Hills Sustainability
THEME: SUSTAINABILITY
29 April 2024 Financial Analysts Journal Volume 80, Issue 3

3D Investing: Jointly Optimizing Return, Risk, and Sustainability

  1. David Blitz
  2. Mike Chen
  3. Clint Howard
  4. Harald Lohre
Mean–variance portfolio optimization focuses solely on risk and return, neglecting non-financial objectives, such as sustainability. We introduce mean–variance-sustainability optimization and demonstrate its efficacy empirically.
Read the Complete Article in the Financial Analysts Journal CFA Institute Member Content In Practice Member Companion Feature Read Brief CFA Institute Member Content

Abstract

Traditional mean–variance portfolio optimization is based on the premise that investors only care about risk and return. However, some investors also have non-financial objectives, such as sustainability goals. We show how the traditional approach can readily be extended to mean–variance-sustainability optimization and explain why this 3D investing approach is ex-ante Pareto-optimal. We illustrate its efficacy empirically in several studies, including carbon footprint and sustainable development goal objectives. Importantly, we highlight conditions under which a 3D optimization approach is superior to a naïve 2D approach augmented with sustainability constraints.

We're using cookies, but you can turn them off in Privacy Settings. Otherwise, you are agreeing to our use of cookies. Learn more in our Privacy Policy.