ABSTRACT
This article investigates the impact of ESG screening on the portfolio value of four risk weighting models in the Chinese stock market from July 2012 to June 2019. Using a novel ESG rating data of CSI 300 composite stock, we show that: (i) ESG screening undermines the portfolio value of the equal-weighted (EW), value-weighted (VW), minimum variance (MVP), and reward-to-return (RRT) model. Portfolio models in the High-ESG group have the lowest out-of-sample return, Sharpe ratio, and cumulative wealth. (ii) After adjusting for asset pricing models, portfolio models in the High-ESG group generally produce the lowest out-of-sample risk-adjusted return per IVOL. (iii) ESG screening harms portfolio value by excluding stocks with favorable risk-return characteristics, leading to a conservative investment style, which is costly both for non-ESG-motivated and ESG-motivated investors. Our findings reveal that although ESG investment is becoming a significant trend, portfolio managers should be aware of the opportunity cost to apply ESG screening in emerging markets.
Disclosure Statement
No potential conflict of interest was reported by the author(s).