How Do Investors Value Sustainability? A Utility-Based Preference Optimization

Aydin Aslan () and Peter N. Posch
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Aydin Aslan: Faculty of Business and Economics, TU Dortmund University, Otto-Hahn-Str. 6, 44227 Dortmund, Germany
Peter N. Posch: Faculty of Business and Economics, TU Dortmund University, Otto-Hahn-Str. 6, 44227 Dortmund, Germany

Sustainability, 2022, vol. 14, issue 23, 1-15

Abstract: We investigate how an investor’s preference for sustainable assets in the portfolio varies for differing levels of risk aversion. Using a sample of 411 publicly listed firms in the S&P 500, we calculate financial and sustainability returns, on which the investor’s utility depends. We approximate the investor’s preference by the exponential and s-shaped utility function and optimize with regard to the sustainability preference. We find that with increasing levels of risk aversion, both minimum-variance and maximum Sharpe ratio type investors seek to incorporate sustainable assets in the portfolio.

Keywords: ESG; socially responsible investing; expected utility theory; portfolio theory (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:gam:jsusta:v:14:y:2022:i:23:p:15963-:d:988701

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