ESG Goes East: Examining the Preference-Driven Premium during the Opening of the Chinese Bond Market

Abstract

We estimate the impact of investors' ESG preferences on corporate bond pricing in an international context. Matching onshore and offshore bonds issued by the same issuer and using the opening of the Chinese bond market as a quasi-experiment, our estimate controls for time-varying issuer characteristics that potentially correlate with ESG scores. We find that issuers within the top quartile of ESG scores experience a reduction in borrowing costs equivalent to 8.8% of average credit spreads compared to those in the bottom quartile, despite overseas capital flows accounting for just 1% of the onshore bond market's size. These results highlight the need to consider heterogeneous investor preferences and demand elasticity when assessing the impact of ESG investing.

Keywords: ESG-investing, Globlization, investor preferences, emerging markets, inelastic demand, Chinese bond markets

JEL Classification: C23, G12, G14, G20, Q56