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The cost of sustainability on optimal portfolio choices

  • Stefano Herzel
  • Marco Nicolosi
  • Catalin Starica

We examine the impact of including sustainability related constraints on optimal portfolio selection. Our analysis covers an investment set containing the components of the S&P500 index from 1993 to 2008. The optimizations are performed according to the classical mean-variance approach while sustainability constraints are introduced by eliminating from the investment pool those assets that do not comply to given social responsibility criteria (screening). We compare the efficient frontiers with and without screening. The analysis is performed on the three main dimensions of sustainability, namely Environmental, Social and Governance. We find that socially responsible screening implies a small loss in terms of Sharpe Ratio even though it has a strong impact on the market capitalization of the optimal port-folio. The spanning test shows that the ex-post differences between the two frontiers, when short selling is not allowed, are significant only in the case of Environmental screening

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Paper provided by Università di Perugia, Dipartimento Economia in its series Quaderni del Dipartimento di Economia, Finanza e Statistica with number 84/2011.

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Length: 32 pages
Date of creation: 01 Feb 2011
Date of revision:
Handle: RePEc:pia:wpaper:84/2011
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