ESG and asset pricing in China: policy-contingent returns and risk mitigation

This paper examines whether Environmental, Social, and Governance (ESG) performance generates excess returns or mitigates downside risk in China's A-share market. Using a comprehensive panel of 65,000 firm-year observations from the CNRDS ESG Rating Database (2007-2022), this paper construct ESG-based long-short portfolios and estimate Fama–French five-factor regressions. The results reveal a consistent negative ESG-return relation, mainly driven by the Governance (G) pillar, while high-ESG portfolios exhibit lower volatility and downside deviation. Dynamic tests show that ESG effects are policy-contingent and episodic, turning positive only during government promotion periods. Robustness checks using alternative data sources and fixed-effects models confirm that these findings are not driven by data or portfolio design. Overall, ESG in China functions primarily as a risk-mitigation and policy-alignment signal, rather than a structural source of abnormal returns.