ESG Scores and Firm Performance in the Nordics: An Empirical Study of the Link Between ESG Scores and Profitability, Firm Value and Cost of Capital in the Nordics

Abstract

The relationship between environmental, social, and corporate governance (ESG) performance and profitability, firm value, and cost of capital in the Nordics is explored in this thesis. The influence of ESG is examined using pooled OLS, random, and fixed effect regressions on 340 publicly traded Nordic companies. The data is obtained from Thomson Reuters' database and spans the years 2013 to 2019. Our findings reveal that there is no statistically significant relationship between individual and combined ESG factors and firm profitability (i.e., ROE). However, the social pillar score and ESGC performance have a positive and significant effect on the firm value of Nordic firms through their idiosyncratic risk profile (higher profitability and lower exposures to tail risk) For the cost of capital we found a positive relationship with ESGC and the social pillar, while the environmental pillar showed a negative effect on WACC. This effect is gained through both their idiosyncratic risk profile and their systematic risk profile (lower costs of capital and higher valuations).