Abstract
We propose a multi-objective approach for portfolio selection, which allows investors to consider not only return and downside risk criteria but also to include environmental, social and governance (ESG) scores in the investment decision-making process. Owing to the uncertain environment of portfolio selection, the return and ESG score of each asset are considered as independent L-R power fuzzy variables. To make the model more realistic, we take budget, floor ceiling and cardinality constraints into account. In order to select the optimal portfolio along the efficient frontier, we apply the Sortino ratio in a credibilistic environment. The subsequent empirical application uses a data set from Bloomberg's ESG Data in combination with US Dow Jones Industrial Average data. The experimental results show that the proposed model offers promising results for socially responsible investors seeking ethical and sustainability goals beyond the return-risk trade-off and its ability to beat the benchmark.
Highlights
Multiple criteria decision making is a method which pursues making choices in the presence of multiple criteria, goals or objectives [1]
Experimental Results we illustrate the usefulness of the MDRSR model with a real-world empirical study using a data set from Bloomberg's ESG Data in combination with data from companies included in the Dow Jones Industrial Average (DJIA)
This paper contributes to the Socially responsible investment (SRI) literature by proposing a novel fuzzy multi-objective approach that optimises the expected return, the expected ESG score and the downside risk of a given portfolio, subject to real-world constraints such as budget, floor-ceiling and cardinality
Summary
Multiple criteria decision making is a method which pursues making choices in the presence of multiple criteria, goals or objectives [1]. This discrepancy is mainly due to the methodological choices made by researchers in the different studies [43] It could reflect the complex relationship between SRI and financial performance, which is based on both company corporate social responsibility (CSR) performance and market characteristics (e.g., portfolio management and influence of investors). Due to the above consideration, this paper extends current knowledge by employing the Bloomberg ESG Disclosure Score in order to measure the level of social responsibility of each asset To our knowledge, this approach is one of the first uses of Bloomberg’s ESG score in an academic study on SR portfolio investment. On the basis of the SRI literature review, the aim and contribution of this paper is two-fold: First, we present a multi-objective approach for the portfolio selection model, which allows investors to consider return and downside risk criteria and ESG performance as part of the investment decision-making process.
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