The Influence of ESG Fund Capital Flows on Corporate Financing Behaviour: A Comparative Examination of Active and Passive Investment Strategies in the Hong Kong Market

Abstract

This paper presents a comprehensive analysis of how capital flows from funds incorporating Environmental, Social, and Governance criteria affect the financing decisions of corporations listed in Hong Kong. The research design employs a robust multi-method empirical strategy to dissect the distinct mechanistic pathways through which actively managed and passively managed ESG funds exert their influence. Key findings reveal that active ESG fund ownership is associated with a substantial reduction in the average cost of debt for firms (approximately twenty-eight basis points), primarily facilitated through direct engagement and governance improvements. Passively managed ESG funds also demonstrate a significant effect, leading to a fifteen basis point decrease in borrowing costs, largely mediated by market signaling and liquidity enhancement mechanisms, with these impacts typically observed within a six-month window following portfolio adjustments. Furthermore, the environmental and governance dimensions of ESG emerge as the most potent factors, correlating with an approximate five percent increase in the issuance of green bonds as a proportion of total debt. This study contributes fresh empirical evidence on the financial materiality of sustainable investing within the unique context of an advanced emerging market and offers actionable implications for corporate financial strategy and regulatory policy.