Abstract
We investigate how an investor’s preference for sustainable assets in the portfolio varies for differing levels of risk aversion. Using a sample of 411 publicly listed firms in the S&P 500, we calculate financial and sustainability returns, on which the investor’s utility depends. We approximate the investor’s preference by the exponential and s-shaped utility function and optimize with regard to the sustainability preference. We find that with increasing levels of risk aversion, both minimum-variance and maximum Sharpe ratio type investors seek to incorporate sustainable assets in the portfolio.
Subject
Management, Monitoring, Policy and Law,Renewable Energy, Sustainability and the Environment,Geography, Planning and Development,Building and Construction
Reference40 articles.
1. What do you think about climate finance?;Stroebel;J. Financ. Econ.,2021
2. EU (2022, September 01). Taxonomy: Final Report of the Technical Expert Group on Sustainable Finance. Available online: https://ec.europa.eu/info/sites/default/files/business_economy_euro/banking_and_finance/documents/200309-sustainable-finance-teg-final-report-taxonomy_en.pdf.
3. Responsible investing: The ESG-efficient frontier;Pedersen;J. Financ. Econ.,2021
4. Sustainable investing in equilibrium;Stambaugh;J. Financ. Econ.,2021
5. Safety first portfolio choice based on financial and sustainability returns;Dorfleitner;Eur. J. Oper. Res.,2012