Full Text 01

EXAMENSARBETE INOM INDUSTRIELL EKONOMI,
AVANCERAD NIVÅ, 30 HP
STOCKHOLM, SVERIGE 2019
E, S or G? A study of ESG score

and financial performance
YRR AHLKLO
CARIN LIND
KTH
SKOLAN FÖR INDUSTRIELL TEKNIK OCH MANAGEMENT
E, S or G? A study of ESG score and
financial performance
by
Yrr Ahlklo
Carin Lind
Master of Science Thesis TRITA-ITM-EX 2019:12

KTH Industrial Engineering and Management
Industrial Management
SE-100 44 STOCKHOLM
E, S eller G? En studie om ESG score,
lönsamhet och avkastning
av
Yrr Ahlklo
Carin Lind
Examensarbete TRITA-ITM-EX 2019:12

KTH Industriell teknik och management
Industriell ekonomi och organisation
SE-100 44 STOCKHOLM
Master of Science Thesis TRITA-ITM-EX 2019:12
E, S or G? A study of ESG score

and financial performance
Yrr Ahlklo
Carin Lind
Approved Examiner Supervisor
2019-01-29 Hans Lööf Christian Thomann
Commissioner Contact person
Erik Penser Bank Jonas Thulin
Abstract
Sustainability is not a new concept to the financial markets, but its popularity and wider
use have increased as people have grown more concerned about the future of this
planet. However, the relationship between sustainable investments and financial
performance is not clear. One of the most used measures of sustainability is the
concept of ESG score, where E, S and G stand for environmental, social and
governance. In this study, we investigate the relationship between ESG score and
financial performance, both market and accounting based. We also separate the score
into its individual parts E, S, and G, and try to distinguish which factor has the strongest
relation to financial performance. To evaluate the relationship, a regression analysis
was performed on a sample of Nordic stocks and the Sustainalytics ESG rank. Our
findings concluded no significant relationship between ESG score and financial
performance, neither market nor accounting based. The environmental factor (E)
showed the strongest relation to financial performance, however slightly negative and
only significant to one dependent variable out of three. Our results indicate that based
on the ESG score used in this study, no conclusions can be drawn about financial
performance. Since our research does not indicate a significant relationship, our
recommendation is to invest in the highest ESG ranked stock in case of choosing
between two otherwise similar stocks.
Key-words
ESG score, financial performance, regression, return, firm value, sustainable
investment, corporate social responsibility, stakeholder theory.
Examensarbete TRITA-ITM-EX 2019:12
E, S eller G? En studie om ESG score,

