Does the inclusion of Chinese A-shares in the MSCI EM index promote ESG performance?

Abstract

This paper explores how the inclusion of Chinese A-shares in the MSCI Emerging Markets (EM) index affects firms’ ESG performance. Making use of staggered inclusion, we construct a difference-in-differences model. We find that the inclusion of A-shares has a positive effect on ESG performance. A series of additional tests indicate that the effect appears causal. Further mechanism analysis suggests that external supervision and green innovation are the main plausible underlying economic mechanisms. Our paper sheds new light on the disputes of capital market internationalization and enriches the literature about the determinants of ESG performance, offering important implications for regulators.