Abstract
Over the last few decades, growing attention to the topic of social responsibility has affected financial markets and institutional authorities. Indeed, recent environmental, social, and financial crises have inevitably led regulators and investors to take into account the sustainable investing issue; however, the question of how Environmental, Social, and Governance (ESG) criteria impact financial portfolio performances is still open. In this work, we examine a multi-objective optimization model for portfolio selection, where we add to the classical Mean-Variance analysis a third non-financial goal represented by the ESG scores. The resulting optimization problem, formulated as a convex quadratic programming, consists of minimizing the portfolio variance with parametric lower bounds on the levels of the portfolio expected return and ESG. We provide here an extensive empirical analysis on five datasets involving real-world capital market indexes from major stock markets. Our empirical findings typically reveal the presence of two behavioral patterns for the 16 Mean-Variance-ESG portfolios analyzed. Indeed, over the last fifteen years we can distinguish two non-overlapping time windows on which the inclusion of portfolio ESG targets leads to different regimes in terms of portfolio profitability. Furthermore, on the most recent time window, we observe that, for the US markets, imposing a high ESG target tends to select portfolios that show better financial performances than other strategies, whereas for the European markets the ESG constraint does not seem to improve the portfolio profitability.
Highlights
Responsible Investment (SRI), called “ethical investment” or “sustainable investment”, is typically defined as a decision-making approach that integrates environmental, social, and ethical features into the investment process (Sandberg et al [1] and Martini [2]).Over the past decades, the popularity and significance of Socially Responsible Investment (SRI) have considerably and rapidly grown
The aim of this study is to investigate the in-sample and out-of-sample effects of the ESG rating on the portfolio selection process and to analyze its impact in terms of portfolio profitability and risk, giving a look at the SRI regulatory framework developments over years
Our aim is to include to the Mean-Variance model the maximization of the portfolio expected ESG, that is defined as ESGP ( x ) = ∑nk=1 ESGk xk, where ESGk denotes the expected ESG score assigned to asset k; for the Mean-VarianceESG approach, a portfolio x is preferred to a portfolio y if and only if μ P ( x ) ≥ μ P (y), σP2 ( x ) ≤ σP2 (y) and ESGP ( x ) ≥ ESGP (y), with at least one strict inequality
Summary
Responsible Investment (SRI), called “ethical investment” or “sustainable investment”, is typically defined as a decision-making approach that integrates environmental, social, and ethical features into the investment process (Sandberg et al [1] and Martini [2]). The aim of this study is to investigate the in-sample and out-of-sample effects of the ESG rating on the portfolio selection process and to analyze its impact in terms of portfolio profitability and risk, giving a look at the SRI regulatory framework developments over years. For this purpose, we consider a multi-objective portfolio optimization model, where we add to the classical Mean-Variance analysis a third non-financial goal represented by the ESG score.
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