Abstract Due to their long-term horizons, pension funds face enhanced exposures to the long-lived effects of many environmental, social, and governance (ESG) risks. Moreover, given the potential consequences of being underfunded, pension funds are particularly exposed to ESG-related downside shocks, especially those related to climate change. In particular, with wealth protection being an important consideration for fiduciaries, pension managers have a strong need to identify and address ESG-related downside risks. We discuss the implications of these risks, provide evidence on institutional investors’ perspectives on climate-related downside risks, and discuss how these risks are priced in financial markets. We also document how institutional investors address climate risks in the investment process, with a focus on the role of engagement versus divestment.