The efficiency cost of ESG investing: evidence from the Korean stock market

Sangki Lee and Dongyoup Lee

Journal of Derivatives and Quantitative Studies: ????????????, 2026, vol. 34, issue 2, 82-95

Abstract: This paper examines the loss in expected return associated with ESG investment constraints in the Korean stock market. Using ESG ratings from the Korea Corporate Governance Service and the framework of Pedersen et al. (2021), we construct ESG-efficient frontiers and estimate the potential loss that investors could suffer by adopting ESG investment principles which limit their portfolio choice. The real-world constraints, such as minimum portfolio-level ESG score requirements and negative screening, may lead to portfolio inefficiencies of at least 9%, a loss that is economically significant for institutional investors. Our findings indicate that ESG investing cannot achieve its goals when confined to a limited set of firms and initiatives for more companies to participate in embedding ESG into their business should come together. This reinforces the argument that universal adherence to ESG investment principles is critical for successful ESG-driven value creation.

Keywords: Constrained optimization; Efficient frontier; ESG investing; Institutional investors; Korean stock market (search for similar items in EconPapers)
Date: 2026
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.emerald.com/jdqs/article/34/2/82/13561 ... esting-evidence-from (text/html)
https://www.emerald.com/jdqs/article-pdf/34/2/82/1 ... s-01-2026-0003en.pdf (application/pdf)

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:eme:jdqspp:jdqs-01-2026-0003

DOI: 10.1108/JDQS-01-2026-0003

Access Statistics for this article

More articles in Journal of Derivatives and Quantitative Studies: ???????????? from Emerald Group Publishing Limited
Bibliographic data for series maintained by Emerald Support ().