Jessye Waxman is a campaign advisor for the Sierra Club’s Sustainable Finance campaign. Waxman has extensive experience in shareholder advocacy on climate and environmental issues, including serving in staff and/or advisory roles for Green Century Capital Management, Majority Action, and Principles for Responsible Investment. Views are the author’s own.
Public pensions in the U.S. are falling short in managing climate risk through their investment strategies. While many have increased their use of proxy voting and corporate engagement, these tools alone are not enough to protect the retirement savings of millions of public sector workers from growing climate-related financial risks. To meaningfully reduce such risks, pensions must also shift capital away from fossil fuels and toward climate solutions that drive decarbonization and climate resilience.
A recent analysis from the Sierra Club finds that most major U.S. public pensions have not adopted investment strategies that intentionally direct capital to these solutions. Few have clear targets or guardrails to ensure their investments help mitigate real-world climate risk. These types of targets are not only feasible, but are consistent with fiduciary duty and essential to protecting long-term portfolio value in a rapidly changing climate.
Setting targets is possible — more pensions need to follow suit
Despite growing recognition that climate change poses both asset-level and systemic risks to long-term returns, most pensions still lack any kind of strategy, let alone clear targets, to steer investments toward companies and projects that advance decarbonization and climate resilience.
Setting time-bound, quantitative targets for scaling investments in climate-solutions both helps ensure that climate considerations are embedded in core investment strategies across asset classes, and provides direction to investment teams. For long-term investors, like public pensions, adopting such commitments not only helps manage climate-related risks, but positions pensions to capture climate opportunities, investing in projects and technologies that are positioned for sustained growth in a decarbonizing economy.
Among the 30 pensions evaluated in the analysis, only five have set public-facing, time-bound, quantitative targets for investing in climate solutions. Several more incorporate low-carbon or climate-solution investments into their investment strategies, even if they haven’t yet formalized them as dedicated targets. While these strategies vary in ambition and scope, this leadership is notable.
Public pensions are not values-driven investors; they are fiduciaries for long-term, diversified portfolios. Their core mission requires them to generate strong, risk-adjusted returns for beneficiaries.
The fact that some pensions are adopting climate-solutions targets proves boards and investment staff increasingly view these investments and strategies as financially prudent, not philanthropic. And, importantly, if some pensions have deemed it financially responsible to set targets to invest in climate solutions, others can too.
Guardrails and guidance are needed to ensure investments are credible and varied
Where pensions are already making climate-solutions investments, two troubling trends are emerging.
First, greenwashing remains a serious problem. Some pensions are counting investments in high-emitting companies or controversial technologies toward their climate goals. The California Public Employees’ Retirement System counts billions of dollars in fossil fuel investments toward its 2030 “climate solutions” target, and New York City pensions count carbon capture and storage toward their climate solutions investment goals. Carbon capture and storage is not considered a credible climate solution due to scalability concerns, high costs, underperformance and fossil fuel lock-in risks.
Several more pensions pursuing investments in climate solutions provide insufficient disclosure about what they consider “climate solutions,” including the Los Angeles County Employees Retirement Association and the New Mexico State Investment Council, among others, making it difficult to assess whether their investments are truly aligned with decarbonization.
Second, there is an overemphasis on clean energy. Clean energy is a critical and necessary part of the climate transition, and continued investment is essential. But clean energy by itself will not fully decarbonize the economy or build needed resilience.
Investments are also needed to support heavy industry decarbonization, expand green and affordable housing, strengthen climate-resilient infrastructure, protect nature and support a just transition for workers and communities. Thinking of “climate solutions” as more than just an energy sector issue opens a much wider set of investable opportunities, allowing pensions to scale allocations to climate solutions while maintaining portfolio diversification.
Both challenges can be addressed through the adoption of strong Principles for Climate Solutions Investments, which establish guardrails to distinguish credible climate solutions from false ones and provide a broader, more inclusive framework that helps pensions and fund managers identify investment opportunities beyond clean energy alone.
Part of a comprehensive climate strategy
As some of the largest and longest-term investors in the country, public pensions must account for — and take steps where they can to mitigate — the full range of risks facing their portfolios. Climate change is one of the most significant growing threats, affecting not only individual assets but the stability of the entire financial system.
Pensions need comprehensive climate strategies that use all available tools: investment, stewardship, and fund manager accountability. These strategies are essential to protecting beneficiaries’ savings, meeting promised obligations, and ensuring retirement security for millions of hardworking Americans.
Investing in credible climate solutions is not only a core part of that responsibility, but is a strategy that is feasible, financially responsible, and fully consistent with fiduciary duty. More pensions need to step up to the task.
