Boosting ESG-Based Optimization With Asset Pricing Characteristics
2021
This article investigates the usefulness of combining traditional factors with ESG data when building optimal equity portfolios. Our contribution departs from the traditional literature by focusing on allocations designed to adjust benchmark policies. We allow compositions to be embedded in a general factor framework in which firm characteristics are the main drivers of the portfolio weights. In line with much of the literature, our results suggest that it is feasible to improve the ESG score of a portfolio without it being detrimental to its out-of-sample performance. However, pure sustainable attributes alone do not allow to fulfil this objective: they need to be boosted by non-ESG predictors to deliver their full potential.
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