Pension funds: the largest and least visible force in impact investing

This is article 13 of 14 in the Impact Capital series. Here is article 12.

Over the past fifteen years, pension funds have become one of the most influential institutional investor groups shaping the global impact investing market. Their growing role in emerging markets and developing economies reflects both the scale of assets under management and the structural alignment between long-term pension liabilities and the extended investment horizons required for sustainable development outcomes. While pension funds were initially cautious participants in EMDE-focused impact funds, they are now among the most significant and stable allocators of institutional capital to this segment, particularly as impact strategies have matured and governance, data quality and risk management standards have improved.

General characteristics

According to the Global Impact Investing Network, global impact investing assets under management reached approximately USD 1.6 trillion (GIIN's "Sizing the Impact Investing Market" 2024). Pension funds account for the largest share of this total, representing roughly 30–35% of impact assets under management, ahead of investment managers, insurance companies and banks. This share has increased steadily over the past decade, supported by regulatory clarification around fiduciary duty, growing beneficiary expectations, and the expansion of institutional-grade impact fund strategies. These figures are broadly consistent with estimates published by the Global Sustainable Investment Alliance, which confirms continued growth in sustainability-aligned institutional capital across both public and private markets. Source: GSIA, Global Sustainable Investment Review 2024.

The global pension fund universe itself is highly concentrated. While thousands of pension schemes operate worldwide, fewer than 300 large pension funds control more than USD 50 trillion in assets. Within this group, only a subset allocates capital systematically to impact funds with a clear focus on emerging markets and developing economies. Based on public disclosures, regulatory filings and industry surveys, fewer than 100 pension funds can be classified as recurring investors in EMDE-focused impact funds, with an even smaller group deploying capital at scale and on a continuous basis rather than through isolated allocations.

Pension funds active in EMDE impact investing tend to fall into three broad categories. The first consists of large public pension funds, often backed by governments, with explicit mandates to integrate sustainability, climate and long-term societal outcomes into investment decisions. The second group comprises corporate pension funds, where impact allocations are typically embedded within broader private markets, infrastructure or real assets portfolios. The third group includes multi-employer and industry pension funds, particularly prevalent in Northern Europe, which have adopted impact investing as part of fiduciary interpretations that emphasise long-term risk-adjusted returns and systemic risk mitigation.

Geographically, pension fund participation in EMDE impact funds is dominated by investors headquartered in Western Europe, Canada and Australia. Dutch, Danish, Swedish and UK pension funds are particularly prominent, supported by regulatory frameworks that explicitly recognise environmental and social risks as financially material over long horizons. Canadian pension funds have emerged as influential allocators to EMDE infrastructure and climate strategies, often through large-scale fund commitments or co-investments. North American corporate pension funds, by contrast, have historically shown greater caution, although engagement has increased as track records and data availability have improved.

Estimating how much pension funds invest in EMDE-focused impact funds remains challenging due to limited disclosure and varying definitions of impact across institutions. Based on GIIN data indicating pension funds account for approximately 35% of global impact AUM, and survey findings showing that roughly 30% of impact investments target lower- and middle-income countries, outstanding pension fund capital in EMDE impact strategies is likely substantial, though precise figures are difficult to verify given reporting limitations and the embedding of some pension fund exposure within broader infrastructure, private equity or private debt portfolios. Based on triangulation of GIIN data, analysis by the OECD and research by BBVA Research, outstanding pension fund capital invested in EMDE impact funds is estimated at approximately USD 40–60 billion, with annual new commitments likely in the range of USD 8–12 billion. These figures should be understood as indicative, as some pension fund exposure is embedded within broader infrastructure, private equity or private debt portfolios rather than reported explicitly as impact allocations.

Unlike banks, pension funds typically access EMDE impact opportunities almost exclusively through fund-based structures. Common approaches include (a) equity commitments to closed-end private equity impact funds, (b) allocations to private debt impact funds focused on financial inclusion or SME finance, (c) participation in blended finance vehicles with public risk-sharing or first-loss mechanisms, and (d) commitments to infrastructure and climate funds with long-dated, contracted cash flows. Direct investments into operating companies or projects in EMDEs remain rare and are generally limited to very large pension funds with substantial in-house investment capabilities.

Fiduciary duty is a defining factor shaping pension fund behaviour. Pension funds operate under strict obligations to act in the long-term financial interests of beneficiaries. Over the past decade, regulatory guidance in many jurisdictions has clarified that environmental, social and governance factors are financially material over long horizons. This has enabled pension funds to integrate impact considerations without accepting below-market returns. Consistent with GIIN findings, the vast majority of pension funds investing in impact strategies target risk-adjusted, market-rate returns, viewing impact as complementary to, rather than in tension with, fiduciary responsibility.

Risk management considerations further shape portfolio construction. Pension funds typically favour diversified impact funds with institutional governance, conservative leverage, robust reporting and established track records. Ticket sizes are often larger than those of banks or family offices, reflecting the need to deploy capital efficiently at scale. First-time managers, small funds and strategies without demonstrated scalability face significant barriers to entry, regardless of the underlying impact thesis.

Sector allocation mirrors long-term structural trends and liability profiles. Climate, renewable energy and infrastructure dominate pension fund impact allocations, reflecting the alignment between long-lived assets and long-dated pension obligations. Financial inclusion and SME finance also feature prominently, particularly through diversified private debt funds. Other sectors such as agriculture, healthcare and education are typically accessed through multi-sector impact funds rather than stand-alone strategies. According to the World Bank and Convergence, climate-related and infrastructure-focused blended finance vehicles have been particularly effective in mobilising pension capital into emerging markets.

