Does ESG Guide Chinese Stock Investment with Economic Policy Uncertainty in Trade War

Abstract

While research in sustainable finance has predominantly centered around advanced economies, this paper investigates the relationship between corporate ESG (Environment, Social, and Governance) information, investor awareness, and operating profitability in the Chinese financial market. Using a sample of 1,301 firms from 2018 to 2021, we find ESG to be a predictive indicator of companies' future operating performance. However, a premium for ESG stocks is inevident compared to the broader market. When examining the impact of economic policy uncertainty (EPU) on stock performance, we find that companies with higher ESG scores tend to sustain higher operating profitability in uncertain times. However, investors' preference for ESG scores remains limited. In addition, ESG scores are valuable in predicting the operating profitability of exporting firms. We find economic intuitions for the empirical findings from the newly introduced ESG-CAPM theory and the impact of economic policy uncertainty in the face of increasing global trade volatility.

Keywords: esg, Sustainable investing, China, ESG awareness, Economic policy uncertainty, US-China trade war