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ESG investment in China: Doing well by doing good

Author

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  • Chen, Shu
  • Han, Xiaoyan
  • Zhang, Zili
  • Zhao, Xuejun

Abstract

This paper provides comprehensive evidence that ESG investors in China can get rewarded by doing good. We construct composite firm-level ESG scores in China covering all the A-share stocks with China-specific ESG-related issues and NLP technologies. We provide strong evidence that stocks with high ESG scores outperform those with low ESG scores in the Chinese A-share stock market, and the premium cannot be reduced by common pricing factors. We find that ESG scores are positively related to firm future fundamentals and the return predictability is more pronounced in stocks with low investor attention and high arbitrage costs. We suggest that current ESG premium is dominated by investors' underreaction to ESG-implied cash flow information rather than risk compensation or investors' preference. Our findings are consistent with the ESG pricing theories, and they can help promote the ESG investment in China.

Suggested Citation

  • Chen, Shu & Han, Xiaoyan & Zhang, Zili & Zhao, Xuejun, 2023. "ESG investment in China: Doing well by doing good," Pacific-Basin Finance Journal, Elsevier, vol. 77(C).
    • Handle: RePEc:eee:pacfin:v:77:y:2023:i:c:s0927538x22002025
    DOI: 10.1016/j.pacfin.2022.101907
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    2. Jiang, Yihuo & Ni, Hongliang & Ni, Yihan & Guo, Xiaomei, 2023. "Assessing environmental, social, and governance performance and natural resource management policies in China's dual carbon era for a green economy," Resources Policy, Elsevier, vol. 85(PB).
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    8. Yadu Zhang & Yiteng Zhang & Zuoren Sun, 2023. "The Impact of Carbon Emission Trading Policy on Enterprise ESG Performance: Evidence from China," Sustainability, MDPI, vol. 15(10), pages 1-27, May.
    9. Bin Wang & Fangzheng Wang & Xiaofei Kong & Li Liu & Chunlu Liu, 2024. "Environmental, social, and governance disclosure and capital market mispricing," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 31(3), pages 2383-2401, May.

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    More about this item

    Keywords

    ESG measure; Return predictability; Mispricing; Risk compensation; Investors' underreaction;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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