War Amongst ESG Ratings in China: A Battle of Stock Return Predictability

Existing literature on the stock return predictability of Environmental, Social and Governance (ESG) ratings in the Chinese A-share market presents conflicting conclusions, primarily due to divergent sources of ESG ratings and variations in sample selection. We are the first to conduct comparative analyses on ESG ratings from all mainstream agencies using the largest available sample and the longest time window. After considering the real impact of transaction costs, ESG ratings provided by three vendors demonstrate a significant positive correlation with stock future returns. Heterogeneity analyses based on firm market capitalization indicate that Sino ESG ratings stand out among various ratings, demonstrating robust and significant positive predictive power under various conditions. Furthermore, we reexamine asset return anomalies from the perspective of the first moment of ESG ratings. Mean-variance spanning tests also suggest positive factor premiums. The conclusions offer valuable reference for subsequent research on the role of ESG ratings in the Chinese capital market, providing practical guidance for asset managers implementing ESG investment principles to optimize portfolio construction. Received: 18 February 2024 | Revised: 27 August 2024 | Accepted: 20 October 2024 Conflicts of Interest The authors declare that they have no conflicts of interest to this work. Data Availability Statement Data available on request from the corresponding author upon reasonable request. Author Contribution Statement Xu Liu: Conceptualization, Methodology, Software, Validation, Formal analysis, Investigation, Resources, Data curation, Writing - original draft, Writing - review & editing, Visualization, Supervision, Project administration. Xinrong Xiao: Conceptualization, Methodology, Resources, Writing - original draft, Writing - review & editing, Visualization, Supervision, Project administration. Siyan Shen: Conceptualization, Methodology, Validation, Resources, Writing - review & editing. Zhiyu Xu: Conceptualization, Validation, Formal analysis, Investigation, Resources, Writing - review & editing, Visualization.