// The rise in sustainable investing brings with it pitfalls, according to fresh CUHK research, particularly when it comes to the pricing of stocks. The greater the Environmental, Social and Governance (ESG) credentials of a company, the less likely its shares are to reflect the company’s underlying value. Fundamental analysis of the stock market will yield signals that a company’s shares are either overpriced, suggesting investors should sell, or underpriced, suggesting investors should buy. But these signals are not heeded by investors seeking strong ESG holdings, according to the findings of CUHK professor Zhan Xintong. That leads to inefficiencies in trading. The research is the first of its kind to look at the relationship between ESG factors and stock-market trading behaviour. It suggests the need to hone asset-pricing theory. In fact, a strong ESG showing may actually drive the fundamental value of a company higher. Professor Zhan and her team are also working on testing these theories in the bond and options markets. She is also interested in how carbon performance and carbon-emission levels affect asset pricing. The expectation is that green credentials also lead to greater trading inefficiencies there. //
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