ESG Investing in Scandinavia in 2013-2022: The Impact of ESG Rating Measured through Portfolio Returns and Portfolio Characteristics

Abstract

This paper examines investing based on ESG ratings in the period between 2013-2022 in the Scandinavian stock market. The majority of previous research on this topic is based on the American market. This paper is inspired by the research in the American market and will apply some of the same approaches to the Scandinavian market. To examine whether there is a relationship between ESG rating and stock performance, four hypotheses have been created to help answering the following research question: “How do the ESG ratings impact the return and the downside risk in the Scandinavian stock market?” To examine the research question the paper is analyzing several return- and risk metrics as well as applying the factor portfolio theory by Markowitz (1952), Fama & French (1992), and Carhart (1997). The paper found an overperformance for stocks with a high ESG rating in the Scandinavian market both in terms of return and risk measures. Furthermore, the paper found a significant positive alpha for the portfolio containing the 20% best ESG rated stocks in the Scandinavian market. On the other hand, the paper did not find any evidence that investing on ESG momentum create abnormal returns or lower risk in the Scandinavian market. When comparing these findings to the American market, most findings are similar. It was also found that the American market had better performing portfolios, the higher the average ESG rating for the portfolios were both in terms of return and risk. In the American market it was found that the ESG momentum portfolios provide investors with an opportunity of abnormal returns. This differs from the Scandinavian market, where there was not any better performance from portfolios with better ESG momentum than other portfolios. The research in the area is still evolving as ESG investing becomes more popular and for the moment is limited by the inconsistent ESG ratings between agencies and limited data on smaller companies.