(Bloomberg) -- The main organization representing European pension funds says it’s still not clear how the industry should balance financial returns against a desire to do more environmental and social investing.

The lack of clarity means pension investors representing about $5 trillion may be putting less cash than they otherwise might into sustainable assets. That’s as the need for a decisive reallocation of capital toward planet-saving goals grows more urgent as global warming becomes increasingly deadly.

For now, “pension funds in Europe have a legal duty to invest in the long-term best interest of beneficiaries,” said Matti Leppala, secretary general of Brussels-based Pensions Europe. “So that’s the legal obligation. Whether going as far as possible to deliver on ESG goals would be in contradiction with that fiduciary goal is very difficult to say.”

How asset managers treat ESG risk will define the industry for years to come. In Europe, it’s already clear some have exaggerated their ethical investing claims as the sector is forced to review its ESG labeling amid a stricter regulatory framework. Meanwhile, hedge funds appear to be lagging behind on ESG investing, a development that hasn’t gone unnoticed by the pension industry.

For pension funds, the question of how much emphasis to place on client returns versus saving the planet has yet to be clarified. And the financial case for ESG remains contentious. So far this year, European ESG funds tracked by Bloomberg have returned 14%, which is about 4 percentage points less than the Stoxx Europe 600 index. U.S. and Japanese ESG funds also returned less than their comparable benchmarks.

Meanwhile, cash continues to gush into ESG assets. The market for environmental, social and governance investing is set to exceed $50 trillion by 2025, Bloomberg Intelligence estimates, which would equal more than a third of total global assets under management.

The European Commission is planning to ask the European Insurance and Occupational Pensions Authority (EIOPA) to look into how best to interpret the industry’s fiduciary duty in 2022, Leppala said.

It’s “an important issue that will possibly take the fiduciary issue further than what is currently legislated,” Leppala said.

At the same time, European asset managers have had to adapt to the world’s most ambitious regulatory framework designed to steer capital away from carbon emitters. The Sustainable Finance Disclosure Regulation, which took effect in March, forces managers to reveal how clean their portfolios are.

For the pension industry, it’s about defining “the question of a pension fund’s core fiduciary duty, which we always emphasize is to pay for pensions, even though ESG considerations are important.” Leppala said.

“So the question is whether double materiality, whereby the impact of external factors on investments and the impact of investments on external factors -- outside in and inside out -- will be integrated into the pension industry’s fiduciary duty,” Leppala said.

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