The Relationship Between ESG and Profitability for Nordic Countries

Abstract

This thesis investigates the relationship between Environmental, Social, and Governance (ESG) scores and financial performance for companies listed on Nordic stock exchanges. The motivation for the thesis is the increasing importance of sustainability in investment decisions, driven by growing awareness of climate change, social inequality, and corporate governance. Using data collected from Thomson Reuters Eikon database, the research employs panel data and various empirical models to explore if there exists correlation between ESG scores and Return on Asset (ROA) and Tobin’s Q.

The analysis reveals a positive correlation between ESG score and ROA, indicating that higher ESG performance is associated with better accounting-based profitability. All three pillars of ESG show a significant positive relation with ROA. However, our study finds a negative correlation between ESG score and Tobin’s Q, suggesting that improvements in ESG performance may not be immediately reflected in market valuations.

These findings contribute to the ongoing debate on the financial implications of ESG practices, offering insights that are particularly relevant for investors, corporate managers, and policymakers in the Nordic region. The results underscore the complexity of the ESG-financial performance relationship and highlight the need for a more standardized ESG reporting framework. Future research should consider the long-term effects of ESG investments as mor data becomes available.