Navigating ESG Constraints: Risk, Return, and Allocation Trade-Offs in Institutional Investment

Subramanian Vignesh Kumar

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Preprint / Version 1

Navigating ESG Constraints: Risk, Return, and Allocation Trade-Offs in Institutional Investment

Authors

Subramanian Vignesh Kumar MarketAxess, USA

Keywords:

ESG investment, risk-return trade-off, institutional portfolios, sustainable finance, asset allocation

Abstract

Environmental, Social, and Governance (ESG) factors have rapidly transformed from ethical considerations into core investment criteria for institutional investors. This paper explores the trade-offs between risk, return, and ESG constraints in portfolio allocation. It analyzes the tension between fiduciary duty and sustainability goals and evaluates empirical evidence on ESG-integrated strategies. Quantitative simulations illustrate how constraints affect performance metrics. A hybrid portfolio optimization model is proposed. Results highlight that ESG alignment need not compromise returns but does demand recalibrated risk tolerance and asset allocation.

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Posted

2025-03-23

License

This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.