To limit temperature increases and avoid the worst impacts of climate change, at least USD 6 trillion in annual climate finance is required globally until 2030, then rising to USD 9 trillion until 2050. Public sector finance alone will be insufficient to close the funding gap. Pension funds, with their significant financial influence and investment capabilities, are uniquely positioned to lead this transition.
This report presents an analysis of data from the Climate Policy Initiative’s Net Zero Finance Tracker (NZFT) to explore the progress of 342 European pension funds on targets, implementation, and impact for net zero.
Key findings
Our analysis shows a positive shift in European pension funds’ commitment to sustainable investing from 2019 to 2023. In particular, there has been significant progress in setting mitigation targets, followed by fossil fuel related goals, and climate investment targets. Transparency and accountability are crucial in tracking these commitments. By 2023, many pension funds had made their climate action or transition plans publicly available, showing particular improvements in the management and disclosure of climate risks. A few levers have enabled this:
- Higher quality and ambitious target-setting. While our study highlights a persistent gap between commitment and action, it also confirms that higher levels of target-setting are associated with greater implementation efforts.
- Resources and external pressure. Large pension funds have generally adopted more developed targets and implementation responses, likely due to their better resources, along with regulations primarily targeting large institutions.
- Regulatory leadership. Driven by regulation, Nordic countries (Norway, Sweden, and Denmark) and the Netherlands have led on both target setting and implementation, with France pioneering sustainability integration into financial regulations.
- Membership of net zero coalitions. Pension funds that are part of a net-zero coalition were significantly more likely to adopt climate targets and implementation actions in 2023.
What ultimately matters is creating an impact on the ground by progressing the real economy toward net zero. Given that European pension funds rarely engage in direct project-level financing, scaling up direct investment in clean energy would require a dramatic shift in their investment practices. However, they can achieve significant impact indirectly by engaging as shareholders and lenders with investee entities such as funds or corporations. In 2023, entities in our sample had indirect equity and debt ownership in more than 1,000 new clean energy and fossil fuel projects amounting to a total project value of USD 331 billion. However, only USD 12.5 million can be conservatively, demonstrably, and transparently attributed to pension funds when the size of their ownership shares, which are usually highly fragmented to ensure diversification, and additionality, are factored in.
Our assessment of ownership trees beyond pension funds indicates that asset managers have been crucial in indirectly enabling USD 14 billion, or more than 50% of new investments in the energy sector traced back to our sample of large global financial institutions. As a result, greater impact can be achieved by enhancing pension funds’ engagement with their asset managers, in order to encompass more of these managers’ investment practices, beyond the development of climate products and what they handle on behalf of the pension funds.
Recommendations
To further scale up pension funds’ impact in the real economy, we provided a set of recommendations around five key areas of this report, with actions charted out for specific key stakeholders.
1. Bridging the gap between pension funds’ asset ownership and asset management
Increase control of investment decision-making strategy and principles
- CSOs: Increase citizens’ influence on investment decisions, especially within Defined Contribution schemes, by building awareness on how individual members can put pressure on providers and employers.
- Pension funds: Increase member participation in shaping their responsible investment policies by establishing a member dialogue model.
- Regulators: Allow pension funds to solicit the climate preferences of their members and integrate these into investment decision-making.
- Governments: Evaluate the consolidation of defined benefit schemes into a public sector superfund which could lead to stronger commitments to climate and sustainability goals.
Scale up stewardship and engagement with corporates
- Pension funds: Advance climate finance alignment concerns through third-party advisors / investment consultants to inform / drive broader corporate engagement Increase the transparency of their engagement activities to increase pressure on corporates. Employ escalation strategies with significant GHG emitters.
- Coalitions: Help small pension funds pool with others to more effectively engage with corporates.
Encourage asset managers’ stewardship and engagement activities with investee corporations
- Regulators: Mandate asset managers of pension funds to report on shareholder engagement.
- Pension funds: Draft voting guidelines to outline expectations for their asset managers and effectively guide proxy voting.
- Coalitions: Help small pension funds pool with other funds to more effectively influence voting via asset managers.
2. Transitioning passively managed investment to net zero
Transition passively managed investment to become Paris-aligned
- Pension funds and coalitions: Demand net-zero financial products and services also across the passive product arena, by exploring the feasibility of creating index-tracking portfolios that are sensitive to climate goals Improve the environmental performance of existing funds by engaging with asset managers where there are conflicts between climate factors and value factors.
- Data providers: Evaluate the climate performance of investment vehicles.
3. Scaling up investment in climate solutions, including in EMDEs
Support pension funds’ access to financial structures for investment in clean energy infrastructure
- Governments: Develop guidance on green funds and provide tax incentives to invest in priority areas.
- DFIs: Facilitate access to large-ticket, low-cost, long-term investment opportunities in risk-diversified portfolios. Provide greater transparency on investment performance and risk exposure.
- Data providers: Collect and share loan default information for EMDE assets and evaluate the climate performance of investment vehicles.
- Pension funds: Create demand for impact funds targeting real, measurable impact on capital allocation.
4. Expanding real economy impact beyond own assets
Increase influence on asset managers beyond assets owned, including at the ecosystem level
- Pension funds: Extend Asset Managers’ assessment to general investment philosophy, overall sustainability practices, and management of other assets.
- Coalitions: Critical to engage systemically with policymakers, regulators and industry associations within and beyond pension funds’ own jurisdictions, particularly where climate legislation is lagging.
5. Improving data and methodology for net zero metrics
Improve assessment of portfolio emissions data and alignment, implementation of climate finance taxonomies, and third-party validation of targets
- Data providers: Scale up reporting efforts and platforms that can consolidate data and methods on corporate emissions, finance goals, and transition plans alignment.
- Regulators: Mandate the adoption of stringent metrics and targets by pension funds. Mandate the development of effective corporate transition plans and their disclosure, including detailed metrics on emissions and progress toward decarbonization.
- Regulators and Coalitions: Standardize emission reporting frameworks Improve and scale up the adoption of internationally accepted taxonomies. Promote high-quality, consistent third-party assurance of critical data for decision-making.
