CFA Society Netherlands: Is a sustainable, well-diversified equity portfolio possible?

October 10, 2025

_{This column was originally written in Dutch. This is an English translation.}

Column by CFA Society Netherlands

At a time when sustainability choices and transparency are hotly debated, investors are rethinking their strategies, such as exclusions or engagement. Increasingly, investors are also opting for inclusion: portfolios consisting exclusively of sustainable companies.

By Mark Voermans, Lead Portfolio Manager Equities at Achmea Investment Management and Member of the Quantitative Committee of CFA Society Netherlands, and Ita Demyttenaere, Director Sustainable & Transition Solutions at BlackRock and Member of the Responsible Investment Committee of CFA Society Netherlands

During the CFA Society Netherlands seminar “Redefining Diversification in the ESG Era” on 3 July, Mathijs van Dijk, Professor of Financial Markets at Rotterdam School of Management, presented his research^[1] on diversification of equity portfolios and ESG integration. Three speakers each highlighted this topic from their own perspective, led by chair Jeroen Roskam of Achmea Investment Management.

Mathijs demonstrated that 30-40 equities, as proposed by traditional theories, are insufficient for a well-diversified equity portfolio. ^[2] Depending on the selection method, at least 100-250 are needed. However, diversification goes beyond simply limiting volatility. Mathijs introduced a lesser-known but equally relevant risk dimension of concentrated portfolios: FOMO (‘Fear of Missing Out’). Only a small proportion of all equities contribute to the total return on global equity markets. ^[3] Apple, for example, has accounted for no less than 3.8% of all value creation from thousands of shares over the past 40 years. NVIDIA is a prominent recent example of the potential importance of a single company. Concentrated portfolios run a greater risk of missing out on these companies. This FOMO risk is still significant for portfolios containing several hundred shares.

The research also shows that portfolio returns improve when more advanced weighting techniques are used that integrate risk and correlation of stocks, such as Minimum Variance and Black-Litterman.

Marcel Jeucken of SustFin placed concentration in a broader context. He argued that a concentrated portfolio actually offers opportunities: better ESG management, fewer reputational risks and credible stewardship. But that does require a clear vision, appropriate governance and a long-term perspective. “From transaction-driven to relational investing,” he summarised.

Anne Kock of Pensioenfonds PGB emphasised that broad diversification and sustainability go hand in hand. PGB has consciously opted for an investment approach in which sustainability is the sole driver of active decisions, with an enhanced index approach that excludes and tilts towards sustainability themes. This approach best suits the diversity of preferences among the pension fund's participants.

The three speakers concluded that there is no one-size-fits-all approach. Those who opt for concentration must be aware of the associated risks. ‘Know what you own’ sounds appealing, but reputational risks cannot be ruled out and may be more damaging when one promises to avoid them. Opting for broad diversification requires careful consideration of suitable and appropriate ways to incorporate sustainability objectives through ESG integration, and of which benchmark to use to measure performance.

Concentration is not a sin, but neither is it a panacea, according to the speakers. The question remains as to what best suits the financial and sustainability preferences of the participants. The seminar provided an interesting insight into the tension between focus and diversification.

_{[1] ‘FOMO in equity markets? Concentration risk in sustainable investing’, June 2025, Andreas Brøgger, Joren Koëter and Mathijs van Dijk, Rotterdam School of Management, Erasmus University. Research commissioned by CFA Society Netherlands. https://dx.doi.org/10.2139/ssrn.5302515
[2] Zvi Bodie, Alex Kane, and Alan J. Marcus (BKM), 2023, Investments, 13th international student edition, McGraw-Hill, p. 203 – update of Statman (1987 JFQA): NYSE backtest 2008-2017
[3] Bessembinder (2018) & Bessembinder et al. (2023) show most stocks underperform risk-free rate + equity premium stems from just 2-4% of stocks!}