Exploring the Impact of ESG Scores on Stock Risk and Returns: A Comparative Study on the Nordic Countries' Stock Markets

Abstract

This study investigates environmental, social, and governance (ESG) scores' relationship to the risk and return of stocks in the Nordic countries. Data on Sweden, Denmark, Norway, and Finland stock markets is from Refinitiv Eikon, and factor model data from Kenneth’s French library, between the time period 2015 to 2022. To investigate return we regress seven portfolios (one long-short portfolio) using CAPM, Fama-French three-factor model, Carhart’s four-factor model, and Fama-French five-factor model. The risk was analyzed using standard deviation, portfolio beta, and VaR. Our findings are (i) a high ESG score does not yield higher returns (ii) a high ESG score leads to lower total risk (iii) ratings in each subcategory Environmental, Social, and Governance are positively related to stock return. Investors should bear in mind the implications of our findings when making investment decisions in ESG stocks on the Nordic market.