Portfolio Optimization for Sustainable Investments

62 Pages Posted: 16 Nov 2022

See all articles by Armin Varmaz

Armin Varmaz

University of Applied Sciences Bremen; School of International Business Bremen

Christian Fieberg

City University of Applied Sciences

Thorsten Poddig

University of Bremen

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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

Suggested Citation

Varmaz, Armin and Fieberg, Christian and Poddig, Thorsten, Portfolio Optimization for Sustainable Investments. Available at SSRN: https://ssrn.com/abstract=4278621 or http://dx.doi.org/10.2139/ssrn.4278621

Armin Varmaz (Contact Author)

University of Applied Sciences Bremen ( email )

Neustadtswall 30
Bremen, 28199

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

School of International Business Bremen ( email )

Werderstr. 73
Bremen, Bremen 28199

Christian Fieberg

City University of Applied Sciences ( email )

Werderstr. 73
Bremen, DE Bremen 28199

Thorsten Poddig

University of Bremen ( email )

Universitaetsallee GW I
Bremen, D-28334

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