Responsible Investing: The ESG-Efficient Frontier

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Abstract

We propose a theory in which each stock's environmental, social, and governance (ESG) score plays two roles: (1) providing information about firm fundamentals and (2) affecting investor preferences. The solution to the investor's portfolio problem is characterized by an ESG-efficient frontier, showing the highest attainable Sharpe ratio for each ESG level. The corresponding portfolios satisfy four-fund separation. Equilibrium asset prices are determined by an ESG-adjusted capital asset pricing model, showing when ESG raises or lowers the required return. Combining several large data sets, we compute the empirical ESG-efficient frontier and show the costs and benefits of responsible investing. Finally, we test our theory's predictions using proxies for E (carbon emissions), S, G, and overall ESG.

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Document Metadata

Issuer: Elsevier BV
Document Type: Research / Academic Paper
Publication Year: 2021
Retrieved: 5 May 2026
Source: Contact XFID for Access
Record ID: XFIJHMNV0G
Validation: Inferred by XFID

Topics

EsgResponsible Investment

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Elsevier BV (2021). Responsible Investing: The ESG-Efficient Frontier. XFID: XF-IJHMNV0-G. Retrieved from https://xframework.id/XFIJHMNV0G

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XF-IJHMNV0-G