lönsamhet och avkastning
Yrr Ahlklo
Carin Lind
Godkänt Examinator Handledare
2019-01-29 Hans Lööf Christian Thomann
Uppdragsgivare Kontaktperson
Erik Penser Bank Jonas Thulin
Sammanfattning
Hållbarhet är inget nytt koncept inom finans, men dess popularitet och användning har
ökat kraftigt. Dock är det fortfarande oklart hur hållbara investeringar förhåller sig till
lönsamhet och avkastning. En av de mest använda hållbarhetsmåtten är ESG, som står
för environmental, social and governance. I denna studie undersöker vi relationen
mellan ESG-mått och lönsamhet, både marknads- och resultatbaserad. Vi delar också
upp ESG i sina tre komponenter E, S, och G för att undersöka vilken faktor som har den
starkaste relationen till lönsamhet. Detta görs genom en regressionsanalys med
paneldata från ett urval av nordiska aktier och Sustainalytics ESG-mått. Vårt resultat
visar ingen signifikant relation mellan ESG-mått och lönsamhet. Komponenten E visar
den starkaste relationen till lönsamhet, ett signifikant och något negativt samband, men
endast till en av tre responsvariabler. Vårt resultat indikerar således att inget samband
verkar finnas mellan lönsamhet och dessa ESG-mått. Eftersom vår studie inte visar på
något signifikant samband, blir vår rekommendation att investera i den aktien med högst
ESG-mått, om man skulle välja mellan två annars lika aktier.
Nyckelord
ESG, finansiell lönsamhet, avkastning, regressionsanalys, hållbara investeringar,
rörelsevärde, CSR, Intressentmodellen.
Contents
1 Introduction 1
1.1 Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Sustainable investing - a debated topic in finance . . . . . . 1
Measuring sustainability is complex . . . . . . . . . . . . . . 1
ESG - the dominating concept for measuring sustainability 2
Regulation pressure banks to take interest in ESG . . . . . . 2
1.2 Problematization . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.3 Purpose of thesis . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.4 Research questions . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.5 Defining and delimiting the scope . . . . . . . . . . . . . . . . 4
1.6 Contribution to research field and industry . . . . . . . . . . . 5
2 Literature Review 6
2.1 Definitions of sustainability . . . . . . . . . . . . . . . . . . . . 6
2.2 Corporate Social Responsibility . . . . . . . . . . . . . . . . . . 7
What is it? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Should CSR affect financial performance? . . . . . . . . . . 7
2.3 Measuring CSR by different scores . . . . . . . . . . . . . . . . 8
Scores and actors . . . . . . . . . . . . . . . . . . . . . . . . . 8
ESG score . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.4 Screening methods in sustainable investing . . . . . . . . . . . 9
Negative screening . . . . . . . . . . . . . . . . . . . . . . . . 9
Positive screening . . . . . . . . . . . . . . . . . . . . . . . . 9
Combined approach example . . . . . . . . . . . . . . . . . 10
2.5 Links between CSR activity and financial performance . . . . . 10
Accounting based financial performance . . . . . . . . . . . 10
Market based financial performance . . . . . . . . . . . . . . 11
Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
2.6 Literature review summary . . . . . . . . . . . . . . . . . . . . 13
3 Method 15
3.1 Scientific approach . . . . . . . . . . . . . . . . . . . . . . . . . 15
Research design and approach . . . . . . . . . . . . . . . . . 15
Literature review method . . . . . . . . . . . . . . . . . . . . 15
Validity and reliability . . . . . . . . . . . . . . . . . . . . . . 16
v
vi CONTENTS
Researchers’ bias . . . . . . . . . . . . . . . . . . . . . . . . . 17
3.2 Designing the regression analysis . . . . . . . . . . . . . . . . . 17
Regression variables . . . . . . . . . . . . . . . . . . . . . . . 18
Preliminary regression models . . . . . . . . . . . . . . . . . 20
3.3 Data collection . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Data collection method . . . . . . . . . . . . . . . . . . . . . 21
Sample selection . . . . . . . . . . . . . . . . . . . . . . . . . 21
Exploring the data . . . . . . . . . . . . . . . . . . . . . . . . 23
3.4 Development of the final regression models . . . . . . . . . . . 26
Statistical tests used in model diagnostics . . . . . . . . . . . 26
Modifications of the regression models . . . . . . . . . . . . 26
Final regression models . . . . . . . . . . . . . . . . . . . . . 27
4 Empirical results 29
4.1 Regression summary . . . . . . . . . . . . . . . . . . . . . . . . 29
4.2 ROA regressions . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Model diagnostics . . . . . . . . . . . . . . . . . . . . . . . . 29
4.3 Tobin’s q regressions . . . . . . . . . . . . . . . . . . . . . . . . 32
Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
4.4 Stock return regressions . . . . . . . . . . . . . . . . . . . . . . 33
Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
5 Discussion & Analysis 35

5.1 Total ESG score and financial performance . . . . . . . . . . . . 35
5.2 Effect of individual ESG components . . . . . . . . . . . . . . . 36
5.3 Critical review . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
5.4 Implications for academia and industry . . . . . . . . . . . . . 39
6 Conclusion 40
6.1 Answering the research question . . . . . . . . . . . . . . . . . 40
6.2 Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . 40
6.3 Future research . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Bibliography 42
A Regressions with ESG score 46

A.1 Response variable: ROA . . . . . . . . . . . . . . . . . . . . . . 46
CONTENTS vii
A.2 Response variable: Tobin’s q . . . . . . . . . . . . . . . . . . . . 51

A.3 Response variable: Stock returns . . . . . . . . . . . . . . . . . 56
B List of stocks 62
List of Figures
3.1 Sustainalytics rank sample histogram . . . . . . . . . . . . . . 23
3.2 Correlation matrix . . . . . . . . . . . . . . . . . . . . . . . . . . 25
4.1 Residuals vs fitted values for the regression with ROA as

response variable and ESG score as variable of interest. . . . . 31
4.2 Residuals vs fitted values for the regression with log(Tobin’s
q) as dependent variable and ESG score as variable of interest. 33
4.3 Residuals vs fitted values for the regression with stock returns
as dependent variable and ESG score as variable of interest. . . 34
viii
List of Tables
2.1 Summary of literature review. . . . . . . . . . . . . . . . . . . . 14
3.1 Keywords used in literature research. . . . . . . . . . . . . . . . 16

