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Quantitative Research

Portfolio Selection: Return, Risk and Sustainability

We investigate how a stock portfolio can be chosen to represent a significant improvement in terms of sustainability, while not sacrificing the financial performance.

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How to add sustainability to the portfolio formation exercise?

Sustainability is currently one of the main investment themes. Investment portfolios that include “sustainable” companies are widely considered to be less risky in the medium and long term.

Currently, equity investment portfolios are formed based on various considerations: diversification, risk-return tradeoff, exposure to various investment factors. Including sustainability parameters into all these ways of constructing portfolios is a non-trivial task.

Optimizing over the third dimension of sustainability (alongside return and risk) makes the problem even more complex and less robust, as there is also quite a lot of uncertainty about sustainability metrics of a company (depending on which data provider or which aspect of sustainable performance is used).

In this paper, we explore adding sustainability considerations at the stock selection stage.

  • 3
    Indices are covered in this research paper; the S&P 500, STOXX 600 and FTSE 100
  • 2010-2020
    The period covered for the historical returns in this paper
  • 2
    Strategies are tested in this research

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