ESG stock volatility and ESG adjusted Mean Variance Portfolio

In this project study, we aimed to investigate the impact of corporate ESG scores on stock return volatility in China’s A-share market and to enhance the Markowitz Mean-Variance Model by introducing ESG scores to study their impact on Mean-Variance investors’ pref- erences.

Regarding our first research question, we constructed regressions, and the results con- firmed that companies with higher ESG scores tend to exhibit lower stock volatility. This finding has significant implications for both companies and investors. By using ESG ratings as a reference, companies can better optimize management structures, plan for long-term development, instill confidence in the market, and investors can choose more stable strate- gies and construct less volatile portfolios.

Furthermore, considering the impact of ESG on volatility, we posed our second research question. We incorporated ESG performance considerations and introduced ESG tilt to adjust the Markowitz Mean-Variance Model. Generally, our study indicated that both excessively low and high ESG scores could lead an undesirable outcome. Additionally, the ESG-derived efficient frontiers demonstrated that investors need to make a sacrifice between lower returns and higher volatility when seeking higher ESG scores. Based on those findings, we provided different investing options for diverse profile investors. In conclusion, our study provides valuable insights into the relationship between the ESG scores and stock return and volatility in China’s A-share market, highlighting the importance of considering ESG factors for both companies and investors, and proposing a mean-variance model that incorporates ESG factors for investors for consideration.

We conducted extensive research on the topic “ESG Impact on Stock and Mean-Variance Portfolio: Evidence from China’s A-share Market” and authored a detailed paper that has been submitted to the Journal of Research in International Business and Finance, where I am a co-first author. The paper is currently under review.

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