How is ESG advantage priced into the stock market? Using ESG ratings as a measure of ESG performance, this paper selects Ashare listed companies in Shanghai and Shenzhen from 2010 to 2021 as the research sample and investigate whether an ESG investment market exists in China’s stock market. Furthermore, the mechanisms behind the ESG anomaly and the influencing factors are explored. The results indicate that firms with lower ESG ratings have significant excess returns relative to firms with higher ESG rating, i.e., ESG ratings reduce the crosssectional returns of firms. It is further concluded that this effect is more pronounced, mainly in smallcap firms, and the excess returns arise from the mispricing of investors’underreaction to ESG information, which does not align with the risk compensation hypothesis. The results enrich the behavioral asset pricing theory and complement the economic consequences of CSR commitment from the perspective of crosssectional asset returns.