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Black-Litterman and ESG Portfolio Optimization

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  • Aviv Alpern
  • Svetlozar Rachev

Abstract

We introduce a simple portfolio optimization strategy using ESG data with the Black-Litterman allocation framework. ESG scores are used as a bias for Stein shrinkage estimation of equilibrium risk premiums used in assigning Black-Litterman asset weights. Assets are modeled as multivariate affine normal-inverse Gaussian variables using CVaR as a risk measure. This strategy, though very simple, when employed with a soft turnover constraint is exceptionally successful. Portfolios are reallocated daily over a 4.7 year period, each with a different set of hyperparameters used for optimization. The most successful strategies have returns of approximately 40-45% annually.

Suggested Citation

  • Aviv Alpern & Svetlozar Rachev, 2025. "Black-Litterman and ESG Portfolio Optimization," Papers 2511.21850, arXiv.org.
    • Handle: RePEc:arx:papers:2511.21850
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    References listed on IDEAS

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