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How Do Investors Value Sustainability? A Utility-Based Preference Optimization

Author

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  • Aydin Aslan

    (Faculty of Business and Economics, TU Dortmund University, Otto-Hahn-Str. 6, 44227 Dortmund, Germany
    These authors contributed equally to this work.)

  • Peter N. Posch

    (Faculty of Business and Economics, TU Dortmund University, Otto-Hahn-Str. 6, 44227 Dortmund, Germany
    These authors contributed equally to this work.)

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.

Suggested Citation

  • Aydin Aslan & Peter N. Posch, 2022. "How Do Investors Value Sustainability? A Utility-Based Preference Optimization," Sustainability, MDPI, vol. 14(23), pages 1-15, November.
    • Handle: RePEc:gam:jsusta:v:14:y:2022:i:23:p:15963-:d:988701
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