Navigating Uncertainty in ESG Investing

Abstract

The widespread confusion among investors regarding Environmental, Social, and Governance (ESG) rankings assigned by rating agencies has underscored a critical issue in sustainable investing. To address this uncertainty, our research has devised methods that not only recognize this ambiguity but also offer tailored investment strategies for different investor profiles. By developing ESG ensemble strategies and integrating ESG scores into a Reinforcement Learning (RL) model, we aim to optimize portfolios that cater to both financial returns and ESG-focused outcomes. Additionally, by proposing the Double-Mean-Variance model, we classify three types of investors based on their risk preferences. We also introduce ESG-adjusted Capital Asset Pricing Models (CAPMs) to assess the performance of these optimized portfolios. Ultimately, our comprehensive approach provides investors with tools to navigate the inherent ambiguities of ESG ratings, facilitating more informed investment decisions.