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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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    Citations

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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. Ni, Yinan & Sun, Yanfei, 2023. "Environmental, social, and governance premium in Chinese stock markets," Global Finance Journal, Elsevier, vol. 55(C).
    3. 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.
    4. 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.
    5. Liu, Xufeng & Wan, Die, 2023. "Retail investor trading and ESG pricing in China," Research in International Business and Finance, Elsevier, vol. 65(C).
    6. 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.
    7. 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).
    8. 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.
    9. 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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