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arXiv · 2511.21850

Black-Litterman and ESG Portfolio Optimization

Aviv Alpern·Svetlozar Rachev
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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.

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Aviv Alpern, Svetlozar Rachev. 2025-11-26. Black-Litterman and ESG Portfolio Optimization. https://arxiv.org/abs/2511.21850

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