EURO 2024 Copenhagen
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3826. Managing ESG Ratings Disagreement in Sustainable Portfolio Selection

Invited abstract in session WC-2: Portfolio Optimization: Models and Methods, stream OR in Banking, Finance and Insurance: New Tools for Risk Management.

Wednesday, 12:30-14:00
Room: Glassalen (building: 101)

Authors (first author is the speaker)

1. Manuel Luis Martino
Business Studies, Roma Tre University

Abstract

The inclusion of sustainable goals in the portfolio selection process may have an actual impact on financial portfolio performance. Environmental, Social, and Governance (ESG) indices provided by the rating agencies are generally considered good proxies for the performance in sustainability of an investment, as well as, appropriate measures for Socially Responsible Investments in the market. In this framework, the lack of alignment between ratings provided by different agencies is a crucial issue that inevitably undermines the robustness and reliability of these measures. Indeed, the ESG rating disagreement may produce conflicting information, implying a difficulty for the investor in the portfolio ESG evaluation. This may cause underestimation or overestimation of the market opportunities for a sustainable investment. In this paper, we deal with a multicriteria portfolio selection problem taking into account risk, return, and ESG criteria. We present a new approach to manage the ESG ratings disagreement between different agencies. We propose a nonlinear optimization model for our three-criteria portfolio selection problem. We show that it can be reformulated as an equivalent convex quadratic program by exploiting the k-sum optimization strategy. An extensive empirical analysis of the performance of this model is provided on real-world financial data sets.

Keywords

Status: accepted

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