We have seen a rising number of pension funds committing to net zero, which prompted us to explore how they plan to achieve these goals. According to Pensions UK, in 2024, 65% of UK pension funds had net-zero commitments in place, and 7% aimed to implement them over the next five years. These are significant figures, especially when considered alongside data released by the Impact Investing Institute, which shows that the impact investing sector grew at a compound annual rate of 10.1% between 2021 and 2023, whereas the broader UK asset management sector saw flat or negative growth (-2% to 0%) over the same period.
To understand the details behind this rising momentum, our research publications in 2025 covered topics ranging from nature and climate solutions, to stewardship and pension fund allocations to venture capital. The findings reflect insights from over 80 interviews with pension funds conducted throughout the year.
We have observed growing momentum for impact investing among pension funds. In our Impact Integration research, we identified a trend of establishing target allocations to impact investing. Among those doing so, targets ranged between 5-13% of their overall portfolios. This is well ahead of the broader UK market, where estimates suggest the industry currently allocates less than 1% towards impact investing.
What is behind their motivation for these allocations?
Climate goals: pension funds are increasingly committing to net zero. However, they are maturing in how they approach their decarbonisation goals. Rather than simply excluding high emitters to ‘clean’ their portfolios, they want to actively contribute to climate solutions.
Place-based outcomes: there is strong momentum for place-based investing, which pension funds see as a way to achieve more tangible and visible outcomes, positively impact members’ daily lives and increase engagement with them.
Long-term returns and diversification: most pension funds with a target allocation of over 10% to impact investing started with a more modest target (typically 3-5%). Encouraged by strong performance, they have since decided to increase these allocations to up to 13%.
How are pension funds allocating to solutions?
In our Climate solutions research, we interviewed pension funds collectively managing £400bn in assets to understand their current impact allocations. In terms of investment themes, they primarily focus on energy transition, renewable energy and place-based social impact, such as social housing, affordable housing and temporary accommodation.
We also asked what they see as the biggest investment opportunities over the next five years. Nature-based opportunities, such as sustainable and regenerative agriculture, are gradually emerging. Central opportunities include grid infrastructure, energy storage and distribution systems, all essential for making renewable energy more reliable. Beyond energy, green infrastructure, including EV-charging networks and sustainable urban development, presents growing opportunities aligned with the global move towards decarbonisation.
In terms of climate technology, opportunities include improving efficiency (reducing water and electricity use), optimising processes with technology and AI, and advancing emerging areas such as grid management, geothermal energy, carbon capture and sustainable aviation fuel.
Figure 1: What do you see as the biggest climate-related opportunity over the next five years?
Fiduciary duty
Interviewees consistently emphasised climate-related risks are intrinsic to fiduciary duty, with asset owners describing climate change as a long term, systemic risk with clear financial implications for portfolio performance and member outcomes. Across our interviews, there was a shared understanding of climate risk and financial risk being increasingly inseparable. Sixty per cent of asset owners we interviewed described integrating climate risk as compatible with fiduciary obligations and, indeed, this practice is essential to fulfilling them over the long term.
Figure 2: Does climate change consideration align with fiduciary duty?
“We take the view climate change is long-term, and probably the most significant risk to our portfolio. Our fiduciary duty involves ensuring we’re managing that risk and aligning our strategy with a net-zero pathway.” – UK pension fund
Our research on Nature and biodiversity shows that financial risk has been the main motivation for schemes to integrate climate concerns and now, more often, nature and biodiversity. Schemes are increasingly recognising the dependence of global gross domestic product (GDP) on natural capital.
“Nature is a significant systemic issue related to climate change – possibly even more critical than climate change itself. We are increasingly seeing risks in supply chains for companies, and addressing nature and biodiversity is clearly an important area of impact. As responsible investors, it’s essential for us to lead in this mission.” – UK pension fund
Figure 3: What is the main reason for your fund to integrate nature and biodiversity into your sustainability strategy?
Managers’ efforts
Asset owners rely on their managers to achieve and measure their impact goals. They focus on selecting managers whose strategies and impact objectives align with their own. There is a list of minimum standards pension funds expect from their managers:
Intent: pension funds expect managers to articulate the social or environmental problems the fund addresses, the solution or intervention the investment supports, the long-term impact and intermediate outputs or outcomes the investment will drive, and how the investment aligns with broader impact goals, such as the UN’s sustainable development goals (SDGs).
Impact measurement: although asset owners establish priorities at a broader level, they do not define key performance indicators (KPIs) for impact investments, relying on their managers to do so. Their priority is understanding the rationale behind a manager’s KPI, the broader goals these KPIs reflect, and the strategy in place to achieve them. They expect managers to firstly, assess the expected impact of each investment at the outset; and secondly, monitor progress over time. They have a strong preference for measurement at the outcome-level, although many funds remain at the output level - something interviewees accept, provided efforts are underway to evolve.
