FENG Ling, LIN Yu, ZHONG Qunchao, WU Weiping
Over the past few years, an ever-increasing number of investors have embraced the integration of environmental, social, and governance (ESG) factors within their decision-making processes. As a result, the growing popularity of investment models with the ESG investment philosophy. Recognizing the limitations of existing decision models based on this philosophy, which neglect the left-tail loss management demands of socially responsible investors, this paper comprehensively considers return volatility and losses caused by low probability extreme events. Specifically, we introduce a hybrid risk measure, combining variance and spectral risk measures, that can effectively manage both symmetric and asymmetric risks. The objective is to shape a more favorable probability distribution of terminal wealth. Then we apply this hybrid risk measure to the sustainable investment decision-making process and construct a mean-risk portfolio selection model with the hybrid risk measure and cone constraints. By doing so, this model reflects investors' social values while effectively characterizing two distinct risk features under realistic trading constraints. To determine optimal sustainable investment strategies and outline the efficient frontier, we convert the model into a quadratic-constrained convex programming problem. The findings from the numerical analysis demonstrate that the hybrid risk measure model enhances financial performance without sacrificing portfolio sustainability when short selling is prohibited, in comparison to the mean-variance model with the ESG investment philosophy. Moreover, it is observed that a positive correlation between sustainable investment performance and investors' inclination toward controlling downside risks. It is essential to note that the implementation of ESG negative screening strategies results in reduced diversification of the optimal portfolio. This reduction subsequently increases investment risk, thereby adversely impacting the performance of sustainable investments. Additionally, the weight parameters reflecting investors' risk aversion significantly impact sustainable investment performance. As a result, prudent consideration should be given to the adoption of ESG negative screening strategies, along with the selection of an appropriate weight function aligned with the investors' risk aversion, to optimize both financial and social benefits.
