On The ESG And Its Explanatory Power Over Stock Yield

The growing concerns about environmental problems,resource exhaustion and social issues have been raised for the past two decades following the development of the society.And concepts such as ESG(Environment,Society and Governance),responsible investment and green finance were proposed and widely supported.As more and more investors start to take ESG scores seriously for better understanding of companies' off-balance-sheet value,ESG shows its importance in the financial market.Nevertheless,Chinese ESG system faced much more challenges and was troubled with issues like the lack of data.It was until 2015 that SynTao Green Finance and China Alliance of Social Value Investment(CASVI)firstly conducted two ESG assessments for the listed companies,making the research on ESG possible.However,there are still many questions to be answered in the Chinese market.What does Chinese ESG indicate?How about its industrial distribution?Would ESG impact stock yield?Could it be a new explanatory variable for multifactor model to explain stock yield?To explore these questions,this paper selects the latest ESG data of CSI 300 constituent stocks from 2016 to 2018(ESG is rated every year and the result is released in June),as well as other financial data such as market value,market premium,SMB factor,HML factor,annual stock yield,monthly stock yield,and conducts two studies.The first study goes to qualitative exploration on ESG.The research on the IR,SASB,and GRI frameworks and the introduction of Chinese ESG rating system show that ESG is not merely an indicator for "environmental protection",but a comprehensive and quantitative indicator that considers various off-balance-sheet factors like business management,which theoretically supports the idea of adding ESG into CAPM and three-factor model for stock yield explanation.And the second study focuses on the empirical research on the correlation between ESG score and stock yield,and the effectiveness of ESG-embedded multifactor model.In the study,statistics show that sample stocks have an average ESG score of 5.Companies of real estate,health care and postal services industries have the lowest ESG while pharmaceutical manufacturing,coal mining and general equipment manufacturing companies enjoy the highest ESG.As for stock yield,after dividing sample stocks into different groups by their market value and ESG score,this paper constructs ESGH-L(the difference between the average annual yield of high ESG score companies and low ESG companies)and ESGHML factors(the difference between the average monthly stock yield of high ESG score companies and low ESG companies)and adds them into CAPM and three-factor models respectively in the research of annual stock yield and monthly stock yield.The result shows that(1)From the perspective of annual stock yield,ESGH-L can be both positive and negative,that is,companies with high ESG score will not necessarily enjoy higher annual stock return;ESGH-L and stock yield difference of different groups(divided by market value and ESG score)show a positive correlation,which means the pattern shown in the groups divided by ESG also appears in the sub-groups divided by both market value and ESG;ESG/H-L factor,together with market premium factor,are both significant explanatory variables in the model.However,R-squared of the model is quite low.(2)From the perspective of monthly stock return,ESGHML factor is quite significant in the model.The ESGHML factor does not conflict with the market risk premium factor,SMB factor,and HML factor,and it helps to explain the stock return.Moreover,the correlation between ESG and monthly stock return varies in different company groups.Compared with companies of medium ESG score,the research shows the possibility that an above-average ESG score may benefit companies:companies of the best ESG score are able to create a virtuous circle between ESG performance and economic outcome while companies with the worst ESG score will be negatively affected by its ESG performance.However,what should be pointed out is that the result is more robust in large enterprises(B)and is not applicable to medium-sized enterprises(M).Therefore,it is necessary to conduct further research on medium companies and adjust the corresponding models,which is what this paper fails to do.In conclusion,this paper,on the one hand,explores the detail of ESG system and constructs new ESG factors for multifactor model and,on the other hand,shows that the ESG score tends to provide incentives to companies whose ESG performance exceed the average while punishing those with bad ESG performance.The result supports the assumption that ESG factor helps to explain Chinese stock yield,and it is foreseeable that ESG will encourage Chinese companies to pay more attention to their social responsibility.