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Asset management with an ESG mandate

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  • Azzone, Michele
  • Barucci, Emilio
  • Stocco, Davide

Abstract

We investigate the portfolio frontier and risk premia in equilibrium when institutional investors aim to minimize the tracking error variance and to attain a certain ESG score (ESG mandate). Provided that a negative ESG premium is priced by the market, we show that an ESG mandate can reduce the mean–variance inefficiency of the portfolio frontier when the asset manager targets a limited over-performance return with respect to the benchmark. In equilibrium, with mean–variance investors and asset managers endowed with an ESG mandate, a negative ESG premium arises if the mandate is binding for asset managers. The negative ESG premium is due to the ESG constraint (institutional investors over-invest in virtuous ESG stocks). We find empirical evidence of such a negative premium in the US market.

Suggested Citation

  • Azzone, Michele & Barucci, Emilio & Stocco, Davide, 2026. "Asset management with an ESG mandate," Journal of Banking & Finance, Elsevier, vol. 184(C).
    • Handle: RePEc:eee:jbfina:v:184:y:2026:i:c:s0378426626000142
    DOI: 10.1016/j.jbankfin.2026.107640
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    Cited by:

    1. Michele Azzone & Carlo Bechi & Gabriele Sbaiz, 2026. "Temperature Anomalies and Climate Physical Risk in Portfolio Construction," Papers 2604.11143, arXiv.org.

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    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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