We investigate the portfolio frontier and risk premia in equilibrium when institutional investors aim to minimize the tracking error variance under an ESG score mandate. If a negative ESG premium is priced in the market, this mandate can reduce portfolio inefficiency when the return over-performance target is limited. In equilibrium, with asset managers endowed with an ESG mandate and mean-variance investors, a negative ESG premium arises. A result that is supported by empirical data. The negative ESG premium is due to the ESG constraint imposed on institutional investors and is not associated with a risk factor.
@article{arxiv.2403.11622,
title = {Asset management with an ESG mandate},
author = {Michele Azzone and Emilio Barucci and Davide Stocco},
journal= {arXiv preprint arXiv:2403.11622},
year = {2024}
}