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How to improve the ESG profile of portfolios while keeping a similar risk-adjusted return

Author

Listed:
  • Kopp, Antoine

    (Pictet Asset Management)

  • Barber, Dominic

    (Pictet Asset Management)

  • Cottet, Rémy

    (Pictet Asset Management)

  • Susinno, Gabriele

    (Pictet Asset Management)

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. Namely, Banks and Pharmaceuticals are replaced by Insurers and Real Estate Investment Trusts, in addition to Healthcare providers. 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.

Suggested Citation

  • Kopp, Antoine & Barber, Dominic & Cottet, Rémy & Susinno, Gabriele, 2021. "How to improve the ESG profile of portfolios while keeping a similar risk-adjusted return," Journal of Risk Management in Financial Institutions, Henry Stewart Publications, vol. 15(1), pages 51-71, December.
    • Handle: RePEc:aza:rmfi00:y:2021:v:15:i:1:p:51-71
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    More about this item

    Keywords

    ESG; portfolio construction; risk-adjusted return; sustainable investing; socially responsible investing; convex optimisation;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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