Toward a Sustainable Portfolio Theory: Introducing Sustainability Concerns in a Behavioural Framework

We propose a behavioural approach to sustainable finance, which integrates the ethical con- cerns of the investor in the asset allocation process. The proposed model adopts an s-shaped value function, similar to the likes of the prospect theory, but incorporating specific sustain- ability constraints, allowing the investor to decide to what degree their portfolios should be sustainable. We introduce a measure of statistical deviation from the chosen sustainability benchmarks and consequently introduce the notion of tolerance to sustainability deviation, much like the usual risk tolerance. The model is tested against a real-world asset allocation problem and optimised by means of evolutionary algorithms.