Impact of ESG Objectives on a Portfolio

The authors offer a comprehensive analysis of the theoretical and practical implications of environmental, social, and governance (ESG) objectives within equity funds. Employing a methodology that minimizes the impact of constraints, the authors investigate the effects of integrating voluntary objectives based on specific ESG criteria. They consider objectives based on ESG scores, European Union taxonomy alignment, sustainable investment, and classifications linked to a net-zero framework (achieving, aligned, or aligning companies). The authors illustrate the effects through two distinct approaches. The first involves minimizing tracking error and helps in defining reasonable objectives according to the maximum tracking error that would be offered. The second, assuming an active portfolio with expected return and tracking error, aims to establish objectives that limit deviations in terms of both expected return and tracking error.