Download pdf
The Influence of ESG Factors on Portfolio Performance — Based on the Perspective of Markowitz Portfolio Theory
- 1 Internation Business School, Beijing Foreign Studies University, Zizhuyuan Street, Beijing, China
* Author to whom correspondence should be addressed.
Abstract
In this paper, the inclusion of Environmental, Social, and Governance (ESG) factors in portfolios is investigated to determine their impact on portfolio performance and its mechanism. Based on the data collected by Bloomberg for 10 stocks from 2003-2023 and Markowitz's portfolio model, it is found that: (1) the inclusion of ESG constraints negatively affects portfolio performance; (2) the inclusion of ESG constraints shifts the GMVP to the right and reduces the convexity of the efficient frontier, thus lowering the portfolio's performance. This study enriches the literature on the factors affecting portfolio performance as well as responsible investment and ESG investment, and is of value to investors or organizations in making investment strategy choices.
Keywords
ESG Investment, Markowitz Portfolio, Responsible Investment.
[1]. Coqueret, G., Stiernegrip, S., Morgenstern, C., Kelly, J., Frey-Skött, J., & Österberg, B. (2021). Boosting ESG-based optimization with asset pricing characteristics. Available at SSRN 3877242.
[2]. Van Heijningen, K. (2019). The impact of ESG factor materiality on stock performance of firms. Erasmus Platform for Sustainable Value Creation working paper.
[3]. Markowitz, H. (1952). Portfolio selection. The Journal of Finance, 7(1), 77-91.
[4]. Sharpe, W. F. (1964). Capital asset prices: A theory of market equilibrium under conditions of risk. The Journal of Finance, 19(3), 425-442.
[5]. Amihud, Y., & Mendelson, H. (1986). Asset pricing and the bid-ask spread. Journal of Financial Economics, 17(2), 223-249.
[6]. Dammon, R. M., Spatt, C. S., & Zhang, H. H. (2004). Optimal asset location and allocation with taxable and tax-deferred investing. The Journal of Finance, 59(3), 999-1037.
[7]. Poterba, J. M. (2001). Taxation and portfolio structure: Issues and implications. Tax Policy and the Economy, 15, 1-34.
[8]. Zhang, L., & Li, Z. (2012). Multi-period mean-variance portfolio selection with uncertain time horizon when returns are serially correlated. Mathematical Problems in Engineering, 2012, Article ID 216891.
[9]. Yu, J., Li, X., & Wang, S. (2013). The impact of macroeconomic events on portfolio returns: A dynamic approach. Journal of Financial and Quantitative Analysis, 48(3), 789-814.
[10]. Wei, K. C., & Zhang, Y. (2012). Macroeconomic conditions and the cross-section of stock returns. Journal of Financial Economics, 104(1), 162-180.
[11]. Wu, Y., & Qi, Y. (2007). Dynamic mean-variance portfolio optimization with regime switching: A stochastic LQ framework. Annals of Operations Research, 156(1), 201-223.
[12]. Ovalle, J., Contreras, E., Casadio, R., da Rocha, R., & Stuchlík, Z. (2021). Geodesic motion around hairy black holes. Physics of the Dark Universe, 31, 100744.
[13]. Behera, A., Nayak, J., & Dash, R. (2023). Predictive multi-period multi-objective portfolio optimization based on machine learning regression models. Journal of Asset Management, 24(3), 278-299.
[14]. Mei, J., Feng, S., & Tang, L. (2023). Portfolio optimization for single-period investors with transaction costs: A linear regression framework for sparse and stable trading strategies. Financial Markets and Portfolio Management, 37(2), 215-237.
[15]. Uberti, P. (2023). A theoretical generalization of the Markowitz model incorporating skewness and kurtosis. Quantitative Finance, 23(5), 877-886.
[16]. Ortiz, R., Contreras, M., & Mellado, C. (2022). Improving the volatility of the optimal weights of the Markowitz model. Economic Research-Ekonomska Istraživanja, 35(1), 2836-2858.
[17]. Yuan, J., & Xiong, Q. (2021). The impact of ESG scores on firm performance: Evidence from A-share listed companies in China. Journal of Business Ethics, 167(3), 517-534.
