Sustainable Investments: Principles Without Sacrifice? The Cost and Impact of Choosing a Sustainable Portfolio

Agnethe Stenersen Lie & Guro Slettvold Larsgaard

Student thesis: Master thesis

Abstract

The market for sustainable investments has developed from being a small niche to a more sophisticated market. As a consequence, investors evaluate the performance of investments in light of multiple preferences that go beyond the classical financial perspective. The purpose of this thesis is to highlight the development in the sustainable investment market by quantifying the cost and impact of choosing a sustainable portfolio. Moreover, by applying both the classical mean-variance and the mean-variance stochastic goal programming framework, this thesis looks beyond the classical financial perspective. This thesis acknowledges that the preferences for sustainability among investors varies, and therefore, introduces three different investor types: The traditional-, the value driven- and the responsible profit seeking investors. The two latter types are characterised as sustainable investors. The frameworks are used to optimise portfolios based on yearly ESG screens combined with the individual assets included in the S&P 500 index. As a result, three different frontiers are created for the different investor types each year in the period from 2013 to 2016. The optimal portfolio is selected based on the location of the tangency portfolio on these frontiers, and a three-year buy-andhold strategy are applied to evaluate the performance of these portfolios. Although the findings showed that the traditional portfolios outperformed the sustainable portfolios in terms of risk and return, the risk-adjusted performance relative to the benchmark suggested otherwise. Choosing the sustainable portfolios involved paying a premium relative to the traditional portfolio in 2013 and 2014. However, in 2015 and 2016, sustainable portfolios no longer involved a cost. On the contrary, the findings suggested that the sustainable portfolios rather came at a discount relative to the traditional investors and that the most sustainable portfolio performed closest to the benchmark. Moreover, the sustainable portfolios indeed showed to have an impact towards meeting the UN Sustainable Development Goals and exhibited the same development as the performance of the portfolios.

EducationsMSc in Applied Economics and Finance, (Graduate Programme) Final Thesis
LanguageEnglish
Publication date2019
Number of pages125