ESG Investing in China Stock Market: An Empirical Study Based on Three-factor Model

Abstract

Given the escalating prominence and swift advancement of ESG investments on a global scale, the feasibility of attaining a specified return while accounting for social responsibility has emerged as a pivotal concern garnering investors' scrutiny. As one of the earliest applied investment strategies, the negative screening strategy has been proven effective worldwide. This study utilizes a sample of 2414 stocks with ESG ratings for five consecutive years (2018-2021) from the Wind database and employs the Fama-French three-factor model to measure the impact of score-based filters on passive investment in the vast and distinctive Chinese stock market. Empirical evidence indicates that by excluding stocks of low best-in-class ESG scores, it is possible to increase the average ESG performance without deterioration of investors’ risk-adjusted excess return. The findings demonstrate the validity of the three-factor model and the significance of ESG-related indicators as an implicit factor in investment strategy within China stock market.