The ESG Sacrifice

14 Pages Posted: 18 Dec 2019

See all articles by Alexander Joshua Michael Fish

Alexander Joshua Michael Fish

Cornell University - College of Engineering

DH Kim

Cornell University

Shankar Venkatraman

Cornell University - College of Engineering

Date Written: November 17, 2019

Abstract

Socially Responsible investing has become a key point of discussion within the past few years as society gravitates towards producing positive externalities. The topic remains greatly contested especially when considering the perspectives of Milton Friedman, who claimed the sole focus of any publicly-traded company is to generate positive growth and performance for its shareholders. One of the key questions this paper sought to explore was whether or not an investor would sacrifice a portfolio’s performance in order to achieve a socially responsible portfolio. ESG (Environmental, Social, and Governance) Scores from Bloomberg and historical performance on various securities in both the United States and Europe were collected in order to construct various portfolios. For some portfolios, the returns were adjusted based on ESG Scores in order for companies with better ESG scores to receive more weight when portfolio optimization techniques were applied. In addition, given that the returns of companies with better ESG scores tended to have highly correlated returns, alternative portfolio optimization techniques beyond the traditional Mean-Variance Optimization were used to enhance the portfolio’s performance. Ultimately, it was shown that minimal difference existed between the returns of the ESG-weighted portfolios and the non-weighted portfolios indicating an investor does not have to sacrifice financial performance to achieve a socially responsible investment portfolio.

Keywords: ESG, Socially Responsible Investing, Hierarchical Risk Parity, Mean Variance Optimization, Computational Finance, Financial Engineering

JEL Classification: G11

Suggested Citation

Fish, Alexander and Kim, DH and Venkatraman, Shankar, The ESG Sacrifice (November 17, 2019). Available at SSRN: https://ssrn.com/abstract=3488475 or http://dx.doi.org/10.2139/ssrn.3488475

Alexander Fish (Contact Author)

Cornell University - College of Engineering ( email )

Ithaca, NY 14853
United States

DH Kim

Cornell University ( email )

Ithaca, NY 14853
United States

Shankar Venkatraman

Cornell University - College of Engineering ( email )

Ithaca, NY 14853
United States

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