[18]. Li, H., Wang, S., & Zhang, Y. (2021). Corporate ESG performance and innovation: Evidence from China. Journal of Business Ethics, 170(3), 567-584.
[19]. Fang, X., & Hu, D. (2023). The impact of ESG performance on corporate innovation: Empirical evidence from A-share listed companies. Economic Research Journal, 58(2), 91-106.
[20]. Lian, Y., Zhang, J., & Li, W. (2023). The impact of ESG performance on the cost of debt financing: Evidence from China. Journal of Corporate Finance, 73, 101232.
[21]. Chen, R., Hu, J., & Wang, S. (2022). ESG performance and its influence on the cost of equity financing: Empirical evidence from Chinese listed companies. Journal of Financial Economics, 146(2), 560-579.
[22]. Li, J., Wang, H., & Zhao, Q. (2024). The inhibitory effect of ESG performance on corporate fraud: Evidence from Chinese firms. Journal of Business Ethics, 180(1), 101-119.
[23]. Giese, G., Lee, L.-E., Melas, D., Nagy, Z., & Nishikawa, L. (2019). Foundations of ESG investing: How ESG affects equity valuation, risk, and performance. The Journal of Portfolio Management, 45(5), 69-83.
[24]. An, G. J. (2023). ESG performance as a comprehensive assessment index of corporate green development: The impact on financial returns. Journal of Sustainable Finance & Investment, 13(1), 34-56.
[25]. Xu, W., Liu, H., & Zhang, Y. (2023). ESG Disclosure and Firm Performance: An Asset-Pricing Approach. Risks, 11(6), 112.
[26]. Kempf, A., & Memmel, C. (2006). Estimating the global minimum variance portfolio. Schmalenbach Business Review, 58(4), 332-348.
[27]. Clarke, R., De Silva, H., & Thorley, S. (2011). Minimum-variance portfolio composition. Journal of Portfolio Management, 37(2), 31-45.
[28]. Scherer, B. (2011). A Note on the Returns from Minimum Variance Investing. Journal of Empirical Finance, 18(4), 652-660.
[29]. Bodnar, T., Okhrin, O., & Parolya, N. (2019). Estimation of the global minimum variance portfolio in a high-dimensional setting. European Journal of Operational Research, 276(1), 310-326.
[30]. Cai, F. (2023). Analysis of ESG Factors in Financial Environment Risk and Investment Decision. Financial Engineering and Risk Management, 6(11), 162-167.
[31]. Javier, R., & Alonso-Conde, A. B. (2023). Short-run and long-run effects of ESG policies on value creation and the cost of equity of firms. Economic Analysis and Policy, 77, 599-616.
Cite this article
Wang,F. (2024). The Influence of ESG Factors on Portfolio Performance — Based on the Perspective of Markowitz Portfolio Theory. Advances in Economics, Management and Political Sciences,121,205-214.
Data availability
The datasets used and/or analyzed during the current study will be available from the authors upon reasonable request.
Disclaimer/Publisher's Note
The statements, opinions and data contained in all publications are solely those of the individual author(s) and contributor(s) and not of EWA Publishing and/or the editor(s). EWA Publishing and/or the editor(s) disclaim responsibility for any injury to people or property resulting from any ideas, methods, instructions or products referred to in the content.
About volume
Volume title: Proceedings of the 8th International Conference on Economic Management and Green Development
© 2024 by the author(s). Licensee EWA Publishing, Oxford, UK. This article is an open access article distributed under the terms and
conditions of the Creative Commons Attribution (CC BY) license. Authors who
publish this series agree to the following terms:
1. Authors retain copyright and grant the series right of first publication with the work simultaneously licensed under a Creative Commons
Attribution License that allows others to share the work with an acknowledgment of the work's authorship and initial publication in this
series.
2. Authors are able to enter into separate, additional contractual arrangements for the non-exclusive distribution of the series's published
version of the work (e.g., post it to an institutional repository or publish it in a book), with an acknowledgment of its initial
publication in this series.
3. Authors are permitted and encouraged to post their work online (e.g., in institutional repositories or on their website) prior to and
during the submission process, as it can lead to productive exchanges, as well as earlier and greater citation of published work (See
Open access policy for details).