Currency risk remains a constraint, though pension funds are generally more flexible than banks or insurers. While most prefer hard currency exposure in USD or EUR, some pension funds accept limited local currency risk where hedging mechanisms are embedded at fund level or where currency exposure is diversified across portfolios. Despite policy efforts, local currency impact strategies remain a minority within pension fund allocations.

Equally important is what pension funds typically avoid. Short-duration strategies, opportunistic funds with high volatility, or vehicles lacking institutional-grade governance and transparency rarely meet investment committee requirements. Early-stage impact funds without demonstrated scalability or robust risk management frameworks generally fall outside the investable universe for pension capital, regardless of potential development impact.

Investment cases

The investment behaviour of pension funds in EMDE impact investing becomes most transparent when examining concrete fund relationships and fund-aligned transactions. Unlike banks, pension funds often participate not only as limited partners in impact funds, but also through co-investments, platform investments or parallel vehicles alongside specialist fund managers. In each of the examples below, the fund structure and manager provide the primary lens through which pension funds translate long-term sustainability objectives into investable exposure.

One example is APG, acting on behalf of Dutch pension funds, as an investor in the Environmental Opportunities Fund, a climate-focused private equity fund managed by Adamantem Capital. APG publicly disclosed its commitment to the fund as part of its strategy to increase exposure to climate transition investments in the Asia-Pacific region (mainly Australia and New Zealand but including some emerging markets). The Environmental Opportunities Fund targets businesses enabling decarbonisation, resource efficiency and environmental services, offering pension capital exposure to long-term structural climate themes through a diversified fund structure. This investment reflects APG's preference for established managers, institutional governance and scalable platforms capable of deploying capital across multiple markets.

A second example is USS as an investor in TPG Rise Climate, a global climate impact fund managed by TPG. USS was publicly named among the investors contributing to the inaugural close of TPG Rise Climate, which focuses on large-scale investments supporting decarbonisation, climate resilience and energy transition across developed and emerging markets. While the fund has a global mandate, a meaningful share of its opportunity set targets EMDEs where capital requirements and transition needs are most acute. This case illustrates how large pension schemes access EMDE impact indirectly through globally diversified climate funds that combine scale, long duration and institutional-grade risk management.

A third example is ATP, Denmark's statutory pension fund, as a cornerstone investor in the Danish SDG Investment Fund, a public-private impact investment platform focused on emerging markets and developing economies. The fund is designed to mobilise institutional capital into SDG-aligned investments across sectors such as infrastructure, financial inclusion and sustainable industry, with operational management linked to Denmark's development finance ecosystem. ATP's participation reflects how large pension funds engage with EMDE impact through nationally sponsored platforms that combine policy alignment, diversification and long-term capital deployment.

A fourth example illustrates the co-investment approach employed by some large pension funds. The Canada Pension Plan Investment Board (CPPIB) maintains significant exposure to emerging markets, with 26% of its assets allocated to Asia and 6% to Latin America. While CPPIB invests heavily in infrastructure and renewable energy globally, its approach combines both fund commitments and direct co-investments, allowing it to deploy large capital amounts alongside specialist managers. This model, though not exclusively focused on fund-based impact strategies, demonstrates how very large pension funds can access EMDE opportunities through hybrid structures that leverage external manager expertise while maintaining investment control.

A fifth example demonstrates pension fund engagement with impact strategies through specialized managers. APG, which also manages investments on behalf of Dutch pension funds ABP and bpfBOUW, was the cornerstone investor in ILX Fund I, a USD 1.05 billion SDG-focused emerging market private debt fund that co-invests in syndicated loans originated by multilateral development banks and development finance institutions. APG committed USD 750 million at the fund's launch in January 2022, with Achmea Investment Management (on behalf of Pensioenfonds Vervoer) adding a further USD 300 million to bring the fund to its full size. Separately, PGGM, which manages investments on behalf of Dutch pension fund PFZW, has publicly articulated its own commitment to impact investing through infrastructure, private equity and private debt in emerging markets, working with specialized managers active in EMDEs, particularly in sectors such as infrastructure, energy transition and financial inclusion, combining fund allocations with co-investment rights where appropriate.

Current trends

Looking ahead to 2026 and beyond, pension funds' role in EMDE impact investing is shaped by long-term demographic trends, regulatory expectations and climate-related risks. While impact assets under management continue to grow, pension funds face increasing pressure to demonstrate both financial performance and measurable contribution to sustainability objectives.

At the same time, reductions in official development assistance place greater emphasis on private institutional capital to fill financing gaps in emerging markets. Pension funds, with their scale and long-term horizons, are increasingly viewed as critical contributors to blended finance structures.

Discussions with pension fund investment teams indicate a growing focus on climate adaptation, resilient infrastructure and energy transition in EMDEs. These themes are seen not only as impact opportunities but as essential to managing long-term systemic risks that could affect portfolio performance.

Despite this, home bias remains a challenge. A significant share of pension fund impact allocations continues to be concentrated in developed markets, reflecting regulatory familiarity and governance considerations. Overcoming this bias will require further standardisation of impact measurement, improved data quality and continued de-risking through public-private partnerships.

Nonetheless, pension funds are uniquely positioned within the impact investing ecosystem. Their scale, long-term perspective and fiduciary alignment with sustainability outcomes make them indispensable to financing sustainable development at scale. As one pension fund executive noted, the central question is no longer whether pension capital can support impact in emerging markets, but how quickly appropriate structures can be scaled to absorb it.

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