Advancing Sustainable Investment Strategies through Green Finance and ESG Integration: A Data-Driven Approach to Portfolio Optimization, Risk Management and Long-Term Value Creation

https://doi.org/10.5281/zenodo.18317424

Abstract

The rapid expansion of sustainable finance has positioned green finance instruments and Environmental, Social, and Governance (ESG) integration as central pillars of modern investment decision-making. However, despite growing investor demand and regulatory momentum, significant challenges persist in effectively translating ESG information and green finance signals into robust portfolio construction, risk management, and long-term value creation. ESG data heterogeneity, rating disagreement among providers, sectoral materiality differences, and uncertainties associated with climate transition risks continue to limit the practical and financial effectiveness of sustainable investment strategies. Addressing these gaps, this study proposes a comprehensive data-driven framework capable to systematically integrate green finance indicators and ESG metrics in portfolio optimization and risk management processes. The proposed framework brings together multi-source ESG data harmonization, sector-specific materiality weighting and green finance exposure metrics like green revenue intensity, green bond allocation and climate transition proxies to create a consistent and investable sustainability signal set. These sustainability variables are simultaneously integrated with the traditional financial factors in a multi-objective portfolio optimization model that aims to maximize risk-adjusted returns while minimizing downside risk while improving sustainability performance. The optimization process explicitly takes into account practical investment constraints such as transaction costs, turnover limits, liquidity considerations and ESG-based exclusion and tilt requirements. Risk management is taken care of through dynamic estimation of volatility, measures of tail-risk such as Conditional Value-at-Risk (CVaR), and climate aware stress testing in adverse market and transition scenarios. The empirical analysis uses the rolling window backtesting and out-of-sample validation among the diversified equity portfolio in order to analyze the consistency of their performance, drawdown behavior, and portfolio resiliency under different market regimes. Sustainability outcomes are measured with composite ESG scores, carbon intensity and green exposure measures to align with long-term goals for environmental and social outcomes. The results demonstrate that portfolios constructed using the proposed integrated ESG–green finance framework exhibit improved downside protection, reduced tail risk, and enhanced resilience during periods of market stress compared to conventional and ESG-only investment strategies. Importantly, these benefits are achieved without systematically sacrificing long-term return potential, supporting the argument that disciplined ESG integration can coexist with fiduciary performance objectives. This study contributes to the sustainable finance literature by providing a transparent, replicable, and data-driven methodology that bridges the gap between sustainability goals and financial performance, offering practical insights for asset managers, institutional investors, and policymakers seeking to advance resilient, value-creating sustainable investment strategies.