ESG and Downside Risks: Implications for Pension Funds

31 Pages Posted: 7 Jul 2021

See all articles by Zacharias Sautner

Zacharias Sautner

Frankfurt School of Finance & Management; European Corporate Governance Institute (ECGI)

Laura T. Starks

University of Texas at Austin - Department of Finance

Date Written: June 30, 2021

Abstract

Due to their long-term horizons, pension funds face enhanced exposures to the long-lived effects of many ESG risks. Moreover, given the potential consequences of being underfunded, pension funds are particularly exposed to ESG-related downside risks, especially those related to climate change. We discuss the implications of these risks and provide evidence on institutional investors’ perspectives on climate-related downside risks and how these risks are priced in financial markets. We also document how institutional investors address climate risks in the investment process, with a focus on the role of engagement versus divestment.

Keywords: Institutional investors, pension funds, ESG risks, climate risks, downside risks

JEL Classification: G11, G23, G32, Q54

Suggested Citation

Sautner, Zacharias and Starks, Laura T., ESG and Downside Risks: Implications for Pension Funds (June 30, 2021). Wharton Pension Research Council Working Paper No. 2021-10, Available at SSRN: https://ssrn.com/abstract=3879170 or http://dx.doi.org/10.2139/ssrn.3879170

Zacharias Sautner (Contact Author)

Frankfurt School of Finance & Management ( email )

Adickesallee 32-34
Frankfurt am Main, 60322
Germany

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Laura T. Starks

University of Texas at Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States
512-471-5899 (Phone)
512-471-5073 (Fax)

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