Financial Deregulation and ESG : Impacts and Mechanisms

We examine the causal effect of financial deregulation on publicly-listed firms’ ESG performance in a developing economy. Increased foreign ownership of Chinese firms under the Shanghai and Shenzhen Stock Connect programs increases firms’ ESG ratings; and improvements spill over to non-participating firms upstream through the value chain. For mechanisms, we find evidence consistent with both influence from foreign investors to increase ESG ratings and firms improving ESG ratings to signal trustworthiness to foreign investors. ESG rating improvements and foreign shareholding increases are therefore self-reinforcing, and exogenous changes in either have long-run effects that are about 13.4% greater than short-run effects