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The Sunday Paper – ESG, State Ownership, and Stock Returns: Evidence from China

Social science and economics researchers love ‘exogenous shocks’ or what the rest of us call ‘bolts from the blue’. These shocks allow them to look for patterns the slow creep of orderly progress often mask.

Zhenshu Wu (et al.) from the Tilberg University of the Netherlands has used the shock of the COVID-19 stock market crash (in China stocks) to analyze the effects of ESG in terms of how stock prices performed versus the firm’s ESG credentials. The researchers then took the study forward to see if a good ESG score was a predictor of future returns after the shock.

No surprise, some firms with better ESG scores produced better returns for investors both on the way down and in the subsequent recovery.

The big surprise was that ESG matters in terms of predicting returns for non-State Owned Enterprises [SOEs] but there seems to be no similar relationship for SOEs.

In short, good-ESG-private-company, better returns. Good-ESG-SOE, not so much; but why should this be so?

The answer, for the non-SOEs, is fourfold:

  1. The higher ranked ESG private companies appear to enjoy better employee relations and that seems to translate into stability in bad times and improved returns in good.
  2. There’s greater transparency, at least in this group, and that leads to..
  3. Higher institutional ownership. This seems to prevent a panic out of their stocks on the way down and fosters..
  4. Investor loyalty on the way up.

How is it that SOEs who talk the ESG talk don’t walk the same return-benefit walk? It’s not totally clear but the suggestion is they don’t really follow the principles they say they adhere to [Noooooo?! Ed.].

Conflicting mandates, rather than a flagrant disregard for ESG principles, are almost certainly at the root of the SOE problem but whatever the problem the lesson for investors at least is crystal clear.

For those who’d like more granularity the paper in full can be accessed via the following link ESG and Stock Returns.

Happy Sunday.

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