ESG Rating Dispersion and Expected Stock Return in China

Abstract

ESG rating dispersion has left responsible investors in great confusion and posed non-negligible barriers to sustainable investment. Despite its importance, there is a lack of research on the role of ESG rating dispersion in portfolio decisions and asset pricing for the Chinese capital market. We reveal the negative return predictability of ESG rating dispersion, which cannot be solely attributed to common risk exposures. We also consider two potential mechanisms based on institutional investor demand and belief dispersion underlying this negative relation. Our findings have important practical implications for asset managers seeking to optimize financial performance while investing responsibly.