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A novel approach to sustainable mean-variance portfolio optimization: Accounting for ESG-related uncertainty

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  • Müller, Lukas
  • Joubrel, Mathieu

Abstract

We develop a robust mean–variance portfolio optimization model that incorporates Environmental, Social, and Governance (ESG) risks under Knightian uncertainty. In this approach, ellipsoidal uncertainty sets constructed from ESG scores capture ambiguity in the assets’ expected returns. Unlike standard ESG portfolio models that impose direct ESG constraints or explicitly integrate the maximization of sustainability into the problem, our formulation naturally shifts the portfolio towards more sustainable assets as ESG uncertainty increases.

Suggested Citation

  • Müller, Lukas & Joubrel, Mathieu, 2025. "A novel approach to sustainable mean-variance portfolio optimization: Accounting for ESG-related uncertainty," Finance Research Letters, Elsevier, vol. 85(PC).
    • Handle: RePEc:eee:finlet:v:85:y:2025:i:pc:s1544612325013145
    DOI: 10.1016/j.frl.2025.108056
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    1. T. Di Matteo & L. Riso & M. G. Zoia, 2026. "A Novel approach to portfolio construction," Papers 2602.03325, arXiv.org.

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    Keywords

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    JEL classification:

    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • M14 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Corporate Culture; Diversity; Social Responsibility
    • Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics

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