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Satisfying exclusions in portfolio construction: The ESG case

Author

Listed:
  • Bentata, Amel

    (Senior Quantitative Analyst, Pictet Asset Management SA, Switzerland)

  • Nguyen, Laurent

    (Team Leader, Pictet Asset Management SA, Switzerland)

Abstract

In this paper, we show that quantitative portfolio construction techniques can deal with ‘reasonable’ constraints and deliver most of the expected (ie before constraints) value-added. To do so, we use the case of a hypothetical environmental, social and corporate governance (ESG) investor who chooses to not invest in companies typically excluded for ESG reasons (eg weapons manufacturing, nuclear energy generation, tobacco or high carbon intensity) back in the late 1980s. While satisfying ESG objectives, we capture the market’s exposure using several portfolio constructions such as pro-rata cap-weighting and minimum tracking. We also capture other ‘styles’ that could mimic exposures some asset owners want to be exposed to, such as value or momentum. Our results are helpful to deliver an appropriate, risk-controlled investment experience to asset owners who must integrate externally defined constraints in their long-only equity investments.

Suggested Citation

  • Bentata, Amel & Nguyen, Laurent, 2022. "Satisfying exclusions in portfolio construction: The ESG case," Journal of Risk Management in Financial Institutions, Henry Stewart Publications, vol. 15(2), pages 142-154, March.
    • Handle: RePEc:aza:rmfi00:y:2022:v:15:i:2:p:142-154
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    More about this item

    Keywords

    ESG; constraints; optimisation; Markowitz; equities;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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