Impact of ESG Preferences on Investors in China’s A-Share Market

Abstract

This study explores the time-varying influence of Environmental, Social, and Governance (ESG) factors on asset pricing in China’s A-share market from 2017 to 2023, integrating investor heterogeneity categorized as ESG-unaware (Type-U), ESG-aware (Type-A), and ESG-motivated (Type-M). taxonomy. It adopts a linear regression model with seven control variables (including firm systematic risk, asset turnover ratio, and ownership concentration) to quantify ESG’s marginal effect on stock returns. Annual regressions (2017–2022) reveal distinct ESG coefficient shifts: insignificant negative coefficients in 2017–2018, significantly positive coefficients in 2019–2020, and significantly negative coefficients in 2021–2022. Heterogeneity analysis across five non-financial industries (Utilities, Properties, Conglomerates, Industrials, Commerce) shows industry-specific ESG effects. Portfolio performance tests using 2023 data (stocks divided into eight ESG groups) indicate that portfolios with medium ESG scores outperform high/low ESG portfolios and the traditional mean-variance model in risk-adjusted returns (Sharpe ratio) and volatility control, avoiding poor governance risks (low ESG) and excessive ESG resource allocation issues (high ESG). Overall, policy shocks and institutional maturation transformed the market from ESG indifference to ESG-motivated pricing within a decade, offering insights for stakeholders in emerging ESG markets.