Sustainable investing in the Nordics : A comparative analysis of ESG portfolios

Sammanfattning: Sustainability has become a pressing global issue due to environmental and social challenges caused by human activity which has led to a rise in sustainable investing, including ESG investing. Research on financial performance and sustainable investing have not only showed mixed results, but they are also generally conducted in greater markets such as the US, Europe, and Asia-pacific markets. Currently, there is a lack of research on performance of sustainable investment strategies in the Nordic Region. The purpose of this paper is to examine the performance of portfolios constructed with an ESG investment strategy, which involves creating two portfolios consisting of top and bottom ESG scored companies. The portfolios are measured against each other and a market index benchmark, in the context of various theories, including the efficient market hypothesis, adaptive market hypothesis, shareholder theory, and stakeholder theory. The theoretical framework includes asset-pricing models and portfolio theory. A quantitative study with a deductive approach is utilized to construct the portfolios, focusing on mid-cap companies in the Nordics with data collected from Refinitiv Eikon’s database. The portfolio construction process yields financial metrics such as returns, volatility, and risk-adjusted returns. To test for outperformance in returns, the unpaired t-test is utilized. The Carhart four-factor model is also used to explain variations in returns related to risk factors and investigate the presence of positive and significant abnormal returns. The results demonstrate that the bottom ESG portfolio exhibits superior portfolio characteristics compared to the top ESG portfolio and the index benchmark, including annual returns and risk-adjusted returns. Furthermore, this study identifies significant positive abnormal returns when using the Carhart four-factor model, and evidence of outperformance in mean cumulative returns for the bottom ESG portfolio relative to the top ESG portfolio and index benchmark. On the other hand, the performance of the top ESG portfolio and index benchmark is inconclusive, with mixed results across different performance metrics and years. Although the top ESG portfolio outperforms in two out of three years in terms of annual returns, volatility, and risk-adjusted returns, no evidence of positive abnormal returns is found. Meanwhile, the index benchmark demonstrates evidence of outperformance in terms of cumulative returns. Overall, the findings suggest that the bottom ESG investment strategy is more effective in generating superior performance, while the mixed results of the top ESG portfolio make it difficult to draw definitive conclusions about its performance characteristics.