Can ESG Investing Beat the Market and Improve Portfolio Diversification? Evidence from China

Abstract

Over the past decade, ESG investment has become an important criterion for the Chinese economic activities, including its capital market where ESG integration in asset management has become a hot topic among investment professionals. In this paper, we study the case of ESG investing in China through examining the performance of equity indices that are selected by an ESG screening process and comparing their main risk-return characteristics against those of conventional equity market benchmark indices, in order to provide further understanding on how ESG plays a role in China’s capital market. Specifically, we address three key issues that are of particular concerns to most investors: (i) Can equity indices based on ESG screening outperform their market benchmarks? (ii) Can ESG equity indices be replicated by reference indices? and (iii) Can ESG equity indices improve portfolio diversification? Overall, we find that investing in ESG equity indices can increase risk-adjusted returns and improve portfolio diversification for the case of China.