2022/06/06 by D. Lauria, W. Brent Lindquist, Lauria, Davide +5
Economics, Econometrics and Finance · #Capital Investment and Risk Analysis #Climate Change Policy and Economics #FOS: Economics and business #Financial Markets and Investment Strategies #Portfolio Management (q-fin.PM) #Pricing of Securities (q-fin.PR)
paper · pdf · doi:10.48550/arxiv.2206.02854
openalex publication_date 2022/06/06 · openalex created_date 2025/10/10 · openalex updated_date 2026/07/28
ESG ratings provide a quantitative measure for socially responsible investment. We present a unified framework for incorporating numeric ESG ratings into dynamic pricing theory. Specifically, we introduce an ESG-valued return that is a linearly constrained transformation of financial return and ESG score. This leads to a more complex portfolio optimization problem in a space governed by reward, risk and ESG score. The framework preserves the traditional risk aversion parameter and introduces an ESG affinity parameter. We apply this framework to develop ESG-valued: portfolio optimization; capital market line; risk measures; option pricing; and the computation of shadow riskless rates.