Lipid biomarkers and their pertinent indices have been used as the most effective proxies for paleoclimate and paleoenvironment conditions. This paper conducts a systematic review on a variety of lipid biomarkers in aquatic sediments and water column that are used as proxies tracing paleoclimate and paleoenvironment information. The sources of those lipid biomarkers are autochthonous and/or allochthonous. General mechanisms of lipid biomarkers used as paleoclimate and paleoenvironment archives include characteristics of carbon chain distribution, temperature adaptation and combined temperature and humidity adaptation. Different lipid indices underpinned by the mechanisms are surrogates for the past precipitation, temperature and humidity as well as plant succession. We propose that the combined use of lipid indices and other biomarkers can expand the outlook of individual index, and provide a better understanding of paleoclimate and paleoenvironment reconstruction.