Environmental, social, and governance investing and sustainability of pension funds: Evidence from the organisation for economic cooperation and development countries

Various stakeholders have pressed pension funds (PFs) to refocus their investment strategies on environmental, social and governance (ESG) principles; however, limited attention has been devoted to the impact of sustainable investing on PF assets. Using data from the Organisation for Economic Cooperation and Development (OECD) countries from 1999 to 2022 and using the generalised method of moment estimation, we find that the growth of pension assets in countries with high sustainability scores has slowed since the sustainable development goals were adopted. The impact is more pronounced in the European Union (EU) countries. This finding is noteworthy because EU countries are known for their leadership in sustainable development. Capital market returns are the primary channel through which sustainable investing contributes to reduced pension asset growth. Our findings provide policymakers with important information about the unintended costs of addressing climate risk through exclusionary PF policies. In OECD countries with low fertility rates and ageing populations, the cost exacerbates the sustainability challenges that PFs face. • We study sustainable investing (SI) effects on pension funds (PF). • SI practices have lowered PF assets in countries with high sustainability scores. • The SI effects are more pronounced in the EU than non-EU countries. • Capital market returns are the channel through which SI affects PF assets. • Significant unintended transition costs hurt the growth of PFs.