Sustainable investment under prospect theory

Project Lead: Ines Fortin
Team: Jaroslava Hlouskova, Leopold Sögner
Duration: November 2022 – November 2024
Funding: Oesterreichische Nationalbank (OeNB) Anniversary Fund - Project Number 18798

Sustainable investing, also known as ESG (environmental, social, and corporate governance) investing, has been gaining in importance over the past years. In this project, we plan to implement portfolio strategies for agents with prospect theory preferences, where also ESG factors are accounted for. We consider an investor with mixed prospect theory and ESG preferences, who decides on the allocation of her wealth, towards risky assets and one risk-free asset. We aim to find the closed form solution for this non-differentiable and convex-concave problem, putting certain assumptions on the risky assets and on the ESG preferences. In the empirical part, we find the optimal solution implied by our new investment strategy and assess the portfolio performance implied by different scenarios reflecting the presence of certain habits combined with sustainable investment. Finally, we compare the ESG prospect theory portfolio with portfolios implied by other types of investors. In addition to traditional performance measures we employ measures combining return, risk and ESG aspects in order to assess the various investment strategies. We plan to consider different sectoral indices for the European and the US stock markets, for which ESG scores need to be constructed.