Building an Effective Climate Risk Transition Plan for Pension Funds
The physical risks of climate change—wildfires, heatwaves, and extreme weather disasters —pose a significant threat to the dignified retirement that millions of public employees have worked hard for, as they also pose severe risks to the companies in which workers are invested through their pension funds. Climate transition risks are a different issue and refer to the potential financial losses that companies and investors may face due to the global shift towards a low-carbon economy
Addressing physical and climate transition risks is essential to protecting long-term retirement, and that's why more resilient pension funds use science-based climate measurement tools and a 'transition readiness' approach to manage their risk. They equip the fund to better understand its portfolio's vulnerabilities and inform strategic investment decisions.
Below are three concepts we propose that a pension fund incorporate the following thinking:
A purely emissions-based approach is limited as it is a backward-looking view that looks at just one piece of a company’s approach.
To really fight climate change, investors need to focus on where the biggest problems are. High-emitting companies face more transition risk. Companies that provide solutions to climate change (i.e., solar, batteries, packaging) need more investor support. We can't reach a cleaner future without them, even if they're currently big carbon producers. Investors need to work with both types of companies.
When investors put money into companies that are leading the way in climate solutions or are working hard to reduce their carbon footprint, those companies are more likely to succeed in the long run. They're the ones who will "win" the shift to a low-carbon economy, and that can mean more money for the investors down the road. It's about finding the opportunities in cleaning up the planet.
Whether labeled as "decarbonization," "climate risk resilience," or "transition finance," pension funds today face a critical imperative: to move beyond broad commitments and develop explicit, actionable holistic and forward-looking analysis that assesses transition readiness of portfolio companies across the entire fund. The effectiveness of these plans depends on turning good intentions into concrete, measurable actions, impacting how investments are chosen, how asset managers are evaluated, and how results are communicated.
What Makes a Transition Plan Effective?
Below, we outline six essential indicators of a strong climate risk transition plan for pension funds.
Acknowledgment of Systemic Climate Risk
A robust plan begins with formal recognition of systemic climate risk. This acknowledgment must be embedded in foundational documents, such as the Investment Policy Statement and strategic asset allocation guidelines, signaling that climate risk is central to the fund's long-term strategy and fiduciary responsibility.
Incorporating Transition Readiness
Effective funds establish clear processes to evaluate companies' "transition readiness" as part of investment decisions and ongoing performance reviews. This involves using climate scenario analyses and climate footprint exercises to assess how well companies are prepared for the shift to a low-carbon economy.
Concrete Goals and a Timeline for Implementation
A strong plan sets out specific, measurable goals and criteria for transitioning investments, especially in high-risk asset classes that lag in climate readiness. It includes a timeline for moving assets to firms with credible frameworks and metrics for reducing climate risk and emissions. Enhanced standards and guidance for external asset managers ensure their alignment with these transition goals.
Maximizing Economic Opportunities
Forward-looking funds don't just manage risk—they seize opportunities. This means allocating part of the portfolio to companies driving climate mitigation and energy sector transitions. Investment strategies should also reflect principles of labor rights, biodiversity, and a just transition while setting clear engagement objectives for companies willing to align with climate goals.
Enhanced Climate Risk Measurement
Leading funds expand their climate risk measurement tools and portfolio monitoring practices. This means going beyond surface-level analytics or unreliable self-reporting and anchoring assessments in key performance indicators and rigorous scenario analyses. These tools track emissions and monitor progress on company transition plans, providing a clearer picture of actual risk exposure.
Improved Staff Capacity and Transparency
Ultimately, successful implementation relies on building staff expertise and ensuring transparent and accessible reporting. Regular updates and clear communication are vital for accountability—to trustees, beneficiaries, and the broader community.
In summary, the transition to a climate-resilient portfolio is not just about making promises—it's about embedding climate risk into the DNA of pension fund governance and investment. By following these six indicators, funds can develop credible and effective plans that protect long-term value and support a sustainable future.
Want to learn more?
Download the complete Transition Readiness Primer for pension funds to explore in-depth strategies for building resilient, climate-smart investments.
The Transition Readiness Primer was initially published in March 2025.
