Sustainable Finance and ESG Investing: A Theoretical-Practical Approach from Portfolio Management

The climate emergency and its devastating consequences have become one of the most prominent risks in the twenty-first century. Dozens of cities are suffering from numerous floods, strong storms and weather phenomena with a severe impact on the population and their infrastructures. The need for change in our production and consumption patterns emerges as an action that must be taken now, without delaying it any longer. Focused on energy consumption and production, the energy transition explains the paradigm shift that we must carry out to reduce the negative impacts produced by the current fossil fuel-based system. A shift to renewable energies will help us to mitigate these consequences. However, this transition must be accompanied by a greater effort in the financial sector to finance and invest in this kind of activities. With this premise, the objective of this chapter is to theoretically introduce the problem and empirically test the financial viability of investing in renewable energy companies vs. fossil fuel companies. With a sample of 112 global companies, a set of portfolios is analyzed through portfolio optimization and Monte Carlo simulation for a period from 01/01/2022 to 08/16/2023. The results show that the most optimal portfolios in terms of the risk-return trade-off continue to consist mostly of fossil fuel companies. The financial markets continue to advocate a traditional view, with no real change in their investment decisions. This implies a lack of real action in finance to truly be part of the change, advocating more investment in environmentally responsible companies.