Green investments: Portfolio selection based on risk measure and ESG indicators. Impact of environmental indicators on portfolio selection

Green investments are currently gaining investor attention. The question investors are addressing is to what extent investing in environmental companies or funds increases the risk/reward ratio. The novelty of the theoretical approach lies in the construction of a newly developed portfolio selection model with embedded environmental, social and governance (ESG) indicators that also represent the values of the environmental criteria. This innovative model, based on a portfolio selection model using conditional value at risk (CVaR) measures and analyzed data for the Standard and Poor's 500 (S&P 500) stock index, offers a promising potential for investors. The paper's core is the section where the authors define possible approaches to solve the portfolio selection problem based on the selected environmental criterion E. The analysis itself is contained in section three, where the three variants—the absence of environmental concerns, the maximum preference for environmental requirements, and the combined approach of constructing a portfolio on a defined set of stocks—are analyzed, which is the result of the authors' specific approach. Through a comprehensive analysis, this paper focuses on the aspect of determining the amount of risk difference in the approach of selecting assets with the required value of the relevant indicator. This thorough analysis ensures a narrowing of the set of potential assets in the portfolio, regardless of the amount of their return, and assets for which the group condition on the value of the relevant indicator can be applied, which based on the group condition, allows one to include assets with a higher return in the portfolio. The research results confirm that it is preferable for an investor to consider the environmental criteria on the portfolio as a whole rather than on individual assets.