Black-Litterman and ESG Portfolio Optimization
Portfolio Management
2025-12-01 v1 Computational Finance
Abstract
We introduce a simple portfolio optimization strategy using ESG data with the Black-Litterman allocation framework. ESG scores are used as a bias for Stein shrinkage estimation of equilibrium risk premiums used in assigning Black-Litterman asset weights. Assets are modeled as multivariate affine normal-inverse Gaussian variables using CVaR as a risk measure. This strategy, though very simple, when employed with a soft turnover constraint is exceptionally successful. Portfolios are reallocated daily over a 4.7 year period, each with a different set of hyperparameters used for optimization. The most successful strategies have returns of approximately 40-45% annually.
Cite
@article{arxiv.2511.21850,
title = {Black-Litterman and ESG Portfolio Optimization},
author = {Aviv Alpern and Svetlozar Rachev},
journal= {arXiv preprint arXiv:2511.21850},
year = {2025}
}