Nº 20-21: Optimal Strategies for ESG Portfolios

In a previous paper (Alessandrini and Jondeau, 2020), we demonstrate that in the last decade, investing according to screening based on environmental, social, and governance (ESG) criteria would have allowed investors to considerably improve the ESG quality of their portfolio without deteriorating its financial performance. However, a drawback of such a screening process is that it possibly generates undesirable regional, sectoral, and risk factor exposures. In this paper, we propose an investment strategy that maximizes the ESG quality of the portfolio while maintaining regional, sectoral, and risk factor exposures within stated limits. We provide evidence that such a portfolio would have produced a risk-adjusted performance at least as high as the standard MSCI benchmark for a wide range of ESG criteria and regions over the 2007-2018 investment period.