Characteristic-based portfolio construction: is there a role for the ESG rating?

The basic Markowitz portfolio theory is a methodology already well-known in literature: the concept of taking the returns and the variance to find a good fit between the return we want from our portfolio and the risk we are willing to take, constructing a curve of these portfolios where we solve the problem of maximizing the return and minimizing the risk. Further analysis and methodologies have been developed during the years, of different complexity, with always the same target: if there’s a better strategy to allocate money on assets. In this paper we will analyse in detail one of these strategies called the Characteristics Based Portfolio Construction, a method that in his premises appears to be of lower calculus complexity and permits to construct a valid alternative to the standard methodology of Markowitz, and we will focus on a specific characterstic, the ESG, to see the what is the contribution and the consequences of adding it to the model