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Satisfying exclusions in portfolio construction: The ESG case
Journal of Risk Management in Financial Institutions,
15
(2),
142-154
(2022)
Abstract
In this paper, we show that quantitative portfolio construction techniques can deal with ‘reasonable’ constraints and deliver most of the expected (ie before constraints) value-added. To do so, we use the case of a hypothetical environmental, social and corporate governance (ESG) investor who chooses to not invest in companies typically excluded for ESG reasons (eg weapons manufacturing, nuclear energy generation, tobacco or high carbon intensity) back in the late 1980s. While satisfying ESG objectives, we capture the market’s exposure using several portfolio constructions such as pro-rata cap-weighting and minimum tracking. We also capture other ‘styles’ that could mimic exposures some asset owners want to be exposed to, such as value or momentum. Our results are helpful to deliver an appropriate, risk-controlled investment experience to asset owners who must integrate externally defined constraints in their long-only equity investments.
Keywords: ESG; constraints; optimisation; Markowitz; equities
The full article is available to subscribers to the journal.
Author's Biography
Amel Bentata is a Senior Quantitative Analyst. Prior to joining Pictet Asset Management SA (PAM) in 2021, she spent six years at Bluecrest Capital Management in the systematic equities and rates team. Prior to that, she was a credit quantitative analyst at Société Générale. Amel holds a PhD in mathematics from the University Paris 6, a Master’s in mathematics from the University Paris 6 and a Diploma in mathematics from the Ecole Normale Supérieure de Paris-Ulm.
Laurent Nguyen is the Team Leader of Quest (QUantitative Equities STrategies) at Pictet, where he has worked for 23 years. As at end of June 2021, the team manages US$5bn in assets. Laurent has been managing environmental, social and corporate governance (ESG) best-in-class mandates and funds since 1998. He holds a Master’s degree in financial economics from the University of Geneva and has been a teaching and research assistant in the fields of portfolio construction and options theory.
Citation
Bentata, Amel and Nguyen, Laurent (2022, March 1). Satisfying exclusions in portfolio construction: The ESG case. In the Journal of Risk Management in Financial Institutions, Volume 15, Issue 2. https://doi.org/10.69554/NLDP4184.
© Henry Stewart
Publications LLP
Publications LLP