Does ESG pay off? : A quantitative study of how ESG-scores affect Swedish Large-cap Firms Performance and Stock returns

Sammanfattning: Previous scholars have viewed expenditures on ESG (environmental, social, governance) in two distinct ways. In one way, it has been viewed as wasteful if it does not directly contribute to the business. The other perspective being that by addressing ESG-issues, one can improve businesses by improving society. In recent times, ESG has become an increasingly common topic due to the increased awareness and debates regarding the environment and sustainability. The increased attention toward ESG issues has resulted in increased ESG reporting by firms. As a result, shareholders and stakeholders can address more of their concerns by knowing how ESG-friendly a firm is. With the increased attention given to ESG in recent years, its actual effects on a firm becomes increasingly interesting. The relationship between ESG and firm performance and the relationship between ESG and stock return has been studied by several researchers over the years. The different studies have come to different conclusions regarding these relationships and the relationships are still inconsistent. In this paper, the relationship between ESG-scores and firm performance, as well as ESG-scores and stock returns in Swedish large-cap firms is examined. This study aims to investigate the relationship between ESG-scores and firm performance and the relationship between ESG-scores and stock returns. Furthermore, the study measures firm performance by measuring total asset turnover, net profit margin, and operating profit margin. Stock returns are measured with the use of historical yearly stock returns. The relationships are investigated with regression analysis. This study has a quantitative approach, where secondary data between the years 2016-2020 has been extracted from the database Refinitiv Eikon. The study finds that the relationship between ESG-scores and total asset turnover is negative, meaning that increased ESG-scores result in less efficient use of assets. The relationship between ESG-score and net profit margin is insignificant, and no conclusion can be drawn from that relationship. The relationship between ESG-scores and operating profit margin is positive, meaning that customers are willing to pay more for a firm's sustainable practices. The relationship between ESG-scores and stock returns is insignificantly negative; thus, we cannot draw any conclusions regarding the relationship, but it could indicate that ESG-scores are accounted for in the stock price.