Schemes must factor in climate change risk to their asset allocation strategies over the next two decades or face losing trillions of pounds, Mercer warns.
Research from the consultant - commissioned by a group leading schemes including BT Pension Scheme - anticipated climate change policy will account for 10% of a pension fund's portfolio risk by 2030, with costs hitting about £5trn by 2030.
Mercer said funds could combat the growing policy risk headache by diversifying their portfolios away from equities and bonds into "climate sensitive" assets.
These include infrastructure, real estate, private equity, agriculture land, timberland and sustainable assets. Mercer forecasts a portfolio trying for a 7% return could cancel out the climate change risk by allocating 40% of its funds to these assets.