The Drivers behind ESG Investment: How can ESG-scores be used to Maximize the Investor's Return to Risk on the Danish Stock Market

Abstract

This study investigates if ESG-performance has a financial value-creating effect for companies listed on the Danish stock exchange, Nasdaq OMX Copenhagen. Hereunder, the study will examine if ESG-score can be used as a factor in a multifactor model, with the purpose to maximize the investor's risk-adjusted return for companies listed on Nasdaq OMX Copenhagen. The study will first analyze ESG-scores as a derived parameter for value creation. Hereto, the study will investigate how ESG-performance affects a company's valuation and financial performance. Using the method best-in-class for ESG-score, the risk parameters, return, and a company's characteristics, will be investigated across ESG-performance. Next, six different quantitative models will be conducted, which will set the ground to maximize an investor's riskadjusted return. By using the quantitative models, the effect of ESG as a factor, will be examined. Hereunder ESG as a factor, and its significance on an underlying company's stock, will also be analyzed. Last, the value transmission of a company's ESG, on the company's accounting performance will be investigated. This will help to understand the value-creating effects ESGperformance transfers and investigate the causality between a company's ESG-performance and characteristics. The study concludes that ESG-performance has an insignificant effect on the valuation and risk of a company's underlying stock, which is listed on Nasdaq OMX Copenhagen. Furthermore, the analysis finds an ambiguous connection between ESG-performance and financial performance, which indicates that ESG-performance does not affect a company's financial performance. But it is the case that ESG-performance itself can be derived from other factors, hereunder the company's characteristics as market value. This study finds value-creating from ESG-performance on the key financial figures for a company, but these findings are argued to be caused by causality. From the analysis of the quantitative multifactor models, it can be concluded that ESG-score is not a usable factor in a multifactor model to maximize the investor's risk-adjusted return for stocks listed on Nasdaq OMX Copenhagen. Here, it could be seen across the quantitative multifactor models that ESG-score had a small and insignificant effect on the stock returns.