Financial Deregulation, ESG Ratings, and Their Impacts
This applied research paper is written by Brian Viard (Cheung Kong GSB) and Gang Zhang (Cheung Kong GSB).We examine the effects of financial deregulation in a developing economy on the ESG performance of publicly listed firms. Increased foreign ownership of Chinese firms under the Shanghai and Shenzhen Stock Connect programs leads to a substantial increase in the ESG ratings of firms. The improvement is driven primarily by enterprises dominated by foreign-owned enterprises. Positive effects on ESG ratings spill over to nonparticipating firms through the connected ones’ value chains, especially from downstream to upstream. Moreover, we also find the connected firms increased their application of ‘green’ patents and reduced their carbon emissions after entering into the program. We also provide evidence that exposure to foreign investors leads firms to invest in ESG as a signal of trustworthiness, and meanwhile, Hong Kong/foreign investors respond to such a signal by increasing their shareholding. These findings suggest that firms’ investment in ESG activities and northbound shareholding share a self-reinforcing cycle