Sustainable Multi-Manager Portfolio Optimization under Factor Model Uncertainty

Benoit Begoc, Christophe Boucher (), Patrick Kouontchou () and Sessi Tokpavi ()
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Benoit Begoc: EconomiX - EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique, ABN AMRO
Christophe Boucher: EconomiX - EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique, ABN AMRO
Patrick Kouontchou: CEREFIGE - Centre Européen de Recherche en Economie Financière et Gestion des Entreprises - UL - Université de Lorraine, ABN AMRO
Sessi Tokpavi: LEO - Laboratoire d'Économie d'Orleans [2022-...] - UO - Université d'Orléans - UT - Université de Tours - UCA - Université Clermont Auvergne, ABN AMRO

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Abstract: Beyond environmental and ethical objectives, the performance of sustainable funds has been shown to vary significantly over time due to their exposure to identifiable investment factors such as growth and quality. The authors introduce a straightforward allocation method of sustainable funds that smooths performance over market cycles by capping unwanted style risks and boosting genuine outperformance (alpha). This is accomplished through an empirical strategy that accounts for uncertainty in factor models when estimating fund sensitivities and abnormal returns, combined with an optimization program that requires no tuning parameters and limits portfolio rebalancing. Empirical applications to a European universe—including Sustainable Finance Disclosure Regulation Articles 8 and 9 environmental, social, and governance (ESG) funds—demonstrate that the proposed active strategy outperforms many widely used passive ESG indexes, as well as competing active and smart beta approaches. These results also hold over an extended universe of both sustainable and nonsustainable funds, underscoring the robustness of the methodology.

Date: 2025-12-31
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Published in Journal of portfolio management, 2025, 52 (3), pp.255-279. ⟨10.3905/jpm.2025.1.790⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-05505171

DOI: 10.3905/jpm.2025.1.790

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