How important is green awareness in energy investment decisions? An environmentally-based rebalancing portfolio study

Abstract

This paper empirically studies the financial performance of energy asset allocation strategies under green and brown preferences. We assume that green investors and traditional or brown energy investors behave differently in their investment decisions. Thus, our optimal portfolio choice is developed in several steps for each energy investor profile and for each monthly rebalancing period. First, energy companies are screened based on Environmental (E) rating quartiles. We construct two categories formed via those companies rated above the first quartile, Q1, and below the third quartile, Q4. Second, for each category, a dynamic minimum variance (MV) problem is optimized based on univariate and multivariate GARCH models. Then, we assess the performance of the whole investment strategies posed. This paper contributes to the financial literature by providing evidence that not only does green investment help reduce the carbon footprint, but also that there is a risk-return spread between green and brown energy investment, adding value for the environmentally concerned investor.