Integrating socially responsible criteria in modern portfolio theory via a tradeoff between focusing on the data of stock returns and their ESG scoring

Tomer Shushi

Chapter 7 in Handbook of ESG Investing, 2026, pp 132-144 from Edward Elgar Publishing

Abstract: Socially responsible portfolio selection has recently gained much attention. Environmental, social, and governance (ESG) scores offer a means to quantify a company's contributions to both the environment and society. We propose novel frameworks for optimal portfolio selection that provide a tradeoff between entirely focusing on the data of each of the stocks in the portfolio and entirely focusing on their ESG scores. To obtain the optimal weights as part of the portfolio selection process, a multivariate constrained optimization problem needs to be solved. We propose an explicit solution for such a problem and examine it using numerical illustrations for the mean-variance and tail-value-at-risk measures. These illustrations allow us to gain insights into the models. For example, under the proposed model, the investor's higher risk aversion parameter implies a lower contribution of socially responsible preferences to the computed optimal weights.

Keywords: Modern portfolio theory; ESG; Socially responsible investing; Impact investing; Sustainable investing (search for similar items in EconPapers)
Date: 2026
ISBN: 9781035322770
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