Sin versus green investment: A retrospective study on investor choice during pre- and through COVID regime

Abstract

PurposeIncreasing focus on socially responsible investments (SRIs) and green projects in recent times, coupled with the arrival of COVID pandemic, are the main drivers of this study. The authors conduct a post-factum analysis of investor choice between sin and green investments before and through the COVID outbreak.Design/methodology/approachA passive investor is introduced who seeks maximum risk-adjusted return and/or investment variance. When presented an opportunity to add sin and/or green investments to her initial one-asset market-only investment position, she views and handles this issue as a portfolio problem (MPT). She estimates value-at-risk (VaR) and conditional-value-at-risk (CVaR) for portfolios to account for downside risk.FindingsGreen investments offer better overall risk-return optimization in spite of major inter-period differences in return-risk dynamics and substantial downside risk. Portfolios optimized for minimum variance perform just as well as the ones optimized for minimum downside risk. Return and risk have settled at higher levels since the onset of COVID, resulting in shifting the efficient frontier towards north-east in the return-risk space.Originality/valueThe study contributes to the literature in two ways: One, it examines investor choice between sin and green investments during a global health emergency and views this choice against the one made during normal times. Two, instead of using the principles of modern portfolio theory (MPT) explicitly for diversification, the study uses them to identify investor preference for one over the other investment type. This has not been widely done thus far.

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“…Compared to traditional assets, Green assets have delivered high returns in recent years, reflecting unexpected and substantial increases in environmental concerns and not high expectations of returns only (Pástor et al ., 2022). Despite significant inter-period variations in return-risk dynamics and substantial downside risk over the long term, green investments offer better overall risk-return optimization (Bhatnagar et al ., 2023). This makes the study and its possible outcomes relevant for academicians, professionals, investors and policymakers.…”