Multi-objective selection of portfolios using ESG controversies

Abstract

[EN] It is increasingly common for investors to demand a certain degree of compliance and commitment to environmental, social and governance (ESG) variables in their investments, without renouncing to maximising returns with the minimum possible risk. In this paper, a multi-objective optimisation model applied to Dow Jones stocks is used to analyse the construction of portfolios taking into account the level of controversies of each asset in the portfolio. Controversies are associated with non-compliance by companies in ESG areas, either due to a lack of dedication of resources or a lack of control. The a priori expected positive relationship between higher profitability and low number of controversies is not confirmed. This means that those companies with the highest returns are not necessarily those with the less controversies and vice versa. This finding contradicts the results obtained by some previous studies and underline the importance of applying multi-objective models to properly account for investors¿ preferences, including ESG compliance.