Fund ESG Performance and Downside Risk: Evidence from China

41 Pages Posted: 18 Jan 2023

See all articles by Ning Zhang

Ning Zhang

Xi'an Jiaotong-Liverpool University (XJTLU)

Yue Zhang

Sun Yat-sen University (SYSU)

Zhe zong

PwC Management Consulting

Date Written: June 27, 2022

Abstract

Whether responsible investing reduces portfolio risk remains open to discussion. We study the relationship between ESG performance and downside risk at fund level in the Chinese equity mutual fund market. We find that fund ESG performance is positively associated with fund downside risk during the period between July 2018 and March 2021, and that the positive relationship weakens during the COVID-19 pandemic. We propose three channels through which fund ESG performance could affect fund downside risk: (i) the firm channel in which the risk-mitigation effect of portfolio firms’ good ESG practices could be manifested at fund level, (ii) the diversification channel in which the portfolio concentration of high ESG-rated funds could amplify fund downside risk, and (iii) the flow channel in which fund ESG performance may attract greater investor flows that could reduce fund downside risk. We show evidence that the observed time-varying relationship between fund ESG performance and downside risk is driven by the relative force of the three channels.

Keywords: Downside Risk, ESG, Equity Mutual Fund, Portfolio Diversification, COVID-19

JEL Classification: G11, G23, M14

Suggested Citation

Zhang, Ning and Zhang, Yue and Zong, Zhe, Fund ESG Performance and Downside Risk: Evidence from China (June 27, 2022). International Review of Financial Analysis 86 (2023): 102526. Available at: https://doi.org/10.1016/j.irfa.2023.102526, Available at SSRN: https://ssrn.com/abstract=4323648 or http://dx.doi.org/10.2139/ssrn.4323648

Ning Zhang

Xi'an Jiaotong-Liverpool University (XJTLU) ( email )

111 Renai Road, SIP
, Lake Science and Education Innovation District
Suzhou, JiangSu province 215123
China

Yue Zhang (Contact Author)

Sun Yat-sen University (SYSU) ( email )

Zhuhai Campus, SYSU
Zhuhai, Guangdong 519082
China

Zhe Zong

PwC Management Consulting

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