3.2 Summary of variables. . . . . . . . . . . . . . . . . . . . . . . . 18
3.3 Overview of sample. . . . . . . . . . . . . . . . . . . . . . . . . 23
3.4 Descriptive statistics of sample . . . . . . . . . . . . . . . . . . 24
3.5 Descriptive statistics of processed sample . . . . . . . . . . . . 24
3.6 Summary of all regression variable combinations. . . . . . . . 28
4.1 Regression results summary . . . . . . . . . . . . . . . . . . . . 30

4.2 Confidence intervals of ESG effect . . . . . . . . . . . . . . . . 31
ix
Acknowledgement
We would like to thank Jonas Thulin and Jonathan Werner for the opportunity
to write our thesis in collaboration with Erik Penser bank, and with a great
deal of flexibility regarding the scope of the thesis. Your input has been very
helpful and contributed to a more interesting scope.
We also want to thank our supervisor Christian Thomann, for always an-
swering our questions straight away and for the advice on econometrical
issues. Additionally, we appreciate all the discussions and seminars that
contributed to improving our thesis.
Chapter 1
Introduction
1.1 Background
Sustainable investing - a debated topic in finance
Sustainability is not a new concept to the financial markets, but its popularity
and wider use has increased as people have grown more concerned about
the future of this planet. Since the world strives to be more environmentally
friendly in order to reduce global warming (TT 2018), the financial sector
must keep up with the trend. It is our view that sustainability and investing
is a debated combination which attracts the attention of the general public.
For example, a Swedish newspaper published an interview with professor
Robert G Eccles whose research shows that sustainable companies are more
profitable (Johansson 2015). But some critical voices mean that in the financial
sector, sustainability is just a buzzword to sell new (or slightly changed old)
products at a higher price (Petersson 2018).
One reason for the critique might be that the question remains of what a
sustainable investment really is and how it is defined. The lack of clear
definition and standard contribute to a more doubtful market and can make
investors unsure about the whole concept. Sustainability is such a broad
and complex concept, and there are many definitions and applications of the
word itself. We believe it is common to foremost associate sustainability with
reducing carbon emissions.
Measuring sustainability is complex

The problem with one dimensional measures such as only measuring carbon
emissions, is that low carbon emissions do not necessarily make a business
sustainable. A company could have low carbon emissions, but a rather
unsustainable business or product. For example, a company that produce
single use items like disposable plastic straws could use 100% renewable
energy, but their products may still end up polluting the seas. On the other
1
2 CHAPTER 1. INTRODUCTION
hand, a company can have high carbon emissions but fill a sustainable
purpose, for example a public transport company. It probably has relatively
high carbon emissions but is still an environmentally sustainable business,
since buses transport a lot of people that would otherwise travel in individual
cars.
ESG - the dominating concept for measuring sustainability

Because of the complexity of measuring sustainability, a number of actors
and measures have evolved (see section 2.3). One of the most used concepts
is the ESG score. E, S and G stand for environmental, social and governance
which are three factors commonly used for measuring the sustainability of an
investment (PRI 2018). Unfortunately there is no clear and well defined way
to calculate an ESG score and there is no explicit standard for exactly what is
included in the E, S and G factors. Different actors can use their own methods
for calculating ESG scores, and there is little to no transparency. What
constitutes an acceptable ESG score is therefore subjective. This uncertainty
has increased pressure on the authorities to decide on a standard for the
financial markets.
Regulation pressure banks to take interest in ESG

Soon, sustainable investing might not only be a concern of the individual
investor. In May 2018, the European Commission published a new proposal
for sustainability regulation regarding the financial markets, which will affect
institutional investors when it takes effect. Since sustainable investments
are subject to such uncertainty, this regulation should be welcomed by the
market. However, institutional investors might also be worried about having
to disclose a sustainability measure if they do not agree with the measuring
method.
The proposal from the European Commission contains three parts, which are
summarized below (European Commission 2018).
1. Establishing a unified EU classification system of sustainable economic
activities (taxonomy).
2. Improving disclosure requirements on how institutional investors inte-
grate ESG factors in their decision-making process.
3. Creating a new category of benchmarks which will help investors
compare the carbon footprint of their investments.
CHAPTER 1. INTRODUCTION 3
This proposed regulation shows that sustainability measures in some form

