Efficiency of socially responsible investments in the context of portfolio management

Abstract In this study, we expand the literature on efficiency analysis by exploring the application of multi-directional efficiency analysis (MEA) for sustainable investing. In particular, we investigate multi-criteria portfolio modeling by integrating MEA in the complete portfolio management process of asset selection and asset allocation under consideration of financial and ESG information. We introduce a set of novel efficiency-based asset allocation strategies and conduct a broad empirical analysis using public equities from the US and Europe over a period of over 10 years with 41,932 firm observations resulting in 180 portfolios and almost 4,000 portfolio rebalancings. We show that including ESG in the efficiency evaluation has a positive effect on the financial and social performance of all asset allocations strategies. Furthermore, we find that portfolios, which are constructed using the efficiency information in the asset allocation process, outperform common screening strategies that only employ a positive efficiency screening. These portfolios also provide superior results concerning either the financial or social performance compared to traditional benchmark strategies, such as naive or value-weighted allocations. Herein, we find a small tradeoff depending on the considered region. Our results further show an outperformance compared to a standard mean-variance strategy in both the financial and social dimensions. The results highlight the benefits of efficiency-based portfolio modeling for sustainable investing and further suggest a potential application for conventional investors to create feasible alternative benchmark strategies with a stronger focus on social responsibility with no apparent downside in the financial performance.