A Three-Pronged Sustainability-Oriented Markowitz Model : Disruption in the fund selection process?

University essay from KTH/Skolan för industriell teknik och management (ITM)

Abstract: Since the term ESG was coined in 2005, the growth of sustainable investments has outpaced the overall asset management industry. A lot of research has been done with regards to the link between sustainability and financial performance, despite the fact that there is a lack of transparency in sustainability of listed companies. This thesis breaks down the word sustainability into two di↵erent categories, and in turn eleven di↵erent parameters. The result is the term Q score which represents a company’s sustainability. The purpose is to increase transparency in the fund selection process for asset managers. Further, a multiobjective optimization problem is solved to analyze the relationships between return, risk and sustainability. The main subject is that accommodating sustainability as a third parameter in addition to return and risk modifies the fund selection process. The result indicates that the relationships between sustainability, return and risk follow the ecient market hypothesis, implying that an investor would have to sacrifice risk and return in order to achieve higher sustainability. With that said, the results indicated that the sacrifice is relatively small, and that there are a number of sustainable portfolios that perform well. Moving on, the reporting of ESG company data is still lacking. For this reason, this master thesis acts as a precursor for any future development within the field.

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