2699. Sustainable Diversified Portfolios
Invited abstract in session TC-9: ESG investing and sustainable finance, stream OR in Finance and Insurance .
Tuesday, 12:30-14:00Room: Clarendon SR 2.01
Authors (first author is the speaker)
| 1. | Francesco Cesarone
|
| Department of Business Studies, Roma Tre University |
Abstract
The search for a portfolio maximizing an appropriate measure of diversification has recently gained popularity in portfolio selection due to favourable empirical results documented in the literature.
At the same time, an increasing number of investors are looking to align their financial goals with a desire to positively contribute to the environment and society. This trend has led to developing portfolio selection models that incorporate sustainability objectives.
We propose a novel bi-objective portfolio optimization model aiming at maximizing both portfolio sustainability and diversification.
More precisely, our approach seeks to simultaneously maximize the portfolio ESG (i.e., Environmental, Social, and Governance) score and a diversification ratio based on general risk measures, which extends the diversification measure introduced by Choueifaty and Coignard for volatility.
We conduct an extensive empirical analysis using real-world data from major stock markets to evaluate the out-of-sample performance of this sustainable diversification approach. Additionally, we assess how integrating sustainability influences financial performance by comparing ESG-diversification strategies with ESG-risk strategies across various risk metrics.
The overall trend emerging from our analysis indicates that the out-of-sample performance of the ESG-diversification strategies surpasses that of the corresponding ESG-risk strategies for each risk measure considered.
Keywords
- OR in Sustainability
- Financial Modelling
- Multi-Objective Decision Making
Status: accepted
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