How the World’s Largest Funds Are Investing with Climate Change in Mind

Climate change is a capital allocation problem.

“If we have the largesse of capital, we can solve the climate crisis”. And that’s how this article came to be. It started off as a conversation with a colleague, and I went about digging.

The world’s biggest pools of money are pension funds, sovereign wealth funds, and asset managers. These institutions manage trillions of dollars on behalf of retirees, governments, and investors. The way they invest can accelerate or slow down the transition to a greener economy. This article explains who these funds are, how they’re responding to climate change, and what’s working (and not working) in their climate strategies.

Who Are These Large Funds and Asset Managers?

I’ve divided these into three buckets:

• Pension Funds: Organizations that invest money collected from workers and employers to pay future retirement benefits.
• Sovereign Wealth Funds (SWFs): Government-owned investment funds, often built from resource revenues, that invest globally for long-term national benefit.
• Asset Managers: Firms that invest money on behalf of clients: including individuals, pension funds, and governments.

Together, these groups are among the largest investors in the world, shaping global financial markets and corporate behavior. For the sake of brevity and understanding, i’ve taken only the top 5 biggest (Assets Under Management) firms in each category.

So, in all 15 funds tell us the story of who owns the money, and what are they doing about it to fight climate change.

Among the 15, two funds stand out:

1. Government *Pension Fund Global (GPFG), Norway: Sovereign Wealth Fund
2. Government Pension Investment Fund (GPIF), Japan: Pension Fund

They are the most vocal of the lot, and offer a template on what others can do.

Norway vs Japan. GPFG vs GPIF. Sovereign Fund vs Pension Fund

Let’s start by understanding who is the most vociferous of the lot about climate-related actions — ‘Government Pension Fund Global’ (GPFG) (Norway). This is the world’s largest sovereign fund and is managed by Norges Bank Investment Management (NBIM). They have sounded the alarm on climate risks and have been the most vocal about the need to transition into a greener economy. A recent FT article captures the paradoxical position the GPFG finds itself in.

As per the GPFG’s own modelling, it predicts that the impacts of climate change could wipe out 19% of the value of its US equity holdings.

It’s seen as the vanguard fund against the tyranny of global emitters. They have been vocal about climate-related actions and have pursued systemic change over time. I used them as the benchmark to compare the rest, and it presented a bleak picture of what is to come.

Let’s assign a score of 8/10 for their work and benchmark 3 pointers (taken from the FT article)

1. 74% of their portfolio are now covered by net zero goals, up from 43% in 2021.
2. NBIM voted for 34% of sustainability-related shareholder proposals last year, down from a peak of 52% in 2018.
3. Blacklisted several companies for environmental reasons.

The close second would be the Government Pension Investment Fund (GPIF), Japan. They champion the climate cause from Asia and have a different approach to investments. I’m wholly aware of comparing two different kinds of funds, but these are the two funds that do the most, and it’s interesting to see how they’re approaching their work.

The GPIF invests in green bonds and low-carbon indexes, has ESG integration, supports companies setting net-zero targets. A direct comparison on the above 3 points with GPFG:

1. GPIF does not directly set a net zero target for its entire portfolio, but it tracks the proportion of companies that have set climate targets. In FY22, more companies in GPIF’s portfolio set climate targets, improving its implied temperature rise (ITR) from 2.5°C to 2.4°C—and potentially 2.3°C if all targets are assumed credible. While the direction is positive, exact target coverage figures remain undisclosed.
2. GPIF itself does not directly vote, as it outsources voting to its external asset managers. However, it requires asset managers to integrate ESG and sustainability into their voting and engagement. While support for sustainability proposals is rising, GPIF does not disclose exact year-on-year voting percentages.
3. GPIF does not have a formal “blacklist” or exclusion list. In comparison, GPFG has excluded over 100 companies, including 66 for coal, and publishes a transparent exclusion list.

Through partnerships with organizations like the Asian Development Bank and African Development Bank, GPIF channels capital into green bonds and sustainable projects in developing economies, supporting climate mitigation and adaptation where it’s most needed.

GPIF’s stewardship and reporting requirements have led to a significant increase in climate target-setting and emissions disclosure among Japanese companies, with 79% of companies in its domestic index now setting some form of climate target — higher than many developed markets.

GPIF’s approach is more collaborative and market-shaping, especially in Asia and emerging markets, while GPFG is more forceful and transparent in its exclusions and escalation. They are two different approaches in addressing climate change, although, one can see how much more radically forthright GPFG is.

A summary of all funds and an opinionated rating

Many funds and managers have ambitious climate goals but slower progress on actual divestment or portfolio transformation. Not all institutions have clear guidelines or enforceable rules on climate-related investments. I made a list of all the funds and a glimpse of where things stand. But that in itself does not tell as much, so i added *ratings to better understand how these funds operate. 

4.3 out of 10

In all, these funds manage $46.6 trillion, a sum equivalent to more than 40% of the world’s GDP. We need just about about $1.5 trillion to $2 trillion per year to limit warming to 1.5°C. If these funds are more vocal, and demand change, we will get change.

I started by wanting to understand what some of the biggest funds are doing to combat climate change. And is climate change really a will of capital? Can we throw money at the problem?

Yes.

Climate change is very much a capital problem. We can outspend our way if we trust in our scientists and innovators.

4.3 out of 10.

That is the average rating of the top 15 funds. This score reflects the overall level of climate responsibility, transparency, and action among giants. We have much to do. Back to work. 😎

[Author’s note: The ratings throughout are based on analysis of fund disclosures, policy documents, and climate performance data. They represent a qualitative benchmarking exercise by the author]