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

Lohre, Harald and Blitz, David and Chen, Mike and Howard, Clint (2024) 3D Investing : Jointly Optimizing Return, Risk, and Sustainability. Financial Analysts Journal, 80 (3). pp. 59-75. ISSN 0015-198X

Text (3D Investing BlitzChenHowardLohre2023)
3D_Investing_BlitzChenHowardLohre2023.pdf - Accepted Version
Available under License Creative Commons Attribution.
Download (646kB)

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.