Preference direction-based approach for sustainable portfolio construction

Adolfo Hilario-Caballero, Ana Garcia-Bernabeu, José V. Salcedo and David Pla-Santamaria

Journal of Sustainable Finance & Investment, 2026, vol. 16, issue 2, 467-489

Abstract: This paper aims to provide a novel framework for incorporating investor preferences that integrate sustainability criteria as a third objective in portfolio optimization problems. The approach is based on the concept of preference directions, changing the geometric properties of the objective space and guiding the direction of the multi-objective optimization. This reinterpretation of the dominance concept aids in obtaining the Pareto front solutions. Investors' preferences can be integrated before the optimization process without modifying the algorithm, or at the decision-making stage after obtaining the efficient frontier. We empirically test our approach’s performance on actual socially responsible funds and on the S&P 500 index. Our findings suggest that this approach provides a better understanding of ESG preference integration by refocusing the region of interest, facilitating more effective investor decision-making. The benefits of our approach include improved portfolio sustainable construction and a more comprehensive understanding of investor preferences in sustainable investing.

Date: 2026
References: Add references at CitEc
Citations:

Downloads: (external link)
http://hdl.handle.net/10.1080/20430795.2026.2645368 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:taf:jsustf:v:16:y:2026:i:2:p:467-489

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/TSFI20

DOI: 10.1080/20430795.2026.2645368

Access Statistics for this article

Journal of Sustainable Finance & Investment is currently edited by Dr Matthew Haigh

More articles in Journal of Sustainable Finance & Investment from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().