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

Zhihao Wang, Kezhi Liao and Yu Zhang

Emerging Markets Finance and Trade, 2022, vol. 58, issue 10, 2927-2941

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.

Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:mes:emfitr:v:58:y:2022:i:10:p:2927-2941

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DOI: 10.1080/1540496X.2021.2014317

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