City Research Online

Abstract

This research evaluates the integration of environmental, social, and governance (ESG) considerations in long-term retirement planning, with a particular focus on their relevance for retail investors. In chapter 2, we use a historical backtesting approach to demonstrate that sustainable investment approaches can outperform investment in a conventional, market capitalisation-weighted equity portfolio in terms of pension accumulation and overall financial performance. These results therefore support the case for integrating sustainable investment principles into portfolio management.

Integrating Environmental, Social, and Governance (ESG) factors into investment strategies offers a potential way to align sustainability goals with long-term financial performance. Chapter 3 looks at this issue in the context of retirement by evaluating the potential benefits of ESG integration into a retirement portfolio over an extended investment horizon. A long-term investment model is developed incorporating Refinitiv ESG scores under multiple sustainable approaches and comparing their performance with a traditional index tracker across major equity markets (FTSE 100, FTSE 250, and S&P 500). The analysis replicates the asset allocation glide paths of 17 UK Master Trust Funds and 27 US Target Date Funds to capture realistic investment behaviour. The results indicate that ESG-screened approaches can enhance portfolio performance and stability over the long run, although the extent of improvement varies across different integration methods.

Chapter 4 assesses the potential long-term implications of integrating Environmental, Social, and Governance (ESG) scores into retirement portfolios for an individual US investor. We compare the performance of a traditional equity portfolio with two sustainable ESG-screened portfolios: a market-capitalisation-weighted version and an ESG-weighted version. Our main finding is that the traditional approach to investing outperforms both the sustainable portfolios in terms of retirement security. These results imply that there may be a cost to investing sustainably. If an individual is willing to bear that cost, we find that a sustainable portfolio where the weights are derived from the ESG scores provides better future retirement outcomes than one where the weights are determined by the market capitalisation of the ESG-screened constituent stocks.

Finally, in chapter 5, we examine the role of sustainable investing within the frameworks of a finite-horizon life-cycle model as well as the classic Merton consumption–investment xii problem. We construct two sustainable versions of the S&P 500 by screening stocks using their ESG score: a market capitalization-weighted sustainable portfolio and an ESG score-weighted sustainable portfolio. Historical time series of returns are constructed by dynamically screening stocks, and geometric Brownian motions are then fitted to the time series. We find that risk-adjusted returns on sustainable portfolios decline significantly only when sustainability requirements are very stringent. Tail risk reduces the more sustainable a portfolio is. In both the life-cycle model and the Merton setting, we find that optimal consumption declines only very slightly as sustainability preferences strengthen, as long as these preferences remain moderate. Wealth accumulation and annuitization remain stable with moderately sustainable portfolios. The ESG-weighted portfolio performs better than the market capitalization-weighted portfolio in terms of consumption and wealth accumulation over the life cycle.

Publication Type:	Thesis (Doctoral)
Subjects:	H Social Sciences > HB Economic Theory H Social Sciences > HD Industries. Land use. Labor > HD61 Risk Management H Social Sciences > HG Finance
Departments:	Bayes Business School > Bayes Business School Doctoral Theses Bayes Business School > Faculty of Actuarial Science & Insurance Doctoral Theses

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