Research On The Effectiveness of Esg Screening Strategies In China's A-Share Market—from The Perspective of Industry Heterogeneity

Research on the Effectiveness of ESG Screening Strategies in China's A-share Market—From the Perspective of Industry Heterogeneity

Abstract

Despite the growing adoption of Environmental, Social, and Governance (ESG) strategies in global financial markets, the variability in their effectiveness across different industrial sectors and stages of corporate development remains inadequately explored. Particularly in China's A-share market, there is a significant gap in understanding how industry-specific characteristics influence the outcomes of ESG screening over long periods. This study addresses this gap by examining the impact of ESG screening strategies on the financial performance of companies within various sectors of China's A-share market from 2012 to 2022. Using Bloomberg ESG scores to construct long-short portfolios, this research employs a robust methodology including the Discounted Cash Flow (DCF) model to dissect the differential effects of ESG strategies on cash flows, valuation, and risk management across growth, maturity, and decline life cycles.

The findings reveal that ESG screening consistently generates positive abnormal returns, with negative screening strategies notably outperforming positive ones. However, the impact varies considerably across industries: ESG strategies are less effective in growth-stage companies compared to those in mature or declining phases. This heterogeneity is primarily due to how different industry characteristics modulate the influence of ESG factors on operational cash flows, market valuations, and risk levels.

These results not only confirm the critical role of tailoring ESG integration to specific industry contexts but also highlight the necessity for investors and policymakers to adapt ESG strategies based on the distinctive attributes of each sector. Furthermore, the study underscores the urgent need for ongoing research to unravel the complex interactions between ESG practices and financial performance, particularly in emerging markets like China. This research advances our understanding of sustainable investment and aids in the refinement of ESG evaluation frameworks, contributing significantly to the broader field of sustainable finance.