Resumo

Among ESG investments strategies are negative screening (removing companies from the portfolio), positive screening (best-in-class selection), ESG integration (adding ESG factors to the investment objectives), active ownership (corporate engagement) and impact investing (specific sectors and projects investments). This work presents a comparison between ESG integration and best-in-class strategies for Brazilian stocks and it has the objective of helping investors to include ESG concerns in the portfolio optimization problem.

The objective of this paper is to compare environmental, social and governance (ESG) investment strategies. We compare integration and best-in-class strategies for Brazilian stock portfolios. The integration strategy uses IBOVESPA and ESG data from Sustainalytics and the best-in-class portfolios are generated from the ISE and ICO2 indices from the Brazilian stock exchange B3. This work uses an optimization routine built in R language to evaluate which strategy has best expected risk adjusted returns and ESG performance.

Socially responsible investing (SRI) has long been perceived as a ex-ante costly investment style. Indeed, this practice was essentially based on the exclusion of some industries that do not satisfy some social or environmental norms, that may sometimes perform better than others over time (Alessandrini and Jondeau, 2020). However, there isn't a consensus about whether considering ESG factors results in different financial returns, in a positive or negative way, or even if it is neutral (ex post performance).

The traditional inputs of the portfolio optimization problem are the covariance matrix and the expected returns on investments. In this paper, we use an additional input i.e. an ESG score provided by the Sustainalytics, for the ESG integration strategy. The higher the score, the riskier the asset, regarding ESG. Sustainalytics is a company that rates the ESG risk (will be referred as ESG score) of listed companies based on their environmental, social and corporate governance performance. In order to determine which stocks are the best in their class we used ISE and ICO2 indexes from B3.

The integration strategy is more cost efficient than the best-in-class approach. We cannot say that the ESG efficiency of the integration strategy is better or worse than the best-in-class strategy. Indeed, the filtering boundary is a relevant parameter in this comparison. In the simulations we may achieve better ESG resilience with the integration strategy. Regarding maximum and minimum allocation constraints, the minimum allocation constraint reduces ESG resilience in the simulations and the effect of the maximum allocation constraint is not clear.

This paper presents ESG strategies for investments in stocks based on a resampling methodology. Portfolios are generated by an optimization process combined with a Monte Carlo simulation using a multivariate normal distribution of returns. The methodology presented in this paper differs from many presented in the literature, since it is not necessary to optimize portfolios by modifying the utility function. Integration strategies have a better ex ante risk adjusted returns.

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