New CPI research suggests pension funds’ climate progress increasingly depends on private markets, where infrastructure, credit and project finance align more naturally with long-term transition goals
Pension funds across the OECD continue to make steady progress in supporting the climate transition, but private markets are emerging as the asset classes where ambition is most likely to translate into real-world outcomes.
That is one of the central messages of a new Climate Policy Initiative (CPI) report based on Net Zero Finance Tracker (NZFT) indicators, which analyses climate alignment across 135 large OECD pension funds. While public markets still dominate portfolios, the report underlines how private markets’ structure, time horizons and capital concentration position them as a critical lever for climate delivery.
CPI identifies six core findings. Three apply broadly across asset classes: pension funds are ramping up climate targets and implementation measures; once climate is embedded in strategy, pension funds tend to match or exceed the ambition of other financial institutions; and robust policy frameworks remain essential to sustaining progress. The remaining findings have particular relevance for private markets.
Securing exposures
One key conclusion is that pension funds wield significant influence over the decarbonisation of the real economy, yet remain materially exposed to fossil fuels.
CPI’s analysis links portfolio holdings to around 2,800 new energy projects. Of the $310 billion invested in energy by surveyed schemes, 55% was allocated to expansionist fossil fuel companies, 8% to non-expansionist fossil fuel companies, and 38% to clean energy. While this split partly reflects the composition of public markets rather than investor intent, it highlights the limits of portfolio-level decarbonisation strategies alone.
Frederick Fabian, manager at CPI leading on the development and delivery of the NZFT, says: “Roughly two-thirds of associated capital supports clean or transition assets, often channelled through private markets routes such as infrastructure, project finance and private credit.”
By contrast, the remaining third still finances new fossil fuel capacity, which is “more typically funded through large corporate balance sheets and mainstream banks or public debt”, he says.
“A substantial share of the capital required for the climate transition will flow through private markets, especially for infrastructure, private credit, and project-level equity, where pension funds’ long-term investment horizons are well aligned with financing low-carbon systems.”
For investors seeking tangible climate outcomes, private markets increasingly offer exposure to the assets and technologies driving the transition, rather than relying on secondary market reallocations.
Bobby Riddaway, managing director at HS Trustees, argues that many private market companies are already structurally aligned with climate goals, particularly newer businesses. “Many of the investable opportunities in energy transition, batteries, biodiversity and related technologies sits outside public markets,” he says.
He adds this is especially the case in the UK, where successful companies are often acquired by overseas institutional investors. “Many companies that grew up in the UK have been bought by American fund managers or Australian and Canadian pension funds – so they definitely offer plenty of value.”
Stewardship through concentration
Another CPI finding is that the asset owner–manager relationship is a critical but underused lever for climate impact. The report notes that large pension schemes are “uniquely positioned” to drive climate impact, and that European ones consistently outperform in this area.
The report highlights not only traditional approaches such as active ownership and mandate termination, but also reallocation, internalisation and reduced diversification — strategies more feasible in private markets, where capital is concentrated across fewer managers and assets.
Fabian says: “Although not explicitly captured in our data, investments via private markets could offer pension funds greater potential to influence the real economy because this capital is often deployed through fewer layers of intermediaries.”
This proximity can improve engagement and accountability, he adds, helping align capital with climate objectives. “But the opportunity isn’t automatic – most private markets exposure is still accessed via external managers, so pension funds need clear mandates, internal capacity and strong governance.”
Riddaway agrees that infrastructure and private credit, in particular, offer a more direct route to change, but argues that UK pension funds need greater scale and coordination to fully exploit these opportunities.
Transition plans — and their limits
CPI’s final major finding is that climate targets, implementation measures and transition plans are associated with measurable shifts in portfolio allocation, rather than serving as purely symbolic commitments.
NZFT data show that schemes with clearer targets and plans are more likely to reallocate capital toward transition-aligned assets.
“Transition plans provide the opportunity to wrap everything up in an efficient reporting framework, and to concentrate on action rather than reporting,” says Riddaway.
However, he cautions against over-reliance on scheme-level carbon targets. For pension funds, which are often several steps removed from underlying assets, poorly designed targets risk encouraging “paper decarbonisation” rather than real-world impact.
Instead, he suggests that smaller schemes in particular should focus on allocating capital to climate, nature and energy solutions — which in practice often means accessing private markets — while using collective influence to shape effective policy frameworks.
In the UK, this debate is timely. The Department for Energy Security and Net Zero consulted on climate-related transition plans over the summer, with outcomes expected to shape pension funds’ future reporting and governance requirements.
Bolstering progress
Despite their potential, CPI notes that private markets are not without challenges. Regulation and scheme design still tend to prioritise liquidity, low costs and short-term risk metrics, often compounded by limited in-house expertise. Meanwhile, pooled vehicles and external managers can obscure line-of-sight on climate alignment.
CPI recommends that pension funds respond by setting explicit climate objectives for private markets, embedding them in mandates and stewardship policies, and using manager selection and monitoring to demand credible transition strategies across private equity, credit and infrastructure.
Riddaway believes large schemes are already moving in this direction, but stresses that scaling access for smaller funds will be critical. New investment vehicles, partnerships and public institutions — including the British Business Bank and National Wealth Fund — will be needed to broaden participation.
For pension funds, the case for private markets is not only about climate impact but also long-term value creation. As Riddaway stresses, investing in the transition does not imply sacrificing returns. “For schemes able to access infrastructure and growth companies early, private markets may offer the most direct route to aligning fiduciary duty with climate outcomes.”