Negative ESG Premiums: Preference‐Driven or Risk‐Driven?*

Abstract We use the implied cost of capital as a proxy for future expected returns and investigate the existence of an environmental, social, and governance (ESG) premium in China's A‐share market. Our results show that high ESG stocks yield lower expected returns than low ESG stocks, with risk compensation being the primary driver of this negative ESG premium. Furthermore, we provide an explanation from a risk compensation mechanism of why ESG investment continues to grow despite the presence of a negative ESG premium.