Four Ways Pension Funds Can Strengthen Climate Stewardship and Corporate Engagement
Pension funds are increasingly recognizing the importance of managing climate risks and opportunities to safeguard the long-term health and performance of their portfolios. While many funds have made progress, there remain critical areas where improvements in stewardship and corporate engagement can deliver greater effectiveness and better align with investment principles and risk management goals.
To help pension funds prepare for future challenges and opportunities, here are four essential areas for improvement:
Update Proxy Voting Guidelines
Proxy voting serves as a foundation for direct shareholder engagement and can drive stronger climate risk and opportunity management. Consider the following enhancements to your fund’s proxy voting guidelines:
Explicitly establish systemic climate risk as a key consideration within fiduciary duty and the pursuit of long-term value creation.
Strengthen language to specify withholding votes or voting against board directors at companies failing to align with the Paris Climate Agreement, establish credible net zero transition plans, or demonstrate appropriate oversight of climate-related risks.
Revise voting directives by replacing “vote case-by-case” with “generally support” on items such as material climate risk analysis, impacts on natural resources (including biodiversity and deforestation), and transition readiness. This clarity can position your fund for more consistent action on climate priorities.
Refine Proxy Voting Implementation and Goal Alignment
To ensure proxy voting principles are consistently applied, closely align custom voting policies with your climate risk management objectives. This can involve:
Clearly defining and communicating your fund’s climate-related voting principles around key themes: emissions, transition planning, disclosure, risk assessment, and lobbying.
Setting policy directives that clarify how your voting approach differs from standard benchmark policies, and providing clear instructions on climate-related issues.
Engaging regularly with proxy service providers to review the application of your policy and clarify any discrepancies, as well as to improve reporting on climate- and ESG-related proxy activity.
Strengthen Asset Manager Due Diligence In Public Markets
Because many pension funds delegate large portions of their assets to external managers, it is crucial to assess how these managers engage portfolio companies on climate and deforestation issues. Improved due diligence should include:
Revising asset manager questionnaires and review processes to incorporate findings from recent risk assessments and to set clearer expectations on climate-related engagement.
Asking targeted questions: What are the completion and satisfaction rates from previous due diligence exercises? How will underperforming managers be transitioned out? Are managers expected to track emissions, transition plans, and apply transparent methodologies consistent with your fund’s climate risk objectives?
Seeking greater alignment on the data sets and frameworks asset managers use to evaluate climate risk, setting a consistent baseline for implementation and progress tracking.
Align Shareholder Engagement Priorities with Risk Analysis
With a clearer understanding of risks—from annual or periodic risk assessments—pension funds can refine engagement principles and set priorities that focus on the most significant risks and opportunities. Recommended steps include:
Developing “bottom-up” insights to identify investment areas requiring stronger proxy voting and engagement policies, especially where exposure to climate and environmental risks is highest.
Communicating new expectations and priorities to asset managers, particularly for those overseeing assets with greater climate risk exposures.
Establishing clearer guidance for tracking progress and outcomes so that engagement and voting connect directly to the fund’s climate preparedness and risk management approach.
Pension funds are stewards of workers’ retirement futures. A deliberate and systematic approach to proxy voting, corporate engagement, and risk analysis forms the foundation for long-term sustainability and performance. Implementing these steps allows funds to demonstrate true stewardship while positioning themselves to better manage emerging risks and seize opportunities in a changing climate.
