Structural barriers such as unclear fiduciary duties and fragmented regulation are preventing the climate ambition of pension funds from translating into real-world emissions reductions, according to analysis from the Climate Policy Initiative (CPI).

CPI’s report, The State of OECD Pension Funds’ Climate Transition, assessed the climate-transition performance of 594 pension funds across OECD countries, representing around USD 22.5trn in assets under management or owned.

It found that while pension funds have moved quickly to adopt climate targets and internal implementation measures, misaligned policy frameworks and market structures continue to constrain their ability to drive the net-zero transition at scale.

Using data from CPI’s net-zero finance tracker, the report showed a sharp rise in climate ambition across the sector.

The share of tracked pension fund assets covered by at least one climate target increased from just 9 per cent in 2020 to 63 per cent in 2024.

Over the same period, the proportion of assets held by pension funds that have implemented at least one climate-related change to strategy, governance or processes rose from 38 per cent to 68 per cent.

Furthermore, once pension funds adopt climate targets and implementation measures, CPI found they often match or exceed the ambition of other financial institutions.

However, the report highlighted a persistent gap between intent and outcomes.

Despite stronger targets, 55 per cent of pension funds’ $310bn in listed equity and bond energy holdings remain invested in companies expanding fossil fuel production, indicating continued misalignment with net-zero pathways.

CPI argued that this disconnect reflects systemic barriers rather than a lack of willingness on the part of pension funds.

In particular, the report pointed to ambiguity around fiduciary duty, inconsistent regulatory expectations across jurisdictions, and limited mandatory requirements for credible transition planning as key obstacles slowing progress.

Climate Policy Initiative managing director, Barbara Buchner, said pension funds have a clear responsibility to manage long-term systemic risks, but are constrained by the policy environments in which they operate.

She noted that funds in jurisdictions with weaker climate policy frameworks consistently lag behind peers in both target-setting and implementation, while clearer rules that recognise climate as a material financial risk would allow pension funds to play a far more decisive role in the financial sector’s net-zero transition.

The report also highlighted the growing importance of the relationship between asset owners and asset managers as a lever for change.

Climate Policy Initiative associate director, Valerio Micale, observed that the largest pension funds are increasingly using mandates, incentives and explicit expectations to push asset managers to strengthen their climate strategies, alongside more intensive scrutiny of performance.

He suggested this dynamic is emerging as one of the most effective channels for accelerating climate alignment across portfolios.

Alongside its analysis, CPI set out targeted recommendations for pension funds, policymakers, regulators, asset managers and data providers.

Central to these was a call for policymakers to provide clearer interpretations of fiduciary duty that explicitly incorporate climate risk, alongside mandatory climate disclosures and requirements for credible transition plans.

The report concluded that without stronger, more consistent policy frameworks, pension funds’ growing climate ambition will continue to fall short of delivering the systemic change required to meet global climate goals.

---