ESG Investing Research Articles

ESG and Smart Beta Investing: A Synergistic Approach to Indian Equity Investing using the NIFTY 100 ESG Index and Multi-Factor Weighted Smart Beta Strategies

Smart Beta Investing Strategies have acquired momentum in emerging markets over the past decade; however, they have yet to be investigated in academia, and researchers are unable to provide empirical evidence. Previous research on the Indian equity markets and the clever beta strategies and factors has indicated that there is some optimism in the field. The authors augment the current corpus of research by employing an ESG-filtered index in conjunction with the conventional factors of value, size, and momentum to identify the ten most optimal stocks for each feasible portfolio configuration. A single factor and multi-factor weighting scheme are implemented to determine the ultimate portfolio and return. The Smart Beta portfolio exhibits superior returns when contrasted with its passive counterparts, as evidenced by statistical tools and risk-return characteristics. The absence of empirical evidence and a scarcity of data result in certain limitations for the study.

Is ESG investment rewarded or just doing good? Evidence from China

The question of whether ESG investment is rewarding is a key determinant of its attractiveness to investors. Despite extensive research, a consensus remains elusive. This paper delves into the potential costs and benefits of ESG preferences in the Chinese stock market by constructing three-dimensional portfolios that integrate risk, return, and investor ESG preference. Instead of providing a binary answer of whether ESG investment is rewarding, we offer a glide path of costs to investors for achieving their ESG goals. Furthermore, given the potential market cap bias, we examine the differences in costs between portfolios composed of large-cap and small-cap stocks. Our empirical findings are twofold: first, if investors have a relatively low preference for companies' ESG performance, their investment is as rewarding as those with no ESG preference. However, if they have a high level of preference for ESG performance, their investment may be just doing good. This means that if the level of ESG preference is below a certain threshold, the costs of ESG preference are minimal or even zero. However, when the threshold is crossed, the costs rise sharply. Second, these costs vary significantly between portfolios with different market capitalizations. Specifically, incorporating ESG factors into small-cap portfolios often results in higher financial sacrifices compared to large-cap portfolios. These insights are crucial for investors seeking to balance financial and non-pecuniary objectives, providing guidance for optimizing ESG integration strategies in their investments.

US Funds’ returns-based ESG extraction and implementation: a multifaceted quantile regression approach

ABSTRACT This study introduces a novel ESG intrinsic-based return factor and its application in asset pricing. This factor is extracted using a parallelized rolling window estimation and extreme value-weighted quantile portfolios. It carries a positive risk premium, indicating that investors are willing to assess its risk exposure. We further show that higher returns can be obtained in the top 30% quantiles using a long-only trading strategy. We apply a Monotone Composite Quantile Regression Neural Network (MCQRNN) model to explain US fund returns and address the needs of investors seeking to optimize their investment strategies. This model surpasses traditional benchmark models by performing deep quantile estimation and considering the nonlinear relationships between fund returns and six firm-based characteristics. This approach empowers investors by explaining the core principles of impact investing and highlighting how our constructed ESG risk factor can generate competitive returns even in volatile markets when its risk is well assessed. Highlights A sustainable smart beta factor construction is ensured ESG Long-only trading strategy grants higher returns in the top 30% quantiles Using ML, we further assessed the need to implement ESG factors into asset pricing Positive ESG risk premium reveals the investors’ interest in impact investing US market remains promising for positive ESG investment signals

Sovereign ESG and Foreign Direct Investment in the GCC: The Amplifying Role of Trade Openness in Economic Diversification

This study examines the relationship between Sovereign Environmental, Social, and Governance (SESG) initiatives and foreign direct investment (FDI) within the context of the Gulf Cooperation Council (GCC) countries from 2000 to 2022. The research explores how national ESG performance influences the attractiveness of these countries to foreign investors, with a particular focus on the moderating role of trade openness. Using a comprehensive panel data analysis, the study finds that strong SESG frameworks are positively correlated with higher FDI inflows, with trade openness amplifying the positive impact of SESG. Additionally, the use of Instrumental Variables (IV) estimation addresses endogeneity concerns, further confirming the robustness of the results. Moreover, the analysis reveals that trade openness amplifies the positive impact of SESG on FDI, suggesting that GCC countries with liberal trade policies and robust ESG practices are more successful in attracting sustainable and responsible investments. These findings contribute to the growing body of literature on ESG and FDI, offering valuable insights for policymakers seeking to enhance economic growth through strategic investments in sustainability and governance. The findings offer valuable insights for policymakers in aligning SESG frameworks with global ESG standards and leveraging global liquidity conditions to enhance FDI inflows, particularly in light of ongoing economic diversification efforts in the GCC.

