Safety first portfolio choice based on financial and sustainability returns

The aim of this paper is to expand the methodological spectrum of socially responsible investing by introducing stochastic sustainability returns into safety first models for portfolio choice. We provide a foundation of the notion of sustainability in portfolio theory and establish a general model for generalized safety first portfolio management with probabilistic constraints and three specifications of it. Moreover, we prove theorems about conditions for unique optimal solutions and for the constraints of one model being more restrictive than those of another. In an empirical part, we calculate the costs of investing according to our approach in terms of less financial return.

► In this paper we expand the methodological spectrum of socially responsible investing. ► The financial and sustainability returns are shaped as stochastic variables. ► Our portfolio choice is subject to probabilistic constraints on both variables. ► The new models can be implemented in practice. ► Empirical results show that accounting for sustainability comes with financial costs.