Quantifying Sustainability: An Empirical Analysis of ESG Integration in CEE Pension Funds

This study explores the integration of environmental, social, and governance (ESG) factors into investment decisions by pension funds in Romania, within the broader context of Central and Eastern Europe (CEE). The research emphasizes the increasing global recognition of sustainable and responsible investing, underscored by significant regulatory frameworks such as the European Union’s Sustainable Finance Disclosure Regulation (SFDR), EU Taxonomy, and the Corporate Sustainability Reporting Directive (CSRD). These regulations mandate transparency and accountability, aiming to mitigate greenwashing and foster sustainable business practices. The study particularly examines Romania’s unique regulatory and economic environment, which presents both challenges and opportunities for ESG integration. Using a dataset comprising the equity holdings of Romanian pension funds and ESG ratings from Sustainalytics, the research employs statistical analyses, including correlation coefficients and regression models, to investigate the relationship between ESG performance and investment decisions. The findings reveal that while there is a moderate correlation between ESG scores and portfolio performance, the explanatory power of these scores is limited, indicating that other factors significantly influence financial performance. The analysis highlights that ESG integration in Romania’s pension funds is still evolving, with data quality, measurement challenges, market maturity, and regulatory complexities impacting the observed outcomes. The study underscores the importance of long-term value creation through ESG integration, despite the short-term statistical insignificance observed. It suggests that ongoing improvements in data quality, longer-term analyses, and a comprehensive understanding of regulatory frameworks are essential for advancing ESG practices in emerging markets like the CEE region. The research calls for future studies to explore the long-term impacts of ESG integration, the role of varying ESG rating methodologies, and comparative analyses across different regulatory environments to identify best practices and policy implications. This study contributes to the growing body of literature on ESG investing in emerging markets, providing insights into the current state and future directions of sustainable investment practices in the region.