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On Imposing ESG Constraints of Portfolio Selection for Sustainable Investment and Comparing the Efficient Frontiers in the Weight Space

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  • Yue Qi
  • Xiaolin Li

Abstract

Sustainable investment is typically fulfilled by screening of environmental, social, and governance (ESG); the screening strategies are practical and expedite sustainable-investment development. However, the strategies typically build portfolios by a list of good stocks and ignore portfolio completeness. Moreover, there has been limited literature to study the portfolio weights of sustainable investment in the weight space. In such an area, this article contributes to the literature as follows: We extend a conventional portfolio-selection model and impose ESG constraints. We analytically solve our model by computing the efficient frontier and prove that the frontier’s portfolio weights all lie on a ray (half line). By the ray structure, we prove that portfolio selection for sustainable investment and conventional portfolio selection fundamentally possess highly different portfolio weights. Overall, our aim is comparing the portfolio weights of sustainable portfolio selection and of conventional portfolio selection; the comparison result has been unknown until now. The result is important for sustainable investment because portfolio weights are the foundation of portfolio selection and investments. We sample the component stocks of Dow Jones Industrial Average Index from 2004 to 2013 and find that our efficient frontier and the conventional efficient frontier are quite similar. Therefore, in plain financial language, investors can still obtain risk-return performance similar to conventional portfolio selection after imposing strong ESG requirements, although the portfolio weights can be totally different. The result is both an endorsement and a reminder for sustainable investment.

Suggested Citation

  • Yue Qi & Xiaolin Li, 2020. "On Imposing ESG Constraints of Portfolio Selection for Sustainable Investment and Comparing the Efficient Frontiers in the Weight Space," SAGE Open, , vol. 10(4), pages 21582440209, December.
    • Handle: RePEc:sae:sagope:v:10:y:2020:i:4:p:2158244020975070
    DOI: 10.1177/2158244020975070
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    2. Mario Bajo & Emilio Rodríguez, 2022. "Integrating the carbon footprint into the construction of corporate bond portfolios," Working Papers 2226, Banco de España.
    3. Rocco Caferra & Pasquale Marcello Falcone & Andrea Morone & Piergiuseppe Morone, 2022. "Is COVID-19 anticipating the future? Evidence from investors’ sustainable orientation," Eurasian Business Review, Springer;Eurasia Business and Economics Society, vol. 12(1), pages 177-196, March.
    4. Hans Lööf & Maziar Sahamkhadam & Andreas Stephan, 2023. "Incorporating ESG into Optimal Stock Portfolios for the Global Timber & Forestry Industry," Journal of Forest Economics, now publishers, vol. 38(2), pages 133-157, June.
    5. Kumar Manaswi & Archana Singh & Vikas Gupta, 2023. "Building a Better Future with Sustainable Investments: Insights from Recent Research," Indian Journal of Human Development, , vol. 17(2), pages 320-343, August.
    6. Francisco Salas-Molina & David Pla-Santamaria & Juan A. Rodriguez-Aguilar, 2023. "An analytic derivation of the efficient frontier in biobjective cash management and its implications for policies," Annals of Operations Research, Springer, vol. 328(2), pages 1523-1536, September.

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