Environmental-, Social-, and Governance-Oriented Pension Funds for Young Contributors: A Win–Win Option

Can young savers invest sustainably without sacrificing their retirement income?

Elisa Bocchialini, Demetrio Miloslavo Bova, Ilaria Colivicchi, and Federica Ielasi study sustainable pension funds for young contributors in their paper "Environmental-, Social-, and Governance-Oriented Pension Funds for Young Contributors: A Win–Win Option".

They run 10,000 Monte Carlo simulations of retirement outcomes using data from an Italian open-ended pension fund covering 2012 to 2022 to compare 3 conventional strategies against responsible ones.

Their main conclusions include:

• For the most cautious guaranteed line, the conventional version delivers a higher retirement value than its sustainable counterpart 52.6% of the time, for both men and women.
• For both the balanced and capitalized lines, the probability that the conventional version beats its sustainable equivalent slips just below 50%, so the sustainable option tends to overperform.
• The sustainable guaranteed line carries both a lower average value and lower volatility, while the sustainable balanced and capitalized lines carry both higher average values and higher volatility.
• The sustainable capitalized line, the one most heavily weighted toward equities, comes out ahead at every level of risk aversion once risk preferences are integrated into expected utility.
• A small preference for sustainability is enough to tip the balance: cautious young savers need a green sensitivity as low as 9% on a 0 to 1 scale to find the sustainable version equally attractive.
• The probability that the conventional balanced line beats its sustainable counterpart is 49.2% for men and 49.4% for women, and the gap stays about equally small across the other lines.

This paper shows defaulting younger members into sustainable balanced or capitalized lines need not cost them retirement income, and may even improve it.

By showing sustainable equity lines hold their own on risk-adjusted outcomes, it supports the reading that integrating sustainability risks is consistent with a prudent long-term mandate.

The strongest caveat is scope: the analysis rests on the investment lines of a single Italian open-ended pension fund observed from 2012 to 2022.

It also defines the sustainable portfolios solely through MSCI ESG indices rather than any alternative rating or screening approach.