Unlocking the power of pension funds for net zero

Pension funds, with their immense reserves of patient capital, hold transformative potential for financing the climate transition and supporting the UK’s ambitious goal to reach net zero by 2050. Yet, these resources remain significantly underutilized in the fight against climate change. Unlocking this potential requires a shift in how pension funds approach climate investments, moving beyond compliance and embedding climate goals into their core strategies.

The Current Landscape of UK Pension Funds

Recent debates about UK pension funds have centered around their role in bolstering the economy and consolidating Defined Benefit and Defined Contribution arrangements. While these discussions are vital, they must also address how pension funds can tackle the climate crisis. Research by Climate Policy Initiative (CPI) highlights a mixed picture of progress among European pension funds, including those in the UK, in setting and implementing climate targets.

Among the 96 UK pension funds tracked by CPI’s Net Zero Finance Tracker (NZFT), performance is moderate. Legislative efforts, such as mandatory climate-related disclosures, have positioned the UK among the top five European countries—behind Sweden, Denmark, Norway, and the Netherlands—but there is significant room for improvement. Compliance-driven approaches still dominate, with many schemes lacking the clear implementation plans needed to turn ambition into action.

Policy as a Catalyst for Change

The UK’s regulatory framework has been instrumental in driving early progress. Since 2021, pension schemes managing over £5 billion in assets have been required to disclose climate-related financial risks, with this requirement extending to schemes over £1 billion in 2022. These regulations have compelled larger schemes to address climate risks, establish governance frameworks, and set preliminary targets. However, many funds approach these requirements as a box-ticking exercise, limiting their potential to drive systemic change.

A review by the UK Pensions Regulator in 2023 revealed that of the first 71 mandatory disclosures, 43 included formal net-zero targets. Yet, these targets often lacked accompanying implementation plans, with only a handful of funds taking meaningful steps toward decarbonization. Without strong incentives to move beyond compliance, the pace of change remains insufficient.

Lessons from Europe

Comparative insights from CPI’s analysis of 342 European pension funds underscore the importance of robust regulation and proactive strategies. In Nordic countries like Sweden, Denmark, and Norway, regulatory frameworks have fostered a culture of leadership in climate finance. These nations have demonstrated that ambitious targets, combined with credible implementation strategies, drive measurable progress.

For example, the number of European pension funds with climate investment targets has grown from none in 2019 to 35 in 2023, representing $2.2 trillion in assets. Similarly, 60 schemes now have fossil fuel phase-out or divestment targets, a dramatic increase from just two in 2019. Despite this progress, the majority of pension funds still lack climate targets or actionable plans, highlighting an urgent need for broader engagement.

Pathways to Accelerate Action

To fully unlock the potential of pension funds for the net-zero transition, both industry leaders and regulators must take decisive action:

1. Strengthen Corporate Engagement: Pension funds must adopt clear voting guidelines and escalation strategies to influence corporate behavior through their asset managers. Active stewardship can drive meaningful change in investee companies.
2. Demand Net-Zero Investment Products: By collaborating with asset managers, pension funds can enhance the environmental performance of existing funds and stimulate the creation of new, innovative net-zero-aligned products.
3. Expand Influence Beyond Owned Assets: Pension funds should broaden their due diligence to assess the sustainability practices of asset managers. This includes evaluating their investment philosophy and the management of assets not directly owned by the fund.
4. Enhance Transparency and Metrics: Regulators can play a pivotal role by mandating robust engagement reporting and requiring the disclosure of emissions data and transition plans. Improved data availability will empower pension funds to make informed capital allocation decisions.

A Call to Action

The climate crisis demands urgency, and pension funds have a unique opportunity to lead the way. As stewards of vast financial resources, they must transition from compliance-driven approaches to proactive, impact-oriented strategies. By setting ambitious targets, developing credible implementation plans, and leveraging their influence across the financial system, pension funds can become powerful agents of change.

Regulators, asset managers, and trustees must collaborate to create an enabling environment that drives meaningful progress. The UK’s pension funds have the potential to be at the forefront of the net-zero transition, setting a global benchmark for climate finance. The time to act is now—to not only safeguard the future of pension beneficiaries but also to secure a sustainable, resilient planet for generations to come.

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Unlocking the power of pension funds for net zero