Green Portfolio: Optimization under environmental constraints

Abstract: The aim of this thesis is to compare traditionally optimized equity portfolios to an alternative which takes the economic effects of environmental damage in to consideration. The comparison between the portfolios are made by their composition, in terms of economic sectors, and their characteristics, such as performance, size and risk. As climate considerations have increasingly become a given theme in public agenda, the interest in investing sustainably has increased. This thesis studies 199 S&P 500 constituents over a nine-year period, using conventional portfolio theory along with a method that utilizes an environmental damage function – a Green Portfolio. The latter enables investors to grasp the environmental and subsequent economic impact of their capital allocation. The results of this study have displayed varied alignment to those of previous research.