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Does It Pay to Be Responsible? The Performance of ESG Investing in China

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  • Xiaoke Zhang
  • Xuankai Zhao
  • Yu He

Abstract

The capital market in China has progressed rapidly within the realm of ESG and sustainability. This study investigates whether and how ESG investing works in China. The portfolio-level analysis shows that both high- and low-level ESG portfolios can earn higher abnormal returns, which implies a non-linear relationship between ESG and portfolio excess returns. In stock-level analysis, the effect of ESG on future stock returns varies by pillar and sector. Governance and social pillars work in opposite directions to predict returns. In the secondary (tertiary) sector, higher ESG scores predict lower (higher) returns. Furthermore, we find that higher ESG performance is associated with worse future profitability, which impairs firm value, and lower cost of equity capital, which increases firm value.

Suggested Citation

  • Xiaoke Zhang & Xuankai Zhao & Yu He, 2022. "Does It Pay to Be Responsible? The Performance of ESG Investing in China," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 58(11), pages 3048-3075, September.
    • Handle: RePEc:mes:emfitr:v:58:y:2022:i:11:p:3048-3075
    DOI: 10.1080/1540496X.2022.2026768
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    Cited by:

    1. Liu, Min & Guo, Tongji & Ping, Weiying & Luo, Liangqing, 2023. "Sustainability and stability: Will ESG investment reduce the return and volatility spillover effects across the Chinese financial market?," Energy Economics, Elsevier, vol. 121(C).
    2. Fan, Yiyi & Li, Shanshan & Yang, WenQi, 2024. "The impact of the percentage of female directors on corporate ESG score," Finance Research Letters, Elsevier, vol. 63(C).
    3. Galletta, Simona & Mazzù, Sebastiano & Naciti, Valeria & Paltrinieri, Andrea, 2024. "A PRISMA systematic review of greenwashing in the banking industry: A call for action," Research in International Business and Finance, Elsevier, vol. 69(C).
    4. Ni, Yinan & Sun, Yanfei, 2023. "Environmental, social, and governance premium in Chinese stock markets," Global Finance Journal, Elsevier, vol. 55(C).
    5. Shan Wu & Ying Li, 2023. "A Study on the Impact of Digital Transformation on Corporate ESG Performance: The Mediating Role of Green Innovation," Sustainability, MDPI, vol. 15(8), pages 1-17, April.
    6. Lai, Xiaobing & Zhang, Fan, 2022. "Can ESG certification help company get out of over-indebtedness? Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 76(C).
    7. Wang, Haijun & Jiao, Shuaipeng & Ge, Chen & Sun, Guanglin, 2024. "Corporate ESG rating divergence and excess stock returns," Energy Economics, Elsevier, vol. 129(C).
    8. Khurram, Muhammad Usman & Chen, Lifeng & Abedin, Mohammad Zoynul & Adu, Douglas A. & Lucey, Brian, 2024. "ESG disclosure and internal pay gap: Empirical evidence from China," International Review of Economics & Finance, Elsevier, vol. 92(C), pages 228-244.
    9. Qiuyan Yan & Kai Wan, 2024. "Energy-Consuming Right Trading Policy and Corporate ESG Performance: Quasi-Natural Experimental Evidence from China," Energies, MDPI, vol. 17(13), pages 1-20, July.
    10. Gong, Xiaomin & Xie, Fei & Zhou, Zhongsheng & Zhang, Chenyang, 2024. "The enhanced benefits of ESG in portfolios: A multi-factor model perspective based on LightGBM," Pacific-Basin Finance Journal, Elsevier, vol. 85(C).
    11. Li, WeiWei & Padmanabhan, Prasad & Huang, Chia-Hsing, 2024. "ESG and debt structure: Is the nature of this relationship nonlinear?," International Review of Financial Analysis, Elsevier, vol. 91(C).
    12. Ainulashikin Marzuki & Fauzias Mat Nor & Nur Ainna Ramli & Mohamad Yazis Ali Basah & Muhammad Ridhwan Ab Aziz, 2023. "The Influence of ESG, SRI, Ethical, and Impact Investing Activities on Portfolio and Financial Performance—Bibliometric Analysis/Mapping and Clustering Analysis," JRFM, MDPI, vol. 16(7), pages 1-19, July.
    13. 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.
    14. Liu, Xufeng & Wan, Die, 2023. "Retail investor trading and ESG pricing in China," Research in International Business and Finance, Elsevier, vol. 65(C).
    15. Lo, Huai-Wei & Lin, Sheng-Wei, 2023. "Identifying ESG investment key indicators and selecting investment trust companies by using a Z-fuzzy-based decision-making model," Socio-Economic Planning Sciences, Elsevier, vol. 90(C).
    16. 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).
    17. 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.
    18. Liu, Dayong & Gu, Kaiyuan & Hu, Wenhua, 2023. "ESG performance and stock idiosyncratic volatility," Finance Research Letters, Elsevier, vol. 58(PB).
    19. Liu, Min & Liu, Hong-Fei & Lee, Chien-Chiang, 2024. "An empirical study on the response of the energy market to the shock from the artificial intelligence industry," Energy, Elsevier, vol. 288(C).
    20. Yunfu Zhu & Haoling Yang & Ma Zhong, 2023. "Do ESG Ratings of Chinese Firms Converge or Diverge? A Comparative Analysis Based on Multiple Domestic and International Ratings," Sustainability, MDPI, vol. 15(16), pages 1-17, August.
    21. French, Joseph J. & Gurdgiev, Constantin & Shin, Seungho, 2023. "When doing the right thing doesn't pay: Impact of corporate decisions on Russian market participation in the wake of the Ukraine-Russia war," Finance Research Letters, Elsevier, vol. 58(PB).
    22. Lipeng Sun & Nur Ashikin Mohd Saat, 2023. "How Does Intelligent Manufacturing Affect the ESG Performance of Manufacturing Firms? Evidence from China," Sustainability, MDPI, vol. 15(4), pages 1-20, February.

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