Proceedings of the 5th World Conference on Management and Economics
Year: 2024
DOI:
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What Is the Significance of Environmental Awareness in Energy Investment Decisions? A Study on Portfolio Rebalancing with an Environmental Focus
Carlos Esparcia, Antonio Díaz, Daniel Alonso
ABSTRACT:
This empirical investigation delves into the financial performance of energy asset allocation strategies concerning green and brown preferences. Distinct behaviors in investment decisions are presumed between green investors and traditional or brown energy investors. Consequently, optimal portfolio choices are devised through a multi-step process for each energy investor profile and during each monthly rebalancing period. Initially, companies within the energy sector undergo screening based on quartiles of their Environmental (E) ratings. Two categories are then formed, encompassing companies rated above the first quartile (Q1) and those below the third quartile (Q4). Subsequently, a dynamic minimum variance (MV) problem is optimized for each category, employing univariate and multivariate GARCH models. The overall performance of the investment strategies is subsequently evaluated. This contribution to financial literature establishes empirical evidence that green investments not only contribute to reducing the carbon footprint but also reveals a risk-return spread between green and brown energy investments, thereby adding value for environmentally conscious investors.
keywords: Energy sector; Sustainability; Environmental ratings; Portfolio choice; Quartiles