ESG Premium in Chinese Stock Markets, Ni & Sun (2023)
https://www.sciencedirect.com/science/article/abs/pii/S1044028323000066
RESEARCH
Abstract
Financial markets have increasingly adopted the concept of ESG (environmental, social, and governance); this paper studies the evolving effect of corporate ESG performance on the stock returns in China’s stock markets. Utilizing the Paris Agreement and China’s President Xi’s pledge to achieve carbon neutrality by 2060 as ESG shocks, we find that firms with lower ESG scores provide higher stock returns after the announcement of the Paris Agreement. Furthermore, the effect of ESG performance heightens after Xi’s pledge. Using sorted portfolios and Fama–French factor models, we find that investors are rewarded for bearing ESG-related risks. Our estimated monthly ESG risk premium is between 0.52% and 0.61%, while state-owned firms with larger market capitalizations and better financial and operational performance tend to have better ESG performance.
Research questions:
Do poor ESG performance firms deliver higher returns than well-performing firms in Chinese stock markets?
Are the extra investment returns associated with poor ESG performance alpha or the compensation for bearing ESG risk?
What firm characteristics are associated with better ESG performance?
Methodology
Event study: Paris Agreement, Xi’s pledge
Quantitative models: Sorted-portfolios / Fama-French factor models
Dataset
Worldscope: ESG and stock price data
Thomas Reuters: Accounting data
Findings
Higher ESG rating firms deliver higher returns before the Paris Agreement, and the main driver is the governance pillar; however, the relationship reverse after the Paris Agreement. Lower ESG rating firms bring higher returns after the Paris Agreement, with all individual E, S, and G pillars contributing. Xi’s pledge magnifies the impact of ESG on stock returns.
Low-ESG minus high-ESG portfolios earned positive returns after the Paris Agreement. These returns cannot be fully explained by well-known Fama–French risk factors. The magnitude of the ESG risk premium is between 0.52% and 0.61% per month.
Large firms with better operational and financial performance are more likely to receive ESG ratings and achieve higher ESG scores. State-owned firms have better ESG performance than private ones. The business model does not matter.