Asset management with an ESG mandate
Abstract: We investigate the portfolio frontier and risk premia in equilibrium when institutional investors aim to minimize the tracking error variance under an ESG score mandate. If a negative ESG premium is priced in the market, this mandate can reduce portfolio inefficiency when the return over-performance target is limited. In equilibrium, with asset managers endowed with an ESG mandate and mean-variance investors, a negative ESG premium arises. A result that is supported by empirical data. The negative ESG premium is due to the ESG constraint imposed on institutional investors and is not associated with a risk factor.
- European Commission (2021) Sustainable Finance Disclosure Regulation.
- Financial Conduct Authority (2023) Sustainability Disclosure Requirements (SDR) and investment labels.
- Boffo, R., and R. Patalano (2020), “ESG Investing: Practices, Progress and Challenges”, OECD Paris.
- Environmental, social and governance scores from Refinitiv (2022) https://www.refinitiv.com/content/dam/marketing/en_us/documents/methodology/refinitiv-esg-scores-methodology.pdf.
- Securities and Exchange Commission (2022) The Enhancement and Standardization of Climate-Related Disclosures for Investors.
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