ESG and stock market performance : An Empirical Study of the Link between ESG Performance and Stock Performance of Scandinavian Companies

Abstract

This thesis investigates the relationship between environmental, social, and corporate governance (ESG) performance and stock performance in Scandinavia between 2011-2020. We analyze the difference in stock performance between companies with high and low ESG performance. To measure ESG performance, we apply various ESG ratings from Refinitiv. Using a long-short zero investment strategy, we examine differences in stock performance between high and low ESG rated companies. By employing Fama-French three-, four- (Carhart) and five-factor models, we control for possible different risk exposures between the portfolios. The portfolios based on ESG score show a neutral relationship. The neutral relationship is consistent when controlling for ESG controversies, the company’s media exposure related to ESG incidents. Amongst the three ESG dimensions, we also find a neutral relationship with portfolios based environmental and social scores. However, screening on governance score, the strategy leads to abnormal returns, indicating a positive relationship.