New Study by CKGSB Professors Finds Foreign Investment Leads to a Substantial Increase in ESG Performance of Chinese Firms


After the launch of the Shanghai Connect program in 2014 companies did not see an immediate increase in their ESG ratings relative to unconnected firms. However, ESG ratings climbed by 1.3% year-on-year compared to unconnected firms. ESG ratings on the Shenzhen Connect program increased by 4.6% upon entry in the Connect program and then grew by 2.2% per year. The study also finds evidence of spillover effects within the value chain. A non-Connect supplier to a Connect firm increases its ESG ratings after its partner entered the program.

The increase in ESG ratings does not appear to reflect greenwashing. Firms on both the Shanghai and Shenzhen Connect programs filed more applications for “green” patents and lowered their total carbon emissions gradually over time.

The study then asks why firms improved their ESG performance. There are two main theories for why firms might respond to foreign investment with improved ESG performance. Foreign investors might exert pressure on the firms to improve because they intrinsically value such performance. Or firms might increase their performance to signal their trustworthiness to the investors. The study finds evidence consistent with both. Foreign investors respond to higher ESG ratings by increasing their shareholding consistent with the signaling theory. At the same time, greater foreign investment in a stock leads to increases in ESG ratings. The effects are therefore self-reinforcing.

The ESG scores and three sub-ratings were obtained from Bloomberg which began publishing the scores in 2020. The Bloomberg ESG database covers more than 11,800 companies worldwide, comprising 88% of global equity market capitalization.

Brian Viard is an Associate Professor of Strategy and Economics and Executive Academic Director of for the MBA Program. He received his Ph.D. from the University of Chicago before moving to Beijing in 2007 to join CKGSB. His recent research focuses primarily on environmental economics including the economic effects to reduce automobile pollution, the impact of air pollution on manufacturing productivity, and how spillovers between Chinese cities affect efforts to reduce air pollution。

Zhang Gang is Assistant professor of Economics at CKGSB. He received his Ph.D. in Economics from the University of Virginia in 2018 and his areas of expertise include macroeconomics, international finance, network economics, and labor economics.

  • Research article: Brian Viard, Zhang Gang. “Financial Deregulation and ESG: Impacts and Mechanisms”. Hong Kong Institute for Monetary and Financial Research. (April 2023)
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