Active portfolio management in the face of ESG uncertainty: An agile framework for adaptive investment strategies

Abstract

This paper establishes an active portfolio model that considers corporate Environmental, Social, and Governance (ESG) ratings, examining the impact of ESG information on portfolio performance. Based on the exponential utility function, the paper incorporates ESG scores and ESG risk (uncertainty factors) into active portfolio management and derives the analytical solution of the model. Theoretical findings indicate that ESG risk adjusts the optimal portfolio, helping to mitigate losses due to ESG divergence. The paper conducts empirical research using ESG ratings from three well-known rating agencies and the CSI300 index. The empirical results demonstrate that ESG preferences enhance the ESG quality of the portfolio. Consistent with theoretical predictions, reliance on a single ESG rating may lead to adverse outcomes, especially when the selected rating agency’s standards deviate from market norms. In contrast, portfolios that include ESG uncertainty exhibit higher stability and lower loss risk, showing good robustness across different stages and industries.