ESG Factors in Financial Investment: Analysis and Application to Portfolio Optimization
DOI:
https://doi.org/10.54691/a4a24x25Keywords:
ESG investment, portfolio optimization, Markowitz Model, Index Model, efficient frontier.Abstract
The concept of ESG (Environment, Social, and Governance) represents a corporate development philosophy and sustainable investment practice that places significant emphasis on environmental, social, and governance factors. In recent years, as understanding of sustainable investment concepts has been deepened, the application of this concept in international financial markets and portfolio construction has become increasingly widespread and in-depth. Whether ESG leads to a decrease in portfolio returns or an increase in volatility has also become a topic of widespread concern. The applicability of ESG factors in asset pricing models can help advance traditional asset pricing theory and provide theoretical support for guiding capital flows toward enterprises and projects aligned with sustainable development, thereby promoting social welfare improvement. In this paper, 10 stocks from industries such as technology, finance, and consumer goods were selected (NVDA, CSCO, INTC, GS, USB, TD CN, ALL, PG, JNJ, CL) to study the application of leverage and ESG factors in the Markowitz Model and Index Model, and to explore the impact of ESG factors on the return and risk performance of investment portfolios. The research data results indicate that ESG constraints indeed reduce the return of investment portfolios in the scenario of minimizing the portfolio’s risk, with risk factor attributes. However, in the efficient risky portfolio, ESG constraints represent an increase in portfolio returns, and an increase in volatility does exist in financial markets.
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