Annual impact reports: including data and metrics to track progress against the baseline.
Back-and-forth communication: because impact is not always easy to quantify, asset owners want to feel confident about what is being measured and claimed. There is a strong concern about greenwashing.
Stewardship and engagement: most pension funds rely on their managers for stewardship activities, with asset owners focusing on holding managers accountable and assessing their efforts.
As our Stewardship research shows, asset owners largely delegate stewardship to their managers. They have a major concern around ensuring consistency between stewardship activities, preventing split voting and building effective engagement practices. Voting and trustee priorities must be aligned and asset owners are increasingly taking steps to address this:
Increasing ownership of the stewardship process: some are reclaiming voting rights, while others are strengthening how they assess managers’ efforts - for example, using technology to track managers’ voting records and engaging with them where they see a lack of consistency. Some have created a ‘watchlist’ for managers who are repeatedly inconsistent with trustees’ priorities.
Voting against management: this was mentioned in at least half of our interviews as the most powerful way to signal dissatisfaction with a company’s actions or lack of progress. There is a concern, however, that sometimes they might be small shareholders, which can make this practice ineffective.
Termination in cases of ‘institutional misalignment’: while pension funds still prioritise engagement over termination, in a few cases, where a manager was not aligned with the asset owner’s sustainability views, this led to termination.
Figure 4: Level of stewardship delegation to asset managers
Future trends: impact investing through PE and VC allocations
The UK pension market, while large and mature, has historically shown limited appetite for venture capital (VC) investment, although this is beginning to shift. Pension funds’ appetite for place-based impact investing is one of the main reasons behind this change.
Figure 5: UK pension industry market (2023)
Across the pension funds we have interviewed for our research on Venture & growth capital in Europe, two core reasons behind the investment case for pension funds to allocate to VC were raised:
Portfolio diversification: in an environment marked by uncertainty and market volatility, especially within the unstable geopolitical environment, VC offers a distinct return profile that helps pension portfolios spread risk at the total fund level and capture upside in less correlated asset classes. As a risk management strategy, pension funds diversify within VC itself. Funds highlighted the importance of diversifying across fund stages, managers and geographies to mitigate single investment risk and improve their overall return potential.
Climate-focused and place-based investment strategies: particularly in the UK, several pension funds are now actively channelling capital towards climate innovation, sustainability and regional growth initiatives, all areas where VC can play a major role. Place-based investing through university spinouts is a popular approach in the UK. By backing local innovation, defined contribution (DC) pension funds can combine financial returns with measurable social impact.
“Private equity (PE) and VC often have better environmental, social and governance (ESG) credentials than public markets, simply because they don’t invest in sectors like oil and gas, tobacco, weapons or coal. Also, many VC-backed companies, especially in life sciences, are driving real positive change – for example, cancer treatments with vastly improved survival rates. So, VC is naturally aligned with strong ESG principles.” – Asset manager
What’s next?
In November 2025, we will publish our first research focused on insurance companies’ sustainability ambitions.
Training
Our interviews with pension funds provided deep insights into the challenges they face on their impact journey, the tools they need and emerging trends. Focusing on the challenges, we are developing training to bridge the educational gaps on three key topics identified by respondents:
Impact integration, including impact reporting.
VC.
Nature capital.
Advocacy
Although pension funds recognise the connection between fiduciary duty and climate change, they still see this as a grey area from a regulatory perspective. For this reason, Pensions for Purpose supports ShareAction’s proposed amendment clarifying pension schemes’ fiduciary duty. This change in legislation would provide trustees with greater legal certainty to consider system-level financial risks, such as climate change, health, housing and education, and to invest for members’ long-term living standards.
Future research
Peace and justice: geopolitical factors and political instability have emerged as a central concern for investors. In 2026, we aim to explore peace and justice as a key impact topic.
Impact in public markets: earlier research revealed that over 50% of pension funds view public markets as the most effective asset class to address climate change. Next year, we aim to gain deeper insights into how funds are leveraging public markets for impact.
Cost versus value: there is an ongoing race to minimise costs, but are DC funds potentially missing out on valuable opportunities, such as impact investments in private markets? We aim to investigate why certain propositions may be undervalued, explore public perceptions of value and identify barriers to recognising it.
Bespoke research on stewardship: Pensions for Purpose has developed a bespoke market research service that allows asset managers to align with Principle 5 by soliciting feedback from clients.
Systems thinking: we propose a research piece exploring how systems thinking can be integrated into pension fund governance, investment decision-making and member engagement. This research will clarify how systems thinking can strengthen decision-making, drive sustainable impact and enhance governance effectiveness.
Get in touch with us to learn more: bruna.bauer@pensionsforpurpose.com
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