Deconstructing 'Greenwashing' and 'Anti-Greenwashing' in Corporate ESG Investments: Based on Behavioral Identification, Motivation Analysis and Effect Evaluation

Abstract: With the increasing corporate attention to Environmental, Social, and Governance (ESG), some companies that do not have ESG investment strengths have also joined the ESG practice. As firms intensively integrate ESG into their operational ethos, discrepancies between proclaimed and actual ESG commitments have given rise to "greenwashing" behaviors. At present, China's research on corporate "greenwashing" is still in its infancy, and it is difficult to accurately identify corporate "greenwashing" behaviors and clarify their motives and impacts, so as to achieve the "anti-greenwashing" effect of precise governance. This paper examines the manifestations, motivations, and effects of "greenwashing" through actual case studies as well as theoretical and comparative literature research in order to propose a comprehensive framework for analyzing the nature of "greenwashing." To counteract "greenwashing," the paper combines the reality of problems to extract the insights and shortcomings of the existing research and propose multi-tiered strategies tailored to policy, corporate, and societal levels to look forward to the direction of future research on "anti-greenwashing." The aim of this paper is to promote the development of "greenwash" research and strengthen the society's awareness of "greenwash" behavior and the understanding of corporate ESG behavior, underscores the theoretical and practical significance of addressing "greenwashing." It calls for sustained research to optimize the ESG investment landscape.

Market Reaction to ESG Information Disclosure A Case Study of Midea Group

Abstract: As global environmental issues become increasingly severe, investors are paying more attention to corporate sustainability. They realize that focusing solely on financial performance is insufficient; a company's environmental, social, and governance (ESG) performance must also be considered. In China, with the goal of carbon neutrality highlighting the importance of ESG, concepts such as ESG investment, reporting, and rating are flourishing. Corporate ESG actions are becoming a new focal point for investors. This paper takes the ESG information disclosure of Midea Group as a case study, using an event study model to explore the stability of the companys stock price and the variation in its returns during the event window, thus analyzing the market's short-term reaction to ESG information. The study finds that the ESG reports issued by Midea Group have a positive impact on the stock market to some extent, significantly reducing stock price volatility and inducing a positive trend in abnormal returns.

The Influence of ESG Factors on Portfolio Performance Based on the Perspective of Markowitz Portfolio Theory

Abstract: In this paper, the inclusion of Environmental, Social, and Governance (ESG) factors in portfolios is investigated to determine their impact on portfolio performance and its mechanism. Based on the data collected by Bloomberg for 10 stocks from 2003-2023 and Markowitz's portfolio model, it is found that: (1) the inclusion of ESG constraints negatively affects portfolio performance; (2) the inclusion of ESG constraints shifts the GMVP to the right and reduces the convexity of the efficient frontier, thus lowering the portfolio's performance. This study enriches the literature on the factors affecting portfolio performance as well as responsible investment and ESG investment, and is of value to investors or organizations in making investment strategy choices.

Relationship Between ESG and Corporate Innovation Investment - Based by A-share Listed Companies

Abstract: ESG criteria are pivotal factors in assessing corporate performance, influencing not only a company's social reputation and investor trust but also its innovation investment decisions. Recognizing the crucial role of innovation in enterprise growth and its linkage to ESG factors, This essay examines the association between company innovation investments and ESG levels objectively. Utilizing China's A-shares as the research sample, an empirical analysis is conducted through a linear regression model. The findings conclusively reveal a notable correlation between ESG performance and the level of enterprise innovation investments. Specifically, companies with stronger ESG performance tend to invest more heavily in R&D and innovation. Conversely, enterprises with higher levels of R&D and innovation often exhibit superior ESG standards. This study underscores the mutual reinforcement between ESG practices and corporate innovation, emphasizing the importance of integrating ESG considerations into business strategies for sustainable growth and innovation.

Empirical Analysis of the ESG and Financial Performance: Evidence from Chinese Technology Enterprises

To date, the concept of sustainable development has gained global attention from companies and investors. One important reason for this is the increasing interest of investors in incorporating environmental, social, and governance (ESG) elements into their investments. The purpose of this dissertation is to analyze the correlation between ESG factor performance and corporate financial performance in Chinese technology enterprises. Additionally, the study focuses on Internet and medical technology companies to ensure relevance. The findings of the study provide guidance on ESG investment and sustainability for both companies and individual investors.

