How to Improve the ESG Profile of Portfolios While Keeping a Similar Risk-Adjusted Return

Abstract

This paper identifies the potential to improve ESG credentials of a given reference portfolio whilst broadly maintaining risk-adjusted return characteristics, hence anchoring the portfolio to a better ESG profile. ‘Improving’ in this case means allocating a higher weight to better ESG stocks according to the variables employed. Using different MSCI benchmarks as reference portfolios, the research shines light on interesting subsector dynamics in the ESG-tilting process.The paper provides significant findings for investment managers in the context of ever-increasing pressure to ‘do good whilst doing well’.
The opinions expressed in this paper are solely those of the authors.

Keywords: ESG, portfolio construction, risk-adjusted return, sustainable investing, socially responsible investing, convex optimisation

JEL Classification: C00,Q00,O00