Abstract
This paper provides comprehensive evidence that ESG investors in China can get rewarded by doing good. We construct composite firm-level ESG scores in China covering all the A-share stocks with China-specific ESG-related issues and NLP technologies. We provide strong evidence that stocks with high ESG scores outperform those with low ESG scores in the Chinese A-share stock market, and the premium cannot be reduced by common pricing factors. We find that ESG scores are positively related to firm future fundamentals and the return predictability is more pronounced in stocks with low investor attention and high arbitrage costs. We suggest that current ESG premium is dominated by investors' underreaction to ESG-implied cash flow information rather than risk compensation or investors' preference. Our findings are consistent with the ESG pricing theories, and they can help promote the ESG investment in China.
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