Liu, Zihao;
Okhrati, Ramin;
Medda, Francesca;
(2025)
Enhancing portfolio performance through ESG theme subdivision: a two-step selection approach with Shapley value decomposition.
Journal of Sustainable Finance & Investment
10.1080/20430795.2025.2499747.
(In press).
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Abstract
This study investigates the impact of incorporating subdivided ESG assets into investment portfolios, focusing on improvements in Sharpe Ratios (SRs), elasticity, and diversification. We compare subdivided ESG indexes—such as security, water, and diversity—with general ESG and pillar indexes over a 10-year period, including the stressed COVID-19 period. Results show that subdivided indexes offer higher SRs, lower correlations, and enhanced diversification. Notably, energy and GHG indexes outperform pillar counterparts in elasticity across both periods. Using Modern Portfolio Theory, we integrate these assets into a benchmark portfolio of stocks, real estate, and bonds, achieving a 38% SR and 6% Diversification Ratio improvement. A two-step portfolio construction approach further enhances performance, especially during stressed markets. The Shapley Value method confirms that subdivided ESG assets positively contribute to excess returns while mitigating downside risks. These findings offer actionable insights for investors aiming to align financial performance with sustainability through more targeted ESG integration.
| Type: | Article |
|---|---|
| Title: | Enhancing portfolio performance through ESG theme subdivision: a two-step selection approach with Shapley value decomposition |
| Open access status: | An open access version is available from UCL Discovery |
| DOI: | 10.1080/20430795.2025.2499747 |
| Publisher version: | https://doi.org/10.1080/20430795.2025.2499747 |
| Language: | English |
| Additional information: | © 2025 The Author(s). Published by Informa UK Limited, trading as Taylor & Francis Group This is an Open Access article distributed under the terms of the Creative Commons Attribution-NonCommercial-NoDerivatives License (http://creativecommons.org/licenses/by-nc-nd/4.0/), which permits non-commercial re-use, distribution, and reproduction in any medium, provided the original work is properly cited, and is not altered, transformed, or built upon in any way. The terms on which this article has been published allow the posting of the Accepted Manuscript in a repository by the author(s) or with their consent. |
| Keywords: | ESG investment; optimal asset allocation; diversification; COVID-19; Shapley value |
| UCL classification: | UCL UCL > Provost and Vice Provost Offices > UCL BEAMS UCL > Provost and Vice Provost Offices > UCL BEAMS > Faculty of Engineering Science > Dept of Civil, Environ and Geomatic Eng |
| URI: | https://discovery.ucl.ac.uk/id/eprint/10208376 |
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