The Trade-off Frontier for ESG and Sharpe Ratio: A Bootstrapped Double-Frontier Data Envelopment Analysis

Sabri Boubaker, T.D.Q. Le, R. Manita and Thanh Ngo

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Abstract: The trade-off between the returns and the risks associated with the stocks (i.e., the Sharpe ratio, SR) is an important measure of portfolio optimization. In recent years, the environmental, social, and governance (ESG) has increasingly proven its influence on stocks' returns, resulting in the evolvement from a two-dimensional (i.e., risks versus returns) into a multi-dimensional setting (e.g., risks versus returns versus ESG). This study is the first to examine this setting in the global energy sector using a (slacks-based measures, SBM) ESG-SR double-frontier double-bootstrap (ESG-SR DFDB) by studying the determinants of the overall ESG-SR efficiency for 334 energy firms from 45 countries in 2019. We show that only around 11% of our sampled firms perform well in the multi-dimensional ESG-SR efficient frontier. The 2019 average (in)efficiency of the global energy sector was 2.273, given an efficient level of 1.000. Besides the differences in the firm's input/output utilization (regarding their E, S, G, and SR values), we found that the firm- (e.g., market capitalization and board characteristics) and country-level characteristics (e.g., the rule of law) have positive impacts on their ESG-SR performance. Such findings, therefore, are essential not only to the (responsible) investors but also to managers and policymakers in those firms/countries. \textcopyright 2023, The Author(s).

Keywords: Bootstrap data envelopment analysis; Double frontier; Environmental; social; and governance (ESG); Portfolio optimization; Sharpe ratio (search for similar items in EconPapers)
Date: 2023
Note: View the original document on HAL open archive server: https://normandie-univ.hal.science/hal-04434028v1
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Published in Annals of Operations Research, 2023, ⟨10.1007/s10479-023-05506-z⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-04434028

DOI: 10.1007/s10479-023-05506-z

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