More ESG Practices, Higher Financial Performance? The U‐Shaped Pattern in China's Agricultural and Food Firms

ABSTRACTESG (environmental, social, and governance) practices, an internationally recognized concept of a firm's sustainability, can serve as a bridge to enhance effective communication between firms and various stakeholders. It is also a new tool for measuring firms' value. This study employs a balanced panel data set of 114 publicly traded agricultural and food firms in China from 2016 to 2022. It empirically investigates the relationship between ESG and financial performance based on shareholder primacy theory and stakeholder theory. Employing a two‐way fixed effects (FE) model, our findings reveal a U‐shaped nonlinear pattern in how ESG impacts financial performance. It differs from previous studies that found predominantly positive relationships: Specifically, the average ESG score for firms is 0.396, the median is 0.390, and the inflection point of the U‐shape occurs at 0.53. When firms' ESG investments are less than 0.53, the high initial ESG cost makes it difficult to transform ESG into financial improvement. However, once this threshold is surpassed, good ESG can convey an excellent reputation to the public and increase anti‐risk ability—which, in turn, significantly improves firms' financial performance and facilitates long‐term development. Also, our study demonstrates that firms' ownership and different positions in the supply chain differentially affect the relationship between ESG and financial performance. This paper also offers insights into promoting the sustainable development of Chinese agri‐food firms.

ESG ratings and investment performance: evidence from tech-heavy mutual funds

ESG ratings and investment performance: evidence from tech-heavy mutual funds

ESG investing & firm performance: Retrospections of past & reflections of future

AbstractThe purpose of this research is to investigate the current state of the literature on environmental, social, and governance (ESG) investing, and study the impact of ESG ratings on firm performance. Corporate sustainability has evolved as a concept and is increasingly being integrated with investment analysis. The present study performs a systematic literature review (SLR) using the theory, context, characteristics, and methodology (TCCM) framework to provide valuable insights and research directions in the context of ESG investing. The review is based on 198 articles published from 2010 to 2022 and follows the scientific procedures and rationales for systematic literature reviews (SPAR‐4‐SLR) protocol using the Scopus database. Further, the research also re‐examines the empirical studies based on ESG as a determinant of firm performance using a meta‐analytical approach. The research findings suggest a positive impact of ESG ratings on firm performance. However, an intriguing discovery surfaced when empirical studies were segmented according to the ESG rating methodologies provided by Bloomberg and Thomson Reuters. The purpose of this research is to offer a comprehensive and collective scholarship of the subject by adopting a mixed‐method approach. Further, it provides a conceptual framework, thereby linking the various elements of ESG investing and explaining the channels of transmission of ESG translates into value creation for the shareholders. It encompasses extensive research agendas discussing barriers to ESG implementation, the materiality of ESG practices, informativeness of sustainability reporting, sustainability performance, and sustainable underpinnings.

Role of environmental, social, and governance (ESG) investment and natural capital stocks in achieving net-zero carbon emission

This study investigates the role of environmental, social, and governance (ESG) investment and natural capital stocks in achieving net-zero carbon emissions, focusing on the Chinese economy. This study uses the data from 2013 to 2022 and applies correlation analysis, quantile process estimation, quantile-factor augmented vector autoregressive, quantile dimension regression, and robustness analysis techniques. The results confirmed that ESG investment has a significant role in net-zero carbon emission and fosters natural capital stocks in the Chinese ecosystem. The results further established that natural capital stocks significantly benefit the Chinese ecosystem and reduce greenhouse gas emissions, CO2 emission – gaseous fuel, CO2 emission – solid fuel, and carbon intensity. Moreover, natural capital stocks have a significant role in achieving net-zero carbon emissions and it accelerates gross tree cover and green agricultural yield. The study is of great interest to corporations, Chinese banks, and the government in planning and achieving net-zero carbon emissions as per Prudential Financial regulation and accounting reporting systems. Achieving net-zero carbon emission is a process-based approach; therefore, the study recommends that policymakers customize investment mechanisms and natural capital accounting standards as per the territorial requirements and execute an ecological control system to make it sustainable.

Can enterprise ESG practices ease their financing constraints? Evidence from Chinese listed companies

Under the guidance of the United Nations SDGs target framework, enterprises' ESG practices of developed countries can effectively promote external investors' ESG investment, thus easing enterprises' financing constraints. Using the data of Chinese A-share listed companies in the Shanghai- and Shenzhen-stock exchange markets from 2013 to 2022, this study explores the causal relationship between enterprises' ESG practices and their financing constraints to provide Chinese experience, examines the mediating effect with corporate transparency and investor sentiment, and analyzes the heterogeneity with external auditor type and earnings management motivation. It is found that enterprise ESG practices can enhance their financing ability by improving corporate transparency and suppressing investor sentiment; for the non-Big 4 audit listed companies and the listed companies with the weak motivation of earnings management, the corporate ESG practice has a more significant effect on their financing ability. This study enriches the research on the relationship between ESG practice and ESG financing by providing Chinese evidence.