will most likely be mandatory in the future. Since the regulation is not
reality yet, it may change before implementation and hence the uncertainty
about defining sustainable investments currently remains. The fact that the
EU Commission is so far in the process makes banks start to investigate
carbon and ESG measures, to be able to influence the way the regulation is
formulated. We imagine that most banks take interest in having a definition
of sustainability that also allows them to make profitable investments. This
thesis is written in collaboration with Erik Penser Bank, a smaller institution,
with a goal of making both profitable and sustainable investments.
1.2 Problematization
The focus on measuring sustainability leads to the question of whether
sustainability measures can be used to improve financial performance. Some
studies, but maybe foremost marketing from the financial sector, say that
sustainable portfolios give higher returns and outperform index (Thompson
2018). One example of an ESG portfolio that actually does well would be
the World SRI (Socially Responsible Investment) Index by MSCI, a provider
of stock/fixed income indices, which has performed slightly better than the
corresponding general world index since 2007 (MSCI 2018). The selection
of stocks is based on ESG data, but is it really sustainability that drives the
performance? As can be seen in section 2.5 in our literature review, the
picture is not clear of whether there exist a link or not, and in that case why.
Today, asset managers, private investors and smaller institutions rely on
external analysis for ESG scoring, since most do not have ESG analysts of
their own. The ESG scoring process is not always very transparent, so if there
is a link, the lack of transparency makes it hard to judge where the returns
really come from. Maybe investors could increase financial performance
if they knew how to pick the best out of the ESG rated companies? In
that case, the question is what part of the ESG score is related to returns.
One hypothesis of why a world SRI index have higher returns could be
that sustainable companies ought to perform better in the long run, since
sustainable businesses and products could be subject to higher demand in
the future as concern for the environment grows. Another hypothesis is
that ESG portfolios show better performance because investors respond to a
temporary ESG trend, which drives up the stock prices for companies with
good ESG practices. With different types of ESG scores, little transparency
4 CHAPTER 1. INTRODUCTION
and an undefined scope of measuring sustainability, it is hard to know which

factors that really drive the performance.
1.3 Purpose of thesis

The purpose of this thesis is to investigate the relation between ESG score
and financial performance. Because of the uncertainty of how ESG and
performance could be linked, the aim is to investigate both market based
performance that relates to the stock market, and accounting based perfor-
mance which relates to profitability. With these two kinds of measures, we
want to add to the knowledge of why there might be a relationship. Further,
we want to investigate what part of the ESG score is the most connected to
financial performance.
1.4 Research questions

The research questions are developed in collaboration with Erik Penser Bank,
in order to be relevant and useful to actors in the financial sector. The research
will be focused on the following questions.
• What is the relationship between ESG score and financial performance?
• What part of the ESG score shows the strongest relation to financial
performance?
1.5 Defining and delimiting the scope

Since this thesis is written in collaboration with Erik Penser Bank, a small
Swedish institutional investor, we have chosen a sample of Nordic stocks
as our universe. We have also chosen to concentrate on the relationship
between ESG score and financial performance, and not causal links. This
delimitation has been made due to our choice of method, since it is impossible
to prove any causal links with a regression analysis. One way to investigate
a causal link better would have been to conduct an event study, such as the
study by Hartzmark and Sussman (2018) which investigates the effect of
the introduction of an ESG rating of mutual funds. The most similar option
for us would have been an event study of the introduction of an ESG score
for stocks. However, for single stocks the problem is isolating the effect of
the ESG score from the effect of company fundamentals or news reporting,
which was not suitable for our time frame.
CHAPTER 1. INTRODUCTION 5
1.6 Contribution to research field and industry

