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The integration of environmental, social and governance criteria in portfolio optimization: An empirical analysis

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  • Guido Abate
  • Ignazio Basile
  • Pierpaolo Ferrari

Abstract

The increasing interest of investors in environmental, social, and governance (ESG) issues has prompted asset managers to develop new approaches to strategic asset allocation that can effectively integrate ESG factors into the optimization process. This study reviews the main techniques of the most recent ESG‐efficient portfolio optimization models. Furthermore, this study conducts an empirical investigation to identify the impact of ESG constraints on mean–variance efficient allocations, and extends existing approaches by incorporating a downside risk framework. Our findings reveal that social and combined ESG ratings mitigate the negative skewness of portfolio returns, and that ESG rating, environmental rating, social rating, and combined ESG rating allow the sustainable investor to incur lower transaction costs.

Suggested Citation

  • Guido Abate & Ignazio Basile & Pierpaolo Ferrari, 2024. "The integration of environmental, social and governance criteria in portfolio optimization: An empirical analysis," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 31(3), pages 2054-2065, May.
    • Handle: RePEc:wly:corsem:v:31:y:2024:i:3:p:2054-2065
    DOI: 10.1002/csr.2682
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    References listed on IDEAS

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