A feasibility study of climate portfolio construction strategies

Abstract

Investments in assets related to positive environmental, social, and governance (ESG) have grown, attracting interest from both academics and investment fund practitioners. In this work, we explore various methods for integrating ESG factors into portfolio construction, assessing their feasibility. We address three key questions. First, what are potential benefits and challenges of incorporating ESG factors into portfolio strategies? We compare our results to an equally weighted benchmark to assess the impact of ESG integration on portfolio performance. Second, how does performance vary across different portfolio optimization techniques? By exploring various optimization approaches, we identify the most effective strategies for constructing climate-resilient portfolios. Finally, does performance differ across countries and/or regions? Our study focuses its analysis on North American (S&P 500 Top 50) and European Union (EU STOXX 50) markets. Through this investigation, we examine the portfolio integration of ESG factors and the impact of country/region-specific characteristics on climate portfolio performance. This study contributes by introducing an ensemble portfolio methodology to ESG integration and providing a comparative cross-regional analysis. Our findings show that the effectiveness of ESG integration depend on the portfolio optimization framework, the portfolio sustainability choice, and the underlying market. Although no single strategy dominates across all settings, the proposed ensemble approach provides the best performance by balancing sustainability objectives with diversification and risk-adjusted returns across regions.