A1533
Title: ESG-constrained portfolio choice with estimation risk
Authors: Chengguo Weng - University of Waterloo (Canada) [presenting]
Abstract: Environmental, social, and governance (ESG) investing has emerged as a global trend, offering sustainable benefits to investors and financial institutions. An ESG constraint is integrated into the classical mean-variance optimization framework while accounting for the estimation risk associated with the first two moments of asset returns. It begins by examining the problem in the absence of estimation risk and deriving the optimal portfolio characterized by three-fund separation. To address estimation risk, a combined three-fund portfolio is proposed, with components based on a plug-in ESG portfolio. The optimal combination coefficients are derived by maximizing the expected out-of-sample mean-variance utility. Extensive simulations and empirical analysis demonstrate that the combined portfolio outperforms the plug-in ESG portfolio in terms of certainty-equivalent return. Furthermore, a comparative performance analysis is provided between the two ESG-constraint types involved.