The area of sustainability measures and investments is important to many
investors, and risk management and return potential are the leading factors
for considering sustainable investing according to a recent survey (Morgan
Stanley 2018). Even though there is much written on this subject, we believe
that the development of the area is faster than the research has been. We
want to contribute to a more complete picture of sustainability in financial
products, by investigating the ESG relation to return with several measures.
We also use a different ESG score than other similar studies (see section
2.5). Furthermore, we want to add a piece to the puzzle of what part of the
ESG score has the strongest relation to financial performance, as previous
studies have showed varying results. Our study will hopefully contribute to
a slightly clearer picture for institutional as well as sustainability conscious
private investors.
Chapter 2
Literature Review
2.1 Definitions of sustainability
In this paper, we do not attempt to judge the sustainability of companies nor
of stock portfolios. Nevertheless, it is important to know different definitions
of sustainability used in the literature. One of the most common and quoted
definitions comes from the UN World Commission on Environment and De-
velopment. It says "sustainable development is development that meets the
needs of the present without compromising the ability of future generations
to meet their own needs" (United Nations 1987). In finance, sustainabil-
ity and sustainable investments is an umbrella term for investments that
pursue to have a long term positive effect on society and environment. Fur-
thermore, sustainability conscious investors also seek returns and financial
performance, like most investors do. Under the umbrella term sustainable
investments, we find terms like socially responsible investing (SRI), ethical
investing, green investing and ESG score. There exits different schools and
opinions about how to define these terms. According to the European Com-
mission European Comission (2018), sustainable finance is defined as "the
provision of finance to investments taking into account environmental, social
and governance considerations". The European Commission also states that
sustainable finance includes a strong green finance component that aims to
support economic growth while:
• Reducing pressures on the environment
• Addressing green-house gas emissions and tackling pollution
• Minimizing waste and improving efficiency in the use of natural re-
sources
It also encompasses increasing awareness of and transparency on
• The risks which may have an impact on the sustainability of the finan-
cial system
6
CHAPTER 2. LITERATURE REVIEW 7
• The need for financial and corporate actors to mitigate those risks
through appropriate governance
We will use the European Commissions definition of sustainable finance and
especially look at the measurement ESG score.
2.2 Corporate Social Responsibility

What is it?
The European Commission defines Corporate Social Responsibility (CSR)
as "a concept by which companies decide voluntarily to contribute to a bet-
ter society and a cleaner environment by going beyond compliance and
investing more into human capital, the environment and the relations with
stakeholders" (Arvidsson 2010). Compared to sustainable finance and mea-
suring terms like ESG, CSR is more an organizational policy which must be
aligned to the business model to be successful. CSR is a broad concept, and
it depends on industry and business how it takes form. As much as CSR is
important for the society, it ought to be equally valuable for the company
itself.
Should CSR affect financial performance?

According to stakeholder theory, CSR should affect financial performance.
In reverse, shareholder theory claims it should not. Stakeholder theory chal-
lenges the classical shareholder view, which indicates that a company should
solely run its business for the shareholders benefit. Shareholder theory is
based on the premise that management is hired to run the company for the
shareholders and serve their interest. The theory was originally presented by
Milton Friedman (Friedman 1970), but is now challenged by the stakeholder
theory. Instead of just shareholders, the stakeholder theory includes other
groups as important to a company’s well being, for example employees, cus-
tomers, unions and many more. The book Strategic Management: A Stakeholder
Approach by Freeman (1983) is mentioned by many as the foundation of the
stakeholder theory. Several articles use stakeholder theory as the theoretical
base for theories about CSR and financial performance, for example Brooks
and Oikonomou (2018) and J. Kim, Chung, and Park (2013).
8 CHAPTER 2. LITERATURE REVIEW
2.3 Measuring CSR by different scores

Scores and actors
There are plenty of actors and types of scoring in CSR. For example, Sustain-
alytics, Thomson Reuters and Morningstar all provide similar types of ESG
scores. Both Sustainalytics and Thomson Reuters provide ESG scores and
other relevant CSR related data on particular firms and Morningstar provides
an ESG score on mutual funds in collaboration with Sustainalytics. Other
actors are MSCI, an index provider of SRI (socially responsible investments)
indices, and Bloomberg, although their score is a disclosure score. There is
a difference between disclosure and performance, where disclosure is how
well companies do sustainability reporting and performance is how good
they are doing environmentally or socially, for example how much carbon
emissions they have. Global reporting initiative (GRI) is another organiza-
tion, whose purpose is to create a standardized system for ESG reporting.
For a more detailed overview of some of the well-known actors, see Huber
and Comstock (2017).
ESG score
As this thesis will focus on ESG score and its implications for financial
performance, ESG score is explained below. According to the Principles of
Responsible Investing (PRI), ESG is defined as a term that helps investors to
better manage risk and sustainable long-term returns (PRI 2018). ESG scores
are used by investors to estimate the ability of companies to be sustainable,
in addition to other analysis tools for assessing future financial performance.
The Sustainalytics ESG rank (the ESG score used in this thesis) ranges from 0
to 100, where 100 is the best score a firm can achieve. As earlier mentioned,
ESG stands for environmental, social and governance. We explain the factors
below (PRI 2018).
The environmental factor

The environmental factor consists of how a company handle for example
pollution, waste, deforestation, carbon dioxide emissions and climate change.
The social factor

