climate goals into investment mandates and external manager relationships more difficult.
This analysis uses data from Climate Policy Initiative’s Net Zero Finance Tracker (NZFT) to examine the climate-transition progress of 594 OECD-based pension funds, collectively managing or owning about USD 22.5 trillion in assets. The report assesses progress across three dimensions—Targets, Implementation, and Impacts—to identify where funds are making real headway and where additional action is needed.
Key Insights
1) Pension funds are escalating climate targets and execution
Funds have sharpened target-setting, especially for mitigation, with clearer baselines and explicit coverage of sectors and asset classes. Yet notable gaps persist in 2024, particularly around climate-specific investment targets.
2) Ongoing exposure to fossil fuels remains material
The energy portfolios of tracked funds are skewed toward companies expanding fossil-fuel operations. An assessment of 96 entities with about USD 310 billion in energy investments found that expansion-focused fossil-fuel firms account for 55% (USD 169 billion) of energy holdings, while non-expansion fossil-fuel companies constitute 8% (USD 24 billion); the remaining 38% is in clean energy. The activities of expansionist firms diverge from the IEA’s net-zero trajectory.
3) Climate-aligned pension funds perform on par with or outperform peers
NZFT data show that once funds embed climate considerations into governance and investment processes, their climate indicators tend to match or exceed those of other tracked financial institutions. Moreover, pension funds often hold a larger share of clean-technology exposure within their energy portfolios—38% versus 26% for other financial entities.
4) Targets, implementation actions, and transition plans drive real shifts
The data indicate that having targets, concrete implementation measures, and transition plans correlates with more substantial changes in portfolio allocations toward clean energy compared to funds without these elements.
5) Strong, mandatory policy frameworks are crucial
Funds tend to set stronger targets and implement them more effectively where regulatory guidance is clear—examples include the Netherlands, Denmark, and the United Kingdom. Fragmented or voluntary regimes, by contrast, leave funds less capable of acting decisively on climate. Regulators should move from permitting climate action to requiring it and should explicitly integrate climate risk management into fiduciary duties.
6) The fund–asset manager dynamic shapes climate impact
Large pension funds are well placed to influence climate outcomes by directing and shaping the behavior of asset managers. European funds generally outperform in stewardship and disclosure, while North American and Asian funds often face legal or political barriers to ESG integration. By tightening engagement terms and mandates, voting climate-aligned, or even internalizing assets to boost direct control, funds can steer capital toward net-zero trajectories and reduce risk when managers underperform.
Recommendations
The report provides a set of actionable recommendations for policymakers, asset owners and managers, pension funds, and civil society to maximize climate investments by pension funds:
Pillar 1 – Policy environment that enables action
I. Align fiduciary duties with net-zero objectives and market signals
II. Build governance, standards, and stewardship infrastructure
III. Scale climate investment with flexible, capable frameworks
Pillar 2 – Leveraging fund-manager relationships to accelerate change
Pension funds can…
I. Set expectations and pre-select aligned managers as ex-ante controls
II. Maintain ongoing monitoring and active engagement
III. Define clear climate-related engagement and escalation processes to stay aligned with net zero
Asset managers can…
IV. Develop climate-focused investment solutions
V. Differentiate through proactive stewardship
Pillar 3 – Independent progress for pension funds
I. Integrate net-zero into strategy, governance, and portfolios
II. Drive reforms across pensions and the broader financial ecosystem
III. Improve transparency and public understanding
Pillar 4 – A supportive ecosystem for policymakers, funds, and managers
I. Improve data availability and reporting
II. Provide independent evaluation of what works in practice
III. Encourage collective action and accountability
For full findings and recommendations, read the complete report:
Read the full report here: https://www.climatepolicyinitiative.org/wp-content/uploads/1996/12/State-of-OECD-Pension-Funds.pdf
Explore the NZFT Platform: https://netzerofinancetracker.climatepolicyinitiative.org/
End with a provocative thought: If pension funds are the stewards of tomorrow’s retirees, whose interests should take priority: delivering dependable near-term returns or financing the uncertain, long-term transition that could redefine entire economies? Do you think current policies do enough to empower funds to act decisively, or is more drastic reform required to align fiduciary duties with a rapid climate transition?
