EURO 2024 Copenhagen
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4003. Tracking-based green portfolio optimization

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. Diana Barro
Dept. of Economics, University of Venice
2. Marco Corazza
Department of Economics, Ca' Foscari University of Venice
3. Gianni Filograsso
Department of Economics, Ca' Foscari University

Abstract

In this contribution, we discuss how to handle financial and
sustainable investment goals, focusing on greenness and ESG features.
Among thematic investments, green and energy-related ones have emerged, capturing investors’ attention. This contribution introduces a novel ESG-focused tracking error model to provide ESG-tailored-made allocations. We consider two reference benchmarks, accounting for a financial target and an ESG one, respectively. The objective function results in a convex linear combination of the two goals where the combining parameter accounts for the investor’s financial and ESG preferences. A symmetric tracking error measure is proposed to replicate the financial benchmark passively, while an asymmetric measure is used to track and possibly outperform the thematic ESG benchmark.
Identifying the benchmarks for the two components represents a crucial
step and, jointly with the choice of the combining parameter, accounts
for the portfolio’s overall risk-return and ESG profiles. In the model,
the sustainability feature is handled not only with the presence of the
ESG benchmark but also with the introduction of dedicated constraints.
An application to the EUROSTOXX 600 equity market is presented and
discussed for different choices of the combining parameter, representing
different sustainability preferences and risk-return profiles.

Keywords

Status: accepted

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