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3D Investing: Jointly Optimizing Return, Risk, and Sustainability

2023; RELX Group (Netherlands); Linguagem: Inglês

10.2139/ssrn.4670534

1556-5068

David Blitz, Mike Y. Chen, Clint Howard, Harald Lohre,

Financial Markets and Investment Strategies

Traditional mean-variance portfolio optimization is based on the premise that investors only care about risk and return. However, some investors also have non-financial objectives such as sustainability goals. We show how the traditional approach can readily be extended to mean-variance-sustainability optimization and explain why this 3D investing approach is ex-ante Pareto-optimal. We illustrate its efficacy empirically in several studies, including carbon footprint and SDG objectives. Importantly, we highlight conditions under which a 3D optimization approach is superior to a naïve 2D approach augmented with sustainability constraints.