Sustainable Portfolio Selection — An Approach To Impact Modelling
Read Dr. Caroline Loebhard and Dr. Jennifer Rasch’s article in full on the Developer Portal.
In our previous article ‘Sustainable Portfolio Selection — Markowitz goes ESG’, we describe the importance of ecological, social and governance (ESG) aspects of financial services and give a first approach, how ESG measures can be included into portfolio selection strategies. Basically, ESG-ratings of financial instruments, like for instance Refinitiv’s ESG Scores, can be mathematically treated similarly to mean historical returns. As a result, one can balance estimates for risk and/or return with ESG-ratings and compute portfolios of financial instruments with a high average ESG Score as well as good risk measures.
In this follow-up article, we adhere to the fact that high ESG-ratings can have a different impact in different industrial sectors or countries. We will show, how impact data can be integrated into portfolio selection models with ESG-awareness.
Overview
In this tutorial, you can learn
- to get business sector information from Refinitiv and to plot the sector distribution of a weighted portfolio;
- how to balance volatility as a risk measure with portfolio returns and ESG-measures in portfolio selection;
- about the basics of impact modeling, and how sector impact information can be included into portfolio selection.
We build on the steps in Sustainable Portfolio Selection — Markowitz goes ESG, where basically a classical Markowitz model is employed, but returns are replaced by ESG-ratings. This tutorial is structured as follows:
- Step 1 Get data via eikon, prepare the basic data structures.
- Step 2 Build the minimum volatility portfolio (MVP) and analyze its business sector distribution.
- Step 3 Build a portfolio, where volatility is balanced with return and also the ESG-score.
- Step 4 Build a model for impact-ESG and utilize it to select a portfolio, where volatility is balanced with return and the impact-ESG-score.
Don’t hesitate to read the full article on the Developer Portal.
