Fund ESG performance and downside risk: Evidence from China |
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| Institution: | 1. School of Economics and Management, South China Normal University, China;2. School of Finance, Guangdong University of Foreign Studies, China;1. School of Accounting, Nanjing University of Finance and Economics, Nanjing, China;2. Master of Accounting, Faculty of Business and Economics, The University of Hong Kong, Hong Kong, China;1. Department of Finance, School of Business, Hohai University, China;2. Department of Management Science and Engineering, School of Business, Hohai University, China |
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| Abstract: | Whether responsible investing reduces portfolio risk remains open to discussion. We study the relationship between ESG performance and downside risk at fund level in the Chinese equity mutual fund market. We find that fund ESG performance is positively associated with fund downside risk during the period between July 2018 and March 2021, and that the positive relationship weakens during the COVID-19 pandemic. We propose three channels through which fund ESG performance could affect fund downside risk: (i) the firm channel in which the risk-mitigation effect of portfolio firms’ good ESG practices could be manifested at fund level, (ii) the diversification channel in which the portfolio concentration of high ESG-rated funds could amplify fund downside risk, and (iii) the flow channel in which funds’ better ESG performance may attract greater investor flows that could reduce fund downside risk. We show evidence that the observed time-varying relationship between fund ESG performance and downside risk is driven by the relative force of the three channels. |
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| Keywords: | Downside risk ESG Equity mutual fund Portfolio diversification COVID-19 |
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