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The ESG-efficient frontier under ESG rating uncertainty

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  • Chibane, Messaoud
  • Joubrel, Mathieu

Abstract

The impact of ESG score uncertainty on the risk-return profile of socially responsible optimal portfolios is analyzed. Focusing on the 109 largest French company stock prices between 2021 and 2024, uncertainty about ESG score is measured through the lens of investors’ assessment rather than from ESG rating agencies. The efficient frontier is generalized by introducing the degree of investors’ social responsibility to the classic Markowitz approach. Our results show that taking into account ESG uncertainty substantially degrades the trade-off between portfolio return and volatility for highly responsible and low-risk portfolios.

Suggested Citation

  • Chibane, Messaoud & Joubrel, Mathieu, 2024. "The ESG-efficient frontier under ESG rating uncertainty," Finance Research Letters, Elsevier, vol. 67(PB).
    • Handle: RePEc:eee:finlet:v:67:y:2024:i:pb:s1544612324009115
    DOI: 10.1016/j.frl.2024.105881
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    References listed on IDEAS

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    1. Olivier Ledoit & Michael Wolf, 2022. "The Power of (Non-)Linear Shrinking: A Review and Guide to Covariance Matrix Estimation [Design-Free Estimation of Variance Matrices]," Journal of Financial Econometrics, Oxford University Press, vol. 20(1), pages 187-218.
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    5. Pedersen, Lasse Heje & Fitzgibbons, Shaun & Pomorski, Lukasz, 2021. "Responsible investing: The ESG-efficient frontier," Journal of Financial Economics, Elsevier, vol. 142(2), pages 572-597.
    6. Luo, Deqing & Yan, Jingzhou & Yan, Qianhui, 2023. "The duality of ESG: Impact of ratings and disagreement on stock crash risk in China," Finance Research Letters, Elsevier, vol. 58(PB).
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    Cited by:

    1. Jérôme, Tiphaine & Poretti, Cédric, 2025. "Stock market reaction to the voluntary adoption of nature-related financial disclosure: An event study," Finance Research Letters, Elsevier, vol. 71(C).

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    More about this item

    Keywords

    Efficient Frontier; ESG consensus; ESG Uncertainty; Impact Investor;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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