The social factor includes how a company treats people and the community.
Here employee relations, working conditions, local community, diversity,
conflict management, health and safety are of great importance.
The governance factor

The governance factor considers how a company is led. The factor includes
different policies, tax strategies, donations, lobbying, corruption and bribery.
2.4 Screening methods in sustainable investing

Negative screening
There are two types of negative screening, which are processes where the
worst companies are removed. The first type of negative screening is where
you remove the worst individual stocks, for example by setting a minimum
ESG score allowed. If a company is involved in too much negative practises,
and therefore has too low ESG score, it will not be considered when choosing
the sustainable investments. Negative practises include for example poor
pollution records, bad employment records and inadequate health and safety
records.
The second type of negative screening is excluding whole sectors, called "sin
sectors". Typical industries and business to be ruled out during this type of
negative screening is oil, tobacco, mining and pornography (The Guardian
2001). Interestingly, Statman and Glushkov (2009) finds that excluding whole
sectors comes at a disadvantage. The social responsible portfolio that just
excluded "sin" sectors had lower returns than the conventional portfolio.
The social responsible portfolio has lower diversification, and it therefore
becomes costly to exclude whole sectors when measuring return.
Positive screening
Positive screening is a screening method where the best companies are
selected. Companies with strong records of social and environmentally
friendly activities such as good working conditions, energy efficient solutions
and good recycling policies are favored. These companies usually have
higher ESG scores. As for negative screening, one method is to pick the
best individual stocks, for example by setting a lowest allowed ESG score
for the portfolio. This type of positive screening is often referred to as the
best-in-class concept. Another method is to invest in sectors which are
deemed beneficial for sustainability. Examples of industries or businesses
that typically are recognized in a positive screening are waste management,
public transport, education, environmental technology and renewable energy

(The Guardian 2001).
Combined approach example

An example of a combined approach to positive and negative screening can
be seen in the study by Statman and Glushkov (2009). By analyzing the
returns of stocks related to social responsibility from 1992–2007, they find
that a combination of both types of screening does not achieve higher returns.
Using positive screening and investing in socially responsible companies
gave a an advantage in return over conventional portfolios. Using negative
screening by ruling out stocks from "sin" sectors gave a disadvantage for
the socially responsible portfolio compared to the conventional portfolio,
as mentioned above. Hence, the two types of screening neutralized each
other to a zero net effect. The study therefore concluded that a best-in-class
(i.e. selecting among the top ranked stocks) positive screening and not using
negative screening ought to be the best way to go in terms of returns (Statman
and Glushkov 2009).
2.5 Links between CSR activity and financial

performance
To summarize, several studies have investigated the relation between CSR
and financial performance in different ways. The conclusion from reading the
studies included in our literature review is that there seems to be a positive
correlation on a company level, but not on an aggregated portfolio and fund
level.
Accounting based financial performance

The state of research today seems to be that there is a small but statistically
significant positive correlation between CSR activity and accounting based
financial performance. By accounting based financial performance we mean
profitability, for example return on assets (ROA).
According to a study by Eccles, Ioannou, and Serafeim (2014) using 180 Amer-
ican companies which they ranked as high or low sustainability companies,
the high sustainability companies significantly outperform their counterparts
in the long run, both in accounting and market based performance. Another
study by Friede, Busch, and Bassen (2015) that compiled data from 2200
studies also found a positive link to accounting based performance. Contrary
to these findings, Dahlberg and Wiklund (2018) found no link between ESG
score and accounting performance based performance in their recent study
of the Nordic stock market.
In a study of the German market, Velte (2017) examines the relationship
between ESG score and financial performance for companies listed on the
German Prime Standard during the years of 2010-2014. The results of his
research and regression analysis show that there is a positive relationship
between ESG performance and accounting based financial performance.
However, the study concludes that there is no positive relationship between
ESG and market based financial performance. Velte also investigated which
of the factors E,S and G showed the strongest correlation to accounting
based financial performance. The factors where included separately in the
regression model. All factors showed a positive correlation to the accounting
based financial performance, and the governance factor (G) showed the
strongest correlation.
Market based financial performance

As can be seen below, there are several studies showing that there exists a
slightly positive relationship between CSR activity and market based finan-
cial performance. By market based financial performance we mean measures
based on market value, for example stock return or Tobin’s q ratio. But there
are also studies that show no significant relationship. As earlier mentioned,
Velte (2017) found no significant relationship between ESG performance and
market based financial performance.
As mentioned above, Friede, Busch, and Bