Research On Strategy Of Tracking-Error Portfolio Based On ESG Information

With the frequent occurrence of climate risks and increasing severity of greenhouse effect and environmental pollution,ESG investing is paid close attentions and widely accepted.Evolved from the concept of corporate social responsibility,ESG aims to measure a company’s sustainability capability from three dimensions:environmental,social and corporate governance.In recent years,due to the lack of social responsibility of listed companies in our country,triggered a lot of social problems.Therefore,investors or financial institutions should take the ESG performance of enterprises into account when making investment decisions,so as to encourage enterprises to take the initiative to assume social responsibility.After decades of development,the international ESG rating system has been gradually improved.But compared with developed countries,ESG concept in our country is still in its infancy,there are major differences between different ratings agencies,there are lots of problems in the application.This paper constructs two tracking error portfolio models to consider the impact of ESG information and ESG uncertainty on portfolios.The first model aims to study the impact of asset pricing power contained in ESG information on portfolio performance,and the second one aims to study whether embedding ESG uncertainty in the model can avoid the risks caused by ESG divergence.In a tracking error portfolio model based on ESG information,we studies how the corporate ESG rating information and investors’ ESG target preference affect the performance of index tracking error portfolios.In the classical mean-variance tracking portfolios,we embed ESG information and ESG target preference of investors and solve explicitly the new tracking model.The empirical analysis shows that ESG information can significantly improve the excess benchmark return,information ratio(IR)and other performance of tracking portfolios,and in ESG-motivated tracking portfolios,there exists an inverse ‘U’ type ESG-IR frontier which is the relationship between ESG score and information ratio(IR)of tracking portfolios.Empirical results with the benchmarks of SSE50 and SSE180 index report more positive impacts of ESG on the performance of tracking portfolios and support these theoretic results.Our results provide several valuable references for investors with ESG awareness and ESG target preference.In a tracking error portfolio model based on ESG uncertainty,we quantifies the uncertainty behind ESG data and incorporates ESG information into tracking-error portfolio selection.The ESG investment model is constructed based on exponential utility function,and the optimal solution of portfolio is obtained.Using ESG ratings from three of China’s mainstream rating agencies and CSI300 index over a period2016-2021,we conduct empirical studies and compare different investment strategies.The empirical results demonstrate that ESG preference significantly improves the ESG level of the portfolio.The investment strategy based on ESG uncertainty reduces the risk caused by ESG divergence,and has better out-of-sample performance.Compared with the no-uncertainty model,the active portfolio model based on ESG uncertainty avoids the impact of extreme risk on the ESG rating.Therefore,the model is suitable for investment managers who take into account the concept of green development,portfolio returns and risks at the same time,and provides effective reference for fund managers.