ESG Rating, Investor Attention, and Stock Returns in China

We study whether ESG ratings can predict stock returns in China. We find marginal evidence that stocks with higher ESG ratings have lower future returns. In addition, we explore the cross-sectional and time-series heterogeneities of the relationship between ESG and stock returns. We find the predictability of ESG rating is stronger for stocks in the industries that are important to climate change, and the relationship is only significant after 2018 when climate change is evident for investors in China. Overall, our findings show that investors’ attention is crucial for the stock return predictability of ESG ratings in China