ESG, Stock Returns and Stock Volatility: Evidence from Chinese Listed Companies

. Corporate sustainability is the top concern of the whole society, and whether environmental, social, and governance (ESG), as a way to measure corporate sustainability, has an impact on company stock returns and volatility is widely discussed. This article investigates how ESG performance influences the return of stocks and volatility for all A-share companies during the period of 2019 to 2022. The research employs the composite ESG score and the separate E, S, and G scores to evaluate the ESG performance of corporations, and employs regression models to examine the association between ESG score, individual score, and stock returns. Additionally, the study examines how the volatility of the stocks is related to the ESG score and individual score. In the results, the combined ESG score is significantly and negatively related to stock returns. Returns on stocks are significantly negatively influenced by individual E, S, and G scores. Moreover, stock volatility is significantly negatively correlated with the combined ESG score and individual score.


Introduction
With increasing awareness of sustainability, investors are more interested in focusing on the environmental implications of companies and other non-financial indicators.For investors, ESG is an effective measurement to assess how well companies are doing on sustainability and ethical issues.The concern for corporate sustainability gives rise to the question of whether the adoption of sustainability measures by companies has an impact on their asset pricing.As such, this study tends to determine if the ESG score of firms affects stock returns and stock volatility.
Given the relatively recent start of ESG systems in China, ESG is still an emerging concept in the stock market, which is the motivation for this study.There is some literature on ESG and firm performance in China; however, the literature on ESG performance and returns and volatility of stocks is scarce.In view of this, this Following is the structure of the rest of this study.
Section two discusses the literature related to ESG and stock performance.The main literature discussed in this section provides empirical and theoretical support for this study.Section three describes the data and methodology.In section four, the results of the study are reported.In the final part, the conclusion is presented.

As shown in
study investigates how the ESG combined score and individual scores influence stock returns and volatility for all listed companies in China through regression model analysis.As a contribution to the literature concerning ESG on asset pricing, this paper studies how ESG influences the returns and volatility of stocks.This article adds to the existing literature on ESG and the Chinese stock market by examining Chinese firms' ESG performance and asset pricing.

3 Data and Methodology 3.1 Sample data
[4,5]g is related to greater returns and less volatility of stocks for companies[2].Similarly, there is a study that investigates ESG performance over the Covid-19 period using the Chinese stock market, showing that higher ESG asset-rich portfolios outperform[3].Moreover, there are also studies that show that firm performance is positively affected by good ESG performance of enterprises[4,5].of each company at year-end; B/M i,t is the ratio of book value to market value for each company at year-end; ROE i,t refers to each company's return on equity at the year-end; LEV i,t represents each firm's leverage ratio at the year-end; I/A i,t denotes the capital expenditure of individual company divided by its asset's book value at the year-end; Age i,t refers to the number of years from company i's inception to year t.The above control variables are obtained from the wind database.Table1demonstrates the descriptive statistics of these variables.It shows that the average monthly stock return for all A-share companies is 2.107%, and the standard deviation is 21.171%.The mean monthly stock volatility is 46.241% and the standard deviation is 43.580%.The mean ESG composite score for all Chinese listed companies is 5.993, and the mean scores for the separate E, S, and G scores are 1.721, 4.021 and 6.406 respectively.Book to market is averaged at 0.477 and the average leverage ratio is 0.430.

Table 2
shows the cross-correlations between all variables.it is observed that the ESG composite score and the separate scores are positively correlated.In particular, the association between the ESG composite score and the S score is stronger than the other two.ESG score and S score are positively related to stock returns, while the E score and G score are negatively related to the returns of stocks, and the coefficients between them are small.There are negative correlations between ESG, E, G scores, and stock volatility, and the coefficient between them is also low.It can be observed that the control variable LogSize is positively related to the four independent variables, which indicates that the ESG score is relatively higher for larger firms.

Table 4 ESG Score and Volatility
This article investigates how to relate returns and volatility of stocks to ESG.This article uses regression models to examine how the combined ESG score and the separate scores influence stock returns and volatility for all Chinese listed companies during the period 2019 to 2022.The results of these regression models show that both the ESG composite score and the individual score negatively impact stock returns.A statistically significant negative association exists between ESG composite score, G score, and E score and stock volatility.The study suggests that ESG score negatively impacts stock returns can be attributed to the fact that ESG is still in its infancy in China, and companies need to invest capital in managing ESG to make it perform better, which will reduce earnings in the near run, but will have a long run beneficial effect.Overall, the findings of this paper highlight the significance of ESG in determining the returns and volatility of stocks.The limitation of the study is the short sample period selected, however, ESG's positive impact on company performance is long-lasting, which affects the results of the study.In addition, this study only used ESG score to measure the companies' ESG performance.It is hoped that future studies will compare how the ESG influences stock returns under short-and long-run periods, and the comparison of the performance of developed and developing countries in terms of ESG.