3D Investing: Jointly Optimizing Return, Risk, and Sustainability

David Blitz, Mike Chen, Clint Howard and Harald Lohre

Financial Analysts Journal, 2024, vol. 80, issue 3, 59-75

Abstract: Traditional mean-variance portfolio optimization is based on the premise that investors only care about risk and return. However, some investors also have non-financial objectives such as sustainability goals. We show how the traditional approach can readily be extended to mean-variance-sustainability optimization and explain why this 3D investing approach is ex-ante Pareto-optimal. We illustrate its efficacy empirically in several studies, including carbon footprint and sustainable development goal objectives. Importantly, we highlight conditions under which a 3D optimization approach is superior to a naïve 2D approach augmented with sustainability constraints.

Date: 2024
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DOI: 10.1080/0015198X.2024.2335142

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