Responsible Investing in the Nordics: Does it Pay Off?

Andreas Peter Lachonius & Petter Tandberg

Student thesis: Master thesis


This thesis studies the relationship between environmental, social and corporate governance (ESG) factors and stock market returns in the Nordic region between 2008 and 2018. ESG is a trending subject in the financial industry and increasingly implemented into the investment decision process. Due to the lack of available ESG scores, we create our own model to rate firms on ESG specific metrics, which in total consists of more than 140,000 data points. Our analysis is split in two: One approach where we form portfolios based on absolute ESG score and ESG score momentum. We apply well known asset pricing models such as the CAPM in addition to the models proposed by Fama and French and Carhart. By following a long/short strategy, implying to buy the best ESG performing firms and sell the worst ESG performing firms, we find no significant outperformance in any direction when considering overall ESG score. In addition, the thesis considers each of the three individual pillars environmental (E), social (S), and corporate governance (G). We find significant underperformance from the long/short strategy in the social pillar. This indicates a negative relationship between Nordic firms’ performance on social metrics and the performance in the stock market. However, this underperformance disappears when excluding the largest outliers in our data sample. The second part investigates the relationship between stock market return and ESG factors when applying multi-factor cross sectional models. We observe ESG scores to be negatively correlated with stock market returns. We conclude that a responsible investmentstrategy in the Nordic stock markets during the sample period of our analysis indicates a worse historic return than if the investment strategy had included so-called “sin stocks”.

EducationsMSc in Finance and Investments, (Graduate Programme) Final Thesis
Publication date2019
Number of pages99
SupervisorsLuigi Butera