Impact of ESG Rating on Portfolio Diversification Benefits Among US Fintech Stocks and Cryptocurrencies

This study aims to analyze portfolio optimization strategies for US ESG-Fintech stocks while considering the diversification role of cryptocurrencies. Using daily data from 2016 to 2023, we categorized Fintech stocks into those with low ESG scores (first quartile) and those with high-ESG scores (fourth quartile). We proposed three portfolio strategies to assess the diversification effects of combining ESG stocks and cryptocurrencies through optimization framework in different market states. The first strategy compared only high and low ESG portfolios. The second strategy incorporated Bitcoin into both portfolios. In the third strategy, we integrated several cryptocurrencies (Bitcoin, Dogecoin, Ethereum, and Litecoin) to assess the full diversification effect. The study used both Markowitz’s mean standard deviation and mean-value-at-risk (VaR) approaches under normal distribution and then complemented the findings with the mean-CVaR framework. The results indicated that the high-ESG portfolio consistently outperforms the low ESG portfolio in terms of returns and resilience to market turbulence. The second strategy revealed that adding Bitcoin improved portfolio performance, resulting in a better Sharpe ratio. In contrast, the third strategy showed a significant increase in returns and risks. The mean-VaR analysis was consistent with these results. However, the CVaR approach offered slightly more efficient optimization results by capturing the extreme tails, especially during periods of crisis. This study provided new insights into the potential of combining ESG-Fintech stocks and cryptocurrencies to optimize portfolio allocation. It highlighted Bitcoin’s diversifying role and its ability to strengthen the resilience of ESG-Fintech portfolios, providing valuable insights for investors seeking sustainable and risk-adjusted returns.