TY - CHAP
T1 - Inclusion of ESG Ratings in Optimization
AU - Lindquist, W. Brent
AU - Rachev, Svetlozar T.
AU - Hu, Yuan
AU - Shirvani, Abootaleb
N1 - Publisher Copyright:
© 2022, The Author(s), under exclusive license to Springer Nature Switzerland AG.
PY - 2022
Y1 - 2022
N2 - ESG scores have become the tool to quantify the social responsiveness of asset issuing entities. This chapter develops the framework of ESG-valuation, under which the value of a traded asset is based upon both its financial and ESG components. The relative weighting of the two is controlled by an ESG affinity parameter. Beginning with the concept of an ESG-valued return, application of modern portfolio theory leads to optimization in a three-dimensional space defined by expected ESG-value, an associated risk measure, and ESG score. Efficient frontiers, capital market lines, risk-minimizing and tangent portfolios are definable in this space, leading to optimized, ESG-valued portfolios. This approach is applied to the domestic REIT portfolio using ESG-valued conditional value-at-risk and dynamic optimization. The behavior of its ESG-valued efficient frontiers and the tangent portfolios derived from them are studied as the value of the affinity parameter changes.
AB - ESG scores have become the tool to quantify the social responsiveness of asset issuing entities. This chapter develops the framework of ESG-valuation, under which the value of a traded asset is based upon both its financial and ESG components. The relative weighting of the two is controlled by an ESG affinity parameter. Beginning with the concept of an ESG-valued return, application of modern portfolio theory leads to optimization in a three-dimensional space defined by expected ESG-value, an associated risk measure, and ESG score. Efficient frontiers, capital market lines, risk-minimizing and tangent portfolios are definable in this space, leading to optimized, ESG-valued portfolios. This approach is applied to the domestic REIT portfolio using ESG-valued conditional value-at-risk and dynamic optimization. The behavior of its ESG-valued efficient frontiers and the tangent portfolios derived from them are studied as the value of the affinity parameter changes.
UR - http://www.scopus.com/inward/record.url?scp=85142014209&partnerID=8YFLogxK
U2 - 10.1007/978-3-031-15286-3_13
DO - 10.1007/978-3-031-15286-3_13
M3 - Chapter
AN - SCOPUS:85142014209
T3 - Dynamic Modeling and Econometrics in Economics and Finance
SP - 227
EP - 245
BT - Dynamic Modeling and Econometrics in Economics and Finance
PB - Springer Science and Business Media Deutschland GmbH
ER -