Source: The post Pension funds must help build green economy has been created, based on the article “Pension funds should prepare for climate risk” published in “Businessline” on 7th August 2025. Pension funds must help build green economy.
UPSC Syllabus Topic: GS Paper 3- Environment conservation
Context: India’s green transition to achieve net-zero by 2070 demands $10–12.5 trillion in mitigation investment, plus $100 billion annually for adaptation. While banks are central to green finance discussions, pension funds — managing over $600 billion — remain underutilized. Their long investment horizon and financial scale make them ideal for climate finance participation.
India’s Climate Finance Needs
- Massive Capital Requirements: India’s green transition needs trillions in investment over the next 25–45 years. Achieving net-zero emissions by 2070 requires $10–12.5 trillion, while climate adaptation needs add $100 billion annually by 2030.
- Banking-Centric Discussions: India’s capital mobilisation for climate action is mostly bank-focused. However, this approach neglects other key players like pension funds that can provide long-term capital.
- Pension Funds’ Untapped Potential: India’s pension funds manage $600 billion, growing 10% annually. Although over half is in government securities, the rest goes into equities, bonds, and other financial assets — yet little flows to climate-focused investments.
Why Pension Funds Suit Climate Investment
- Long-Term Investment Horizon: Pensioners invest over decades, aligning well with the long gestation of renewable energy, clean transport, and climate adaptation projects. These sectors promise better returns than carbon-heavy ones in a decarbonising economy.
- Stable and Patient Capital: Unlike typical market investors reacting to short-term news, pension funds adopt disciplined, patient strategies. This makes them ideal to support climate tech requiring sustained capital over long periods.
- Compatibility with Green Technologies: Clean investments can outperform fossil-based ones in the coming decades. Pension funds’ patient capital can help scale such technologies during India’s economic transition.
Risk Alignment and Future Resilience
- Climate as a Systemic Risk: Long-term risks like climate change threaten company performance and financial stability. Pension funds, due to their long-duration liabilities, must factor these into portfolio decisions.
- Shift from Government to Corporate Assets: As India’s financial markets evolve, pension funds will diversify more into corporate assets. Integrating climate risk into asset selection will ensure : sustained performance and reduced exposure to future shocks.
- Global Practices as a Guide: European pension funds already integrate climate risk to safeguard beneficiaries. Indian funds must follow suit to protect long-term returns.
Regulatory Gaps in Climate Governance
- Weak Climate Disclosures: Globally, regulators demand climate-related disclosures from pension funds. However, Indian pension regulators offer minimal guidance, limiting climate risk management and transparency.
- Structural Challenges in India: EPFO and NPS manage most pension assets. NPS employs external fund managers, but lacks strong enforcement of its stewardship code, leaving climate considerations largely optional.
- Lack of Beneficiary Awareness: Investors are often unaware whether climate risks are factored into fund decisions. This weakens accountability and delays green capital mobilisation.
Moving Towards Global Best Practices
- Role of International Norms: NPS, as an IOSCO member, is aligned with global frameworks promoting climate disclosures. These can improve transparency and support better risk assessments of carbon-intensive investments.
- Initiating Regulatory Dialogue: Like the Reserve Bank’s move on sustainable finance, NPS can begin consultations on climate risk. This would build awareness and push fund managers towards responsible investment aligned with India’s green goals.
Question for practice:
Examine how pension funds can contribute to India’s green economy transition while managing climate-related financial risks.
