Research On The Effectiveness Of ESG Factors In A-share Market

How to explain the return of a stock portfolio has been a key problem in finance research.The birth of the factor model has inspired people to decompose the complex and comprehensive capital asset pricing problem into a simple and easy to solve factor problem,and the discovery of effective factors has become an important part of the asset pricing research.ESG is an acronym for Environmental,Social,and Governance.ESG investing is a way for investors to factor in a company’s ESG performance when making investment decisions.Unlike the previous strategy of selecting stocks based on the company’s financial status,ESG investing aims to focus on non-financial data of the company and select stocks with more sustainable development from three dimensions: environmental responsibility,social responsibility and corporate governance,in order to obtain long-term benefits.In the mature US market,ESG factors have been generally proven to be effective in explaining the returns of equity portfolios,and this non-financial factor is considered to be a useful complement to the factor model.Compared with the hot foreign market,ESG investment in China started late and the investment scale is small,but it is now showing a rapid development,and the performance of ESG factors in the domestic market is noteworthy.This paper constructs ESG score factor,environmental responsibility E factor,social responsibility S factor and corporate governance G factor based on the underlying score data in Bloomberg ESG index,and conducts an empirical study for China’s A-share market stocks from 2015 to 2020 to investigate the effectiveness of ESG and its secondary factors in China’s A-share market and analyze the reasons for ESG effectiveness performance.First,after constructing ESG and its secondary factors,this paper makes a preliminary judgment of factor effectiveness through descriptive statistics of factor returns and comparison of cumulative returns of high and low scoring groups.Next,four four-factor models are constructed by adding the ESG factor and its three secondary factors to the Fama-French three-factor model to test the validity of ESG and its secondary factors.Then,a style effect regression model is constructed to analyze the effectiveness performance of ESG and its secondary factors by attribution.Through theoretical analysis and empirical testing,this paper finds that ESG factors are effective in China’s A-share market,and the market has environmental responsibility effect and social responsibility effect,but the corporate governance effect is weak.The reason for this phenomenon is that in the ESG rating framework,the evaluation index of corporate governance G is largely related to the financial index of the company,and the single G factor cannot explain more about the stock return.However,the ESG factor has more non-financial information due to the role of E and S,and the ESG factor shows its validity under the combined effect.