Asset Allocation with Non-Pecuniary ESG Preferences: Efficiently Blending Value with Values

Vol. 21, No. 3, 2023
Douglas M. Grim, Giulio Renzi-Ricci and Anna Madamba

The explosion of interest in ESG investing has yielded several quantitative frameworks that seek to incorporate non-pecuniary ESG preferences into conventional multi-asset portfolio optimization models. In this article, the authors specify an accessible approach that allows investors to simultaneously optimize for both pecuniary preferences (such as systematic, factor, and active risk aversion) and non-pecuniary ESG tastes in a way that avoids “one size fits all” solutions and arbitrary portfolio decisions. Using case studies, they demonstrate that the strength of non-pecuniary desires along with both pecuniary expectations and risk preferences are important determinants of the optimal portfolio choice.