Robust enhanced indexation with ESG: An empirical study in the Chinese Stock Market

The enhanced indexation constructs tracking portfolios to outperform the benchmark index without incurring additional downside risk. Previous studies only consider optimizing the tracking portfolios return and risk measures derived from historical price data. As environmental, social and governance (ESG) topics advance in the capital markets, this paper quantifies the uncertainty behind ESG data and proposes a robust enhanced indexation model with real-life constraints. Using ESG ratings from three of China's mainstream raters over a period 2015-2020, we conduct empirical studies to compare portfolios constructed by our model and previous works. Numerical results demonstrate that embedding ESG in the enhanced indexation leads to higher returns and lower risks. Moreover, the superiorities of the robust tracking portfolio are reducing the share of assets with high ESG uncertainty and capturing the upward returns of ESG investment. Therefore, our tracking portfolio is suitable for conservative and green investors who are suspicious of ESG data.