Portfolio Optimization for Sustainable Investments

62 Pages Posted: 4 Jun 2021 Last revised: 15 Nov 2022

See all articles by Armin Varmaz

Armin Varmaz

University of Applied Sciences Bremen; School of International Business Bremen

Christian Fieberg

University of Bremen

Thorsten Poddig

University of Bremen

Multiple version iconThere are 2 versions of this paper

Date Written: October 4, 2022

Abstract

In mean-variance portfolio optimization, factor models can accelerate computation, reduce input requirements, facilitate understanding and allow easy adjustment to changing conditions more effectively than full covariance matrix estimation. In this paper, we develop a factor model-based portfolio optimization approach that takes into account aspects of the environment, social responsibility and corporate governance (ESG). Investments in assets related to ESG have recently grown, attracting interest from both academic research and investment fund practice. Various literature strands in this area address the theoretical and empirical relation among return, risk and ESG. Our portfolio optimization approach is flexible enough to take these literature strands into account and does not require large-scale covariance matrix estimation. An extension of our approach even allows investors to empirically discriminate among the literature strands. A case study demonstrates the application of our portfolio optimization approach.

Keywords: portfolio optimization, sustainable investment, investor preferences

JEL Classification: G11, G12, G23, M14, Q5

Suggested Citation

Varmaz, Armin and Fieberg, Christian and Poddig, Thorsten, Portfolio Optimization for Sustainable Investments (October 4, 2022). Available at SSRN: https://ssrn.com/abstract=3859616 or http://dx.doi.org/10.2139/ssrn.3859616

Armin Varmaz (Contact Author)

University of Applied Sciences Bremen ( email )

Neustadtswall 30
Bremen, 28199
Germany

HOME PAGE: http://www.hs-bremen.de/internet/de/hsb/struktur/mitarbeiter/varmaz/

School of International Business Bremen ( email )

Werderstr. 73
Bremen, Bremen 28199
Germany

Christian Fieberg

University of Bremen ( email )

Max-von-Laue-Stra├če 1
Bremen, DE Bremen D-28359
Germany

HOME PAGE: http://www.fiwi.uni-bremen.de

Thorsten Poddig

University of Bremen ( email )

Universitaetsallee GW I
Bremen, D-28334
Germany

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