Eliciting ESG Preferences for Reinforcement Learning-Based Portfolio Optimization

Abstract:Modern portfolio management increasingly demands a balance between traditional risk-adjusted returns and strict Environmental, Social, and Governance (ESG) mandates. Current Reinforcement Learning (RL) approaches typically optimize for a single ESG provider, neglecting the significant divergence in rating methodologies across the industry and the unintuitive nature of manually weighting conflicting objectives. This paper addresses these limitations by formulating ESG-aware portfolio optimization as a Multi-Objective Reinforcement Learning (MORL) problem that simultaneously incorporates ratings from three distinct ESG agencies. To bridge the gap between high-dimensional algorithmic trade-offs and human decision-making, we integrate a Preference Elicitation framework using Gaussian Processes. This system enables practitioners to infer their latent utility functions through intuitive pairwise comparisons of candidate portfolios based on their Sharpe ratios and aggregate ESG scores. We systematically evaluate our framework by employing Large Language Model (LLM) personas to simulate Portfolio Managers operating under varied regional contexts. Empirical results using historical market data reveal that regional backgrounds fundamentally shift the derived preference weights. For instance, European-based personas tend to prioritize ESG alignment over financial returns, while Texas-based personas favor risk-adjusted performance. This work offers a highly adaptable framework that successfully aligns multi-objective algorithmic trading with diverse, real-world human sustainability preferences.

Portfolio Management (q-fin.PM); Computational Engineering, Finance, and Science (cs.CE); Machine Learning (cs.LG)

arXiv:2609.02677 [q-fin.PM]

(or arXiv:2609.02677v1 [q-fin.PM] for this version)

https://doi.org/10.48550/arXiv.2609.02677 Focus to learn more arXiv-issued DOI via DataCite (pending registration)

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