A Method for Discriminating Equities Based on Sustainability Criteria in an ALM Process Designed for Practitioners

Abstract

As the financial sector increasingly prioritizes responsible investment, insurance companies seek user-friendly methods to incorporate sustainability criteria for equities into their assets and liability management processes. This paper presents a practical two-step approach tailored for practitioners. The initial step involves leveraging publicly available sustainability data differing from the ESG score to construct both a sustainable equity index and a complementary index for shares not included in the former, achieved through clustering techniques. The subsequent step entails generating an efficient frontier using the Markowitz methodology. The proposed method has been applied to an authentic portfolio, demonstrating stability with a strong emphasis on sustainable assets when using the efficient reallocations given by the Markowitz model.