Pension schemes should look beyond the transition to net zero and increase investment in climate adaptation, as concerns grow that mainstream economic models may underestimate climate change's financial impact, according to a report from Cushon and the University of Exeter.

The joint white paper, Investing in Resilience: Unlocking Pension Capital for Climate Adaptation, warned that physical climate risks are already affecting UK assets, while a lack of investable opportunities and government support is limiting the deployment of pension capital into climate resilience projects.

It called for improvements in four key areas to help develop a more investable UK climate adaptation market: better data on physical climate risks, a stronger pipeline of suitable projects, clearer government guidance and incentives, and greater coordination between policymakers, public finance institutions, pension schemes and asset managers.

The report argued that mainstream climate risk models could underestimate the economic consequences of climate change, particularly when they fail to adequately account for extreme weather events, climate tipping points and the combined effects of multiple hazards.

Indeed, modelling by the University of Exeter's Green Futures Solutions estimated that annual damage to UK GDP from physical climate risks could reach 2.8 per cent under a 2°C global warming scenario, rising to 7.1 per cent in a more severe, 90th-percentile outcome.

The analysis also identified the East of England as particularly exposed to multiple climate hazards, including flooding, heat stress and drought, highlighting potential risks to agricultural production, ports and energy infrastructure.

Against this backdrop, the report urged pension schemes to consider investment opportunities in resilient infrastructure, flood defences, heat protection, nature-based solutions and improvements to existing assets.

However, it acknowledged that many adaptation projects currently lack the scale, investment structures or commercial incentives needed to attract significant defined contribution (DC) pension investment.

The findings follow the first progress report on the Mansion House Accord, which revealed that £22.1bn of DC growth-phase assets were invested in private markets by the end of 2025.

Of this, £11.1bn went into UK private markets, with a further £3bn committed to UK deals but not yet deployed.

Cushon sustainability manager, Martin Logan, said: "As a Mansion House Accord signatory, Cushon is committed to turning intent into investable allocations. Providers already have £11.1bn at work in UK private markets, which is a strong start, and the £3bn pipeline shows momentum is building.

"The next opportunity is resilience. Funding infrastructure and assets that can cope with a changing climate opens up long-term value creation for members and for the UK economy."

Logan warned that although physical climate risks were already affecting UK assets, the pipeline of pension-scale adaptation investments remained underdeveloped.

The paper therefore suggested that government-backed incentives, similar to the Contracts for Difference mechanism used to support renewable energy investment, could help make climate adaptation projects commercially viable.

This could include Outcome Purchase Agreements, under which investors would receive payments linked to measurable improvements in resilience, such as reduced flood damage, infrastructure disruption or other climate-related losses.

The report argued that such arrangements could provide greater certainty over long-term investment returns while helping to attract pension capital into adaptation projects.

It also called for a stronger pipeline of projects suitable for DC schemes, allowing trustees to assess potential investments against their fiduciary duties and requirements for value, governance and scale.

University of Exeter senior impact fellow, Dr Jesse Abrams, stressed: "Pension capital is well suited to long-term challenges, but the market needs clearer data, stronger project pipelines and policy support.

"The Mansion House Accord creates real momentum; now we should use it to make the UK economy both more productive and more resilient."

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