Asset management with an ESG mandate

ArXiv ID: 2403.11622 “View on arXiv”

Authors: Unknown

Abstract

We investigate the portfolio frontier and risk premia in equilibrium when institutional investors aim to minimize the tracking error variance under an ESG score mandate. If a negative ESG premium is priced in the market, this mandate can reduce portfolio inefficiency when the return over-performance target is limited. In equilibrium, with asset managers endowed with an ESG mandate and mean-variance investors, a negative ESG premium arises. A result that is supported by empirical data. The negative ESG premium is due to the ESG constraint imposed on institutional investors and is not associated with a risk factor.

Keywords: Portfolio Optimization, ESG Investing, Tracking Error, Risk Premia, Equilibrium Models, Multi-Asset

Complexity vs Empirical Score

• Math Complexity: 7.5/10
• Empirical Rigor: 6.0/10
• Quadrant: Holy Grail
• Why: The paper employs dense mathematical modeling with portfolio optimization and equilibrium derivations, yet provides a concrete empirical analysis on US stocks to test the theoretical negative ESG premium and quantify the mean-variance improvement.

  flowchart TD
    A["Research Goal: Investigate portfolio frontier &amp; risk premia<br>under ESG tracking error mandates"] --> B["Methodology: Equilibrium Model<br>ESG-Mandated Investors vs Mean-Variance Investors"]
    B --> C["Key Assumption: ESG Constraint minimizes tracking error<br>Return target is limited"]
    C --> D["Computational Process: Derive equilibrium conditions<br>and asset pricing implications"]
    D --> E{"Key Finding: Negative ESG Premium"}
    E --> F["Outcome 1: Mandate reduces portfolio inefficiency<br>when ESG premium is negative"]
    E --> G["Outcome 2: Negative premium stems from<br>ESG constraints, not risk factors"]
    F --> H["Empirical Validation: Model supported by data"]
    G --> H