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Does ESG Screening Enhance or Destroy Stock Portfolio Value? Evidence from China

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  • Zhihao Wang
  • Kezhi Liao
  • Yu Zhang

Abstract

This article investigates the impact of ESG screening on the portfolio value of four risk weighting models in the Chinese stock market from July 2012 to June 2019. Using a novel ESG rating data of CSI 300 composite stock, we show that: (i) ESG screening undermines the portfolio value of the equal-weighted (EW), value-weighted (VW), minimum variance (MVP), and reward-to-return (RRT) model. Portfolio models in the High-ESG group have the lowest out-of-sample return, Sharpe ratio, and cumulative wealth. (ii) After adjusting for asset pricing models, portfolio models in the High-ESG group generally produce the lowest out-of-sample risk-adjusted return per IVOL. (iii) ESG screening harms portfolio value by excluding stocks with favorable risk-return characteristics, leading to a conservative investment style, which is costly both for non-ESG-motivated and ESG-motivated investors. Our findings reveal that although ESG investment is becoming a significant trend, portfolio managers should be aware of the opportunity cost to apply ESG screening in emerging markets.

Suggested Citation

  • Zhihao Wang & Kezhi Liao & Yu Zhang, 2022. "Does ESG Screening Enhance or Destroy Stock Portfolio Value? Evidence from China," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 58(10), pages 2927-2941, August.
    • Handle: RePEc:mes:emfitr:v:58:y:2022:i:10:p:2927-2941
    DOI: 10.1080/1540496X.2021.2014317
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    Cited by:

    1. Xiuli Sun & Cui Zhou & Zhuojiong Gan, 2023. "Green Finance Policy and ESG Performance: Evidence from Chinese Manufacturing Firms," Sustainability, MDPI, vol. 15(8), pages 1-27, April.
    2. Wang, Ren & Bian, Yuxiang & Xiong, Xiong, 2024. "Impact of ESG preferences on investments and emissions in a DSGE framework," Economic Modelling, Elsevier, vol. 135(C).
    3. Pan-Ting Song & Batsuuri Oyunbazar & Tae-Won Kang, 2024. "The Impact of Agricultural Food Retailers’ ESG Activities on Purchase Intention: The Mediating Effect of Consumer ESG Perception," Sustainability, MDPI, vol. 16(19), pages 1-16, September.

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