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Environmental portfolios via screening or optimization with respect to ecological criteria are not clear-cut concepts. Often, they urge investors to reduce the asset universe, which is accompanied by diversification losses. In this article, we show that a simple passive asset selection strategy based on environmental criteria allows ecological investors to adjust their portfolios without compromising or even reducing risk-adjusted financial performance. In detail, we show that screening does not lead to a significant financial performance reduction. Moreover, we propose an asset selection based on an environmental criteria that improves the portfolios’ financial performance, and further improves its potential positive environmental impact. Our results suggest that a combination of a screening and an environmental-scoring-based asset allocation seems to be a viable option for environmentally responsible investors leveraging the advantages of both strategies. Furthermore, we construct a risk factor CMP (clean minus polluting) and document a significant factor loading when added to the Fama–French five-factor model, suggesting the existence of a risk premium based on a firm’s environmental performance.

In this paper, we study the implications of diversification in the asset portfolios of banks for financial stability and systemic risk. Adding to the existing literature, we analyse this issue in a network model of the interbank market. We carry out a simulation study that determines the probability of a systemic crisis in the banking network as a function of both the level of diversification, and the connectivity and structure of the financial network. In contrast to earlier studies we find that diversification at the level of individual banks may be beneficial for financial stability even if it does lead to a higher asset return correlation across banks. Keywords: systemic risk; financial network; diversification JEL Classification: G21; G28