University of Twente Student Theses
Doing Well, While Doing Good: ESG Screening and the Mitigation of Unfavorable Exposures from the Perspective of an Institutional Investor.
Evers, A.H.M. (2022) Doing Well, While Doing Good: ESG Screening and the Mitigation of Unfavorable Exposures from the Perspective of an Institutional Investor.
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| Abstract: | Investors are increasingly worrying about the tradeoff between sustainable investing and portfolio performance. There is a widespread belief that in order to accomplish the former, you must compromise on the latter. This research shows that exclusion (negative screening) based on ESG scores on the MSCI ACWI universe throughout the period of 2013-2021 leads to a considerable improvement in ESG quality of the portfolio while increasing absolute (risk-adjusted) performance. However, the screening leads to a deterioration of the relative performance through tracking error and the information ratio, as well as undesirable regional and sectoral exposures. The results are plotted for every screened portfolio (5% screened, 10% screened to 95% screened) against various performance measures to provide (institutional) investors a resourceful insight on the implications of screening. We design a quadratic optimization method for monthly portfolio rebalancing that minimizes the ex-ante tracking error relative to the MSCI ACWI, while maintaining similar regional and sectoral exposures as well as keeping portfolio turnover within stated limits. We ultimately show that optimization is most effective starting from the 65% exclusion portfolio but that there will always remain a tradeoff between relative and absolute performance. Still, it is possible to construct a high-quality ESG portfolio with a significantly smaller subset of constituents than the original benchmark, while maintaining exposure close to the benchmark and not underperforming in terms of risk-adjusted returns. |
| Item Type: | Essay (Master) |
| Faculty: | BMS: Behavioural, Management and Social Sciences |
| Subject: | 31 mathematics, 83 economics |
| Programme: | Industrial Engineering and Management MSc (60029) |
| Link to this item: | https://purl.utwente.nl/essays/93793 |
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