The impact of ethical factors on risk-adjusted return: evidence from the Chinese market

This paper examines the impact of the ESG score on risk-adjusted return by examining data from the Chinese market for the period 2006 to 2019. CAPM and factor model are applied to investigate the relationship between ESG score and risk-adjusted return. The empirical findings indicate that ESG scores affected portfolio risk-adjusted return significantly. We found that low ESG score portfolios generate higher average monthly returns than high ESG portfolios. Our findings are confirmed by second-stage regression analysis, providing robust evidence and suggesting that ethical ESG factors are a new risk component on top of size, value, and market factors that affect the risk-adjusted return. Overall, our results are useful for investors, and fund managers to assess the performance of their portfolios and the pricing of the assets.