Too Much of a Good Thing in ESG Ratings? Evidence from Chinese A-Share Market During COVID-19 (Business and Management Studies)

Summary

• The study examines 789 Chinese A-share listed firms during the COVID-19 outbreak using a 5-factor model and quantile regression.p.1
• ESG ratings are positively associated with excess returns when ratings are low, but the association turns negative when ratings are high.p.1
• STαR ESG ratings A+ to C- are converted into scores from 9 to 1, with a higher score indicating better ESG performance.p.6
• When ESG scores are in the 3–5 range the effect weakens, and at 7–8 the effect turns negative; the optimal score appears to be around 6.p.8
• A one-standard deviation increase in ESG score is associated with stock returns about 0.39 percentage points higher, roughly 13% of the standard deviation of returns.p.8
• Both the mean and the median of stock returns are -0.5%, indicating most stocks were declining early in the outbreak.p.7

Key insights

1. Simply increasing ESG investment does not necessarily improve firms' financial performance or market value.p.1
2. Firms should aim for an optimal level of ESG investment, because excessive ESG investment may hurt performance.p.10
3. STαR was established in 2015 and is recognized as the first ESG database covering listed firms in China.p.4
4. STαR's ESG rating data became available on the Bloomberg Terminal in 2021, and Moody's took a minority stake in 2019.p.4
5. Firms with high ESG ratings tend to be larger than firms with low ESG ratings.p.7
6. Using the previous year's ESG rating is supported by evidence that the lagged rating has a more significant impact on current financial indicators.p.6
7. Robustness tests on the event window, subsamples and endogeneity did not change the main findings materially.p.10