Covid-19 and Optimal Portfolio Selection for Investment in Sustainable Development Goals

Area of Science:

• Environmental Economics
• Sustainable Finance
• Climate Policy

Background:

• The COVID-19 pandemic and economic recession have reduced global energy demand, decreasing fossil fuel prices and impacting renewable energy project viability.
• This economic downturn jeopardizes the achievement of Sustainable Development Goals (SDGs) and the Paris Agreement on Climate Change.
• Discrepancies in how consulting firms define SDGs lead to varied investment strategies among institutional investors.

Purpose of the Study:

• To theoretically demonstrate how differing SDG definitions by consultants distort investment portfolios.
• To propose a mechanism for achieving optimal asset allocation aligned with sustainable development and climate goals.

Main Methods:

• Theoretical analysis of investment portfolio allocation based on consultant-driven SDG interpretations.
• Economic modeling to illustrate the impact of pollution taxation on investment decisions.

Main Results:

• Current investment allocation based on diverse SDG definitions results in portfolio distortions.
• A uniform global tax on pollution (CO2, NOx, plastics) can correct these distortions.
• Global pollution taxation facilitates the desired portfolio allocation towards sustainable assets.

Conclusions:

• Standardizing SDG definitions or implementing a global pollution tax is crucial for aligning investments with global sustainability objectives.
• A globally harmonized pollution tax offers a theoretically sound method to correct market failures and promote investments essential for achieving the SDGs and Paris Agreement goals.