Paper: arXiv 2403.11622

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.

Complexity vs Empirical Score

  • Math Complexity: 7.5/10
  • Empirical Rigor: 6.0/10
  • Quadrant: Holy Grail — high math complexity, high empirical rigor

Why this score: The paper employs dense mathematical modeling with portfolio optimization and equilibrium derivations, yet provides a concrete empirical analysis on US stocks to test the theoretical negative ESG premium and quantify the mean-variance improvement.

Research Flowchart

  flowchart TD
  A["Research Goal: Investigate portfolio frontier &amp; risk premia<br>under ESG tracking error mandates"] --> B["Methodology: Equilibrium Model<br>ESG-Mandated Investors vs Mean-Variance Investors"]
  B --> C["Key Assumption: ESG Constraint minimizes tracking error<br>Return target is limited"]
  C --> D["Computational Process: Derive equilibrium conditions<br>and asset pricing implications"]
  D --> E{"Key Finding: Negative ESG Premium"}
  E --> F["Outcome 1: Mandate reduces portfolio inefficiency<br>when ESG premium is negative"]
  E --> G["Outcome 2: Negative premium stems from<br>ESG constraints, not risk factors"]
  F --> H["Empirical Validation: Model supported by data"]
  G --> H

Cited References (47)

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1 of 47 cited works are in the corpus; resolved via arXiv source bundles, Semantic Scholar and OpenAlex. Corpus-wide: 2518 linked papers.