Impact of government’s support policy on decision-making of platform participants under ESG

Blockchain-based token platform economy is a new branch of digital platform economics. Constructing a continuous time dynamic model of token platform economy, this paper analyzes what kind of ESG policy is appropriate for the government, meanwhile the token platform participants (developers, users and speculators) make optimal investments and decisions under ESG policy. Simulation result shows neutral ESG policy is optimal. Based on the given neutral ESG policy, we have done the research on ESG investment and decision strategies for platform participants. Our research shows that the tokens selling rate and efforts of green platform (ESG score greater than 0) developers are lower than the ones of brown platform (ESG score less than 0). Consequently, when developers’ token retention is about half of the initial amount, users should invest more brown tokens. Speculators should invest brown tokens for developers’ high token retention. Green token investments of speculators and users are needed in other cases. Next, the impact of the government’s three ESG policies on the maturity or termination of the platform also been analyzed. An important conclusion occurred: the government’s aggressive or conservative ESG policy cannot make the development of the green platform better; Therefore, we suggest a neutral ESG policy which means that the government could adopt high tax incentive and high tax burden on the green and brown platform while it is not necessary to implement the extra subsidy and punishment policy on the green and brown platform

CEO Overseas Experience, Cultural Distance and Corporate Financialization: The Mediating Effect of ESG Investment in China

CEO Overseas Experience, Cultural Distance and Corporate Financialization: The Mediating Effect of ESG Investment in China

ESG rating disagreement portfolios – Evidence from the EuroStoxx 600

This study examines the impact of ESG rating disagreement on portfolio returns for EuroStoxx600 companies. Portfolios are analyzed using ESG data from Morningstar, Refinitiv, and Bloomberg for 458 firms from January 2016 to December 2022. The empirical findings reveal that high ESG agreement portfolios initially show higher returns. However, this effect vanishes when controlling for Book-to-Market ratio and market capitalization. These results challenge the simplistic view of ESG ratings influencing stock returns independently and highlight the need for a cautious approach to ESG investing. Policymakers and investors should consider the heterogeneity in ESG ratings for future regulations and investment decisions.

ESG investment performance and global attention to sustainability

We analyze ESG-based investments in stocks across 23 developed markets using daily data from 2004 to 2022. The findings suggest a weak relationship between the ESG ratings and expected returns, with some evidence of modest underperformance of high ESG stocks compared to lower-rated ones in specific periods. This outcome indicates that stock prices have already reflected ESG information, and well-known asset pricing factors can effectively capture the returns of portfolios based on ESG ratings. However, the strength of this relationship depends on global attention to sustainability, where high ESG-rated stocks tend to gain advantages during unexpected attention increases, highlighting the dynamic, nonlinear nature of this relationship.

The Co-Inhibiting Effect of Managerial Myopia on ESG Performance-Based Green Investment and Continuous Innovation

Under the new pattern of “double carbon” development, good ESG performance is the best way to promote the sustainable development of enterprises, and ESG investment strategies are directly affected by the strategic vision of managers. Based on the upper echelons theory and stakeholder theory, this paper selected Chinese A-share listed companies from 2011 to 2022 as samples to empirically analyze the impact of managerial myopia on corporate ESG performance. The results show that managerial myopia significantly inhibits corporate ESG performance, mainly by inhibiting corporate green investment and green innovation sustainability. Furthermore, for state-owned enterprises (SOE), heavy polluting enterprises (HPE), and non-high-tech enterprises, the inhibitory effect of manager myopia on ESG performance is stronger. When the enterprise is in the growth stage, the above inhibition effect is more severe. For external governance, the greater the analyst attention and public environmental attention are, the more conducive they are to alleviating the restraining effect of managerial myopia on enterprise ESG performance. Therefore, effectively improving the cognition level of managers with regard to long- versus short-term profitability and strengthening external supervision are important measures for comprehensively optimizing ESG performance.

Evaluating ESG Investment Profitability: From the Perspective of Sophistication in Investment Decision-Making

Environmental, Social, and Governance (ESG) investments are widely discussed in the stock market. Further, the debate on ESG investment profitability has garnered significant scholarly attention. This study examines the relationship between ESG investments and equity investment return (EIR) and whether this relationship is affected by investors' sophistication. The results suggest that while ESG investors generally gain relatively lower profits than others, sophisticated investors, characterized by greater financial knowledge, diversified investments, contrarian investment strategies, and not being influenced by familiar biases, can mitigate these lower returns. These findings enhance our understanding of ESG investments and offer valuable insights to guide investors in making sophisticated ESG investment decisions.