Sustainability and Financial Risk: the Green Mean-to-CVaR Efficient Frontier

n light of the recent policy developments, such as the 2015 Paris Agreements, which steers financial markets towards more sustainable investments, understanding the risk-return dynamics of environmentally focused portfolios becomes crucial. This research proposes a new methodological approach to quantify the trade-off between sustainability and financial performance, the Green Mean-to-CVaR frontier. Measuring the environmental impact using well established environmental metrics, such as the E (Environmental) score and the Green- house gas (GHG) emissions, we explore this topic in the mean-Conditional Value at Risk (CVaR) space where we derive the green Mean-to-CVaR (MtC) efficient frontier. We focus our analysis on the European stock market, using data from the STOXX Europe 600 for the period 03/01/2007 30/12/2019. We find that portfolios with higher E score (lower GHG) have lower CVaR and lower expected return. Above a certain threshold of the green metric only inefficient portfolios are obtained. The sectoral analysis confirms the findings across all sectors except Energy, where higher E scores (lower GHG) correspond to increased risk.