ESG Integration in Multi-Asset Portfolios: The Trade-Off Between Sustainability and Factor Stability
Abstract
This study investigates whether integrating ESG considerations into multi-asset portfolios improves risk-adjusted performance and mitigates drawdowns. Using a factor-tilting approach, we construct ESG-oriented versions of the traditional 60/40 stock/bond portfolio, incorporating data from RepRisk across US and European equity and investment-grade corporate bond indices. Our findings reveal that ESG-tilted portfolios consistently outperform their benchmarks on a risk-adjusted basis, with slightly lower drawdowns and reduced ESG risk. Notably, ESG integration preserves exposure to traditional style factors, ensuring alignment with established portfolio construction principles. We also show that factor-based diversification offers superior risk mitigation compared to geographic diversification alone.
Fields of Study & Subjects
Sustainable Finance and Green Bonds
Financial Markets and Investment Strategies
Corporate Social Responsibility Reporting
Publication details
- Journal / source
- The Journal of Portfolio Management
- Publisher
- With Intelligence LLC
- Volume
- 52
- Issue
- 6
- Pages
- 123–155
- Publication date
- 15 February 2026
- Language
- EN