DOWNSIDE RISK MEASURES AND ESG FACTORS IN OPTIMAL PORTFOLIO CONSTRUCTION: EVIDENCE FROM EUROPEAN EQUITY MARKETS
DOI:
https://doi.org/10.2478/eoik-2025-0082Ključne reči:
ESG factors, Downside Risk Measures, portfolio optimizationApstrakt
In this paper, we implement an integrated framework for construct-
ing ESG-constrained, downside-risk-optimized equity portfolios in
the European stock market. Extending traditional mean-variance ap-
proaches, we employ downside-oriented risk measures-conditional
value at risk (CVaR) and semi-variance-to better capture investors’
asymmetric aversion to losses. ESG scores are introduced as binding
constraints based on percentile thresholds, ensuring that portfolios
comply with predefined sustainability standards. Semi-variance and
CVaR objectives are formulated as convex programs to enable trac-
table optimization. Using data from Euro Stoxx 50 and Euronext 100
constituents, our empirical analysis reveals that: (i) integrating down-
side risk measures enhances tail-risk protection and may improve per-
formance for loss-averse investors; but (ii) enforcing ESG constraints,
particularly at stricter thresholds, leads to reduced diversification and
a decline in risk-adjusted returns (e.g., Sharpe and Sortino ratios).
These findings highlight the inherent trade-off between sustainabili-
ty and financial efficiency, underscoring the importance of moderate
ESG integration when balancing performance and ethical objectives.
Reference
Abate, G., Basile, I., & Ferrari, P. (2021). The level of sustainability and mutual fund performance in
Europe: An empirical analysis using ESG ratings. Corporate Social Responsibility and Environ-
mental Management, 28(5), 1446-1455. https://doi.org/10.1002/csr.2175
Abate, G., Basile, I., & Ferrari, P. (2023). The integration of environmental, social and governance
criteria in portfolio optimization: An empirical analysis. Corporate Social Responsibility and
Environmental Management, 31(3), 2054-2065. https://doi.org/10.1002/csr.2682
Acerbi, C., & Tasche, D. (2002). On the coherence of expected shortfall. Journal of Banking & Finance,
(7), 1487–1503. https://doi.org/10.1016/S0378-4266(02)00283-2
Alessandrini, F., & Jondeau, E. (2021). Optimal strategies for ESG portfolios. The Journal of Portfolio
Management, 47(6), 114-138. https://doi.org/10.3905/jpm.2020.46.3.075
Al-Majali, M., Aldalaien, B., AL-Khazaleh, S., & Al-Smadi, R. (2025). Exploring the Nexus of Fintech
Development, Systematic Risk, and Market Discipline on Financial Stability: Evidence from
Jordan. ECONOMICS - Innovative and Economics Research Journal, 13(2), 351–365. https://
doi.org/10.2478/eoik-2025-0044
Aryati, T., & Susilawati, S. (2025). Exploring the influence of ESG and Prosperity Disclosure Score
on Financial Performance. Economics - Innovative and Economics Research Journal, 13(1),
–486. https://doi.org/10.2478/eoik-2025-0017
Borisov Stoyanov, S. (2025). Geopolitical Risk and the Effects on Companies’ Financial Performance.
Collection of papers new economy, 3(1), 155-169. https://doi.org/10.61432/CPNE0301155s
Cesarone, F., Martino, M. L., Ricca, F., & Scozzari, A. (2024). Managing ESG ratings disagreement in
sustainable portfolio selection. Computers & Operations Research, 170, 106766. https://doi.
org/10.1016/j.cor.2024.106766
Chen, M., & Musalli, G. (2020). An integrated approach to quantitative ESG investing. Journal of Port-
folio Management, 46(3), 65-74. https://doi.org/10.3905/jpm.2020.46.3.065
Chen, L., Zhang, L., Huang, J., Xiao, H. & Zhou, Z. (2021). Social responsibility portfolio optimiza-
tion incorporating ESG criteria. Journal of Management Science and Engineering, 6(1), 75-85.
https://doi.org/10.1016/j.jmse.2021.02.005
Chen, S., Song, Y., & Gao, P. (2023). Environmental, social, and governance (ESG) performance and
financial outcomes: Analyzing the impact of ESG on financial performance. Journal of Environ-
mental Management, 345, 118829. https://doi.org/10.1016/j.jenvman.2023.118829
Coqueret, G. (2022). Perspectives in sustainable equity investing. CRC Press. https://www.esgperspec-
tives.com/index.html
Gasser, S. M., Rammerstorfer, M., & Weinmayer, K. (2017). Markowitz revisited: Social portfo-
lio engineering. European Journal of Operational Research, 258(3), 1181-1190. https://doi.
org/10.1016/j.ejor.2016.10.043
Hirschberger, M., Steuer, R. E., Utz, S., Wimmer, M. & Qi, Y. (2013). Computing the nondominat-
ed surface in tri-criterion portfolio selection. Operations Research, 61(1), 169-183. https://doi.
org/10.1287/opre.1120.1140
Markowitz, H. (1952). Portfolio selection. The Journal of Finance, 7(1), 77–91. https://doi.
org/10.2307/2975974
Pedersen, L. H., Fitzgibbons, S. & Pomorski, L. (2021). Responsible investing: The ESG-efficient
frontier. Journal of Financial Economics, 142(2), 572-597. https://doi.org/10.1016/j.jfine-
co.2020.11.001
Rockafellar, R. T., & Uryasev, S. (2002). Conditional Value-at-Risk for general loss distributions. Jour-
nal of Banking & Finance, 26(7), 1443-1471. https://doi.org/10.1016/S0378-4266(02)00271-6
Siaw Ofori, B., Padi, A., & Musah, A. (2025). Corporate Governance Effectiveness, Operational Risk
and Financial Performance of Banks: The Role of Firm Size. ECONOMICS - Innovative and
Economics Research Journal, 13(2), 71-93. https://doi.org/10.2478/eoik-2025-0031
Downside Risk Measures and ESG Factors in Optimal Portfolio Construction: Evidence from European Equity Markets
Sortino, F. A., & Price, L. N. (1994). Performance measurement in a downside risk framework. Journal
of Investing, 3(3), 59–64. https://doi.org/10.3905/joi.3.3.59
Steuer, R. E., & Utz, S. (2023). Non-contour efficient fronts for identifying most preferred portfolios in
sustainability investing. European Journal of Operational Research, 306(2), 742-753. https://
doi.org/10.1016/j.ejor.2022.08.007
Utz, S., Wimmer, M., Hirschberger, M., & Steuer, R. (2014). Tri-criterion inverse portfolio optimization
with application to socially responsible mutual funds. European Journal of Operational Re-
search, 234(2), 491-498. https://doi.org/10.1016/j.ejor.2013.07.024
Xidonas, P., & Essner, E. (2022). On ESG Portfolio Construction: A Multi-Objective Optimization Ap-
proach. Computational Economics, 1-25. https://doi.org/10.1007/s10614-022-10327-6
##submission.downloads##
Objavljeno
Kako citirati
Broj časopisa
Sekcija
Licenca
Sva prava zadržana (c) 2025 ECONOMICS - INNOVATIVE AND ECONOMICS RESEARCH JOURNAL
Ovaj rad je pod Creative Commons Aуторство-Nekomercijalno-Bez prerade 4.0 Internacionalna licenca.
