Journal of Quality Engineering and Production Optimization

Journal of Quality Engineering and Production Optimization

Balancing Financial Performance and ESG Objectives in Portfolio Optimization: Insights from the S&P 500

Document Type : 20th IIIE Conference Selected Papers

Authors
AmirMohammad Larni-Fooeik
Mostafa Shabani
Emran Mohammadi
Department of Industrial Engineering, Faculty of Engineering, Iran University of Science and Technology, Iran
10.22070/jqepo.2026.20677.1302
Abstract
Portfolio optimization is a critical component of informed investment decision-making, balancing risk and return to maximize long-term performance. With increasing focus on sustainability, integrating Environmental, Social, and Governance (ESG) factors into portfolio construction has gained significant importance. This study presents a multi-objective portfolio optimization model that minimizes ESG impact while ensuring financial viability through return and risk constraints. Utilizing the augmented epsilon-constraint method (AECM), the model incorporates ESG considerations without compromising profitability. The analysis is based on a dataset of 20 top market-cap stocks from the S&P 500, evaluated on annual return, risk exposure, and ESG scores. Our findings demonstrate that ESG-conscious portfolios can generate competitive returns while effectively managing risk levels. A sensitivity analysis investigates the trade-off between volatility and profitability, while a correlation heatmap illustrates the relationships between ESG scores and financial metrics. This framework offers a structured methodology for constructing portfolios that are both financially optimal and socially responsible, enabling investors to align their financial goals with sustainable, ethical practices. A theoretical contribution is provided by integrating ESG criteria into a multi-objective optimization framework using the AECM approach. Practically, a replicable method is offered for constructing portfolios that remain both financially viable and socially responsible.
Keywords
Portfolio Optimization
ESG Investing
Multi-objective Optimization
Epsilon-constraint
Sustainable Finance
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Journal of Quality Engineering and Production Optimization
Volume 10, Issue 2
December 2025
Pages 31-48