Comply or Die: A Study of ESG Factor Returns and Volatility in the Nordic Countries from 2016 to 2022

Sammanfattning: Using corporate environmental, social and governance (ESG) reporting data from 611 publicly traded firms in the Swedish House of Finance's Nordic Compass database, we estimate stock return and volatility exposures to an ESG factor during the period 2016-2022 in the Nordics. Using a Fama-Macbeth methodology, we find that during this time in the Nordic Countries exposure to an ESG factor is compensated with a risk premium and a volatility reduction in a Fama French 4 Factor model. However, we find that the importance of this factor decreases during periods of high market volatility, which may be an explanation as to why the literature provides mixed results as to the existence of such a factor. Our results indicate that the return of an ESG factor might be improved by increasing exposure during periods of low volatility and decreasing exposure during periods of higher volatility.