2020/06/21 by Adolfo Hilario-Caballero, Ana Garcı́a-Bernabeu, Hilario-Caballero, A. +4
Decision Sciences · #Risk and Portfolio Optimization
paper · pdf · doi:10.48550/arxiv.2006.11888
Sustainable finance, which integrates environmental, social and governance\n(ESG) criteria on financial decisions rests on the fact that money should be\nused for good purposes. Thus, the financial sector is also expected to play a\nmore important role to decarbonise the global economy. To align financial flows\nwith a pathway towards a low-carbon economy, investors should be able to\nintegrate in their financial decisions additional criteria beyond return and\nrisk to manage climate risk. We propose a tri-criterion portfolio selection\nmodel to extend the classical Markowitz mean-variance approach in order to\ninclude investors preferences on the portfolio carbon risk exposure as an\nadditional criterion. To approximate the 3D Pareto front we apply an efficient\nmulti-objective genetic algorithm called ev-MOGA which is based on the concept\nof e-dominance. Furthermore, we introduce an a posteriori approach to\nincorporate the investor's preferences into the solution process regarding\ntheir sustainability preferences measured by the carbon risk exposure and\nhis/her loss-adverse attitude. We test the performance of the proposed\nalgorithm in a cross section of European SRI open-end funds to assess the\nextent to which climate related risk could be embedded in the portfolio\naccording to the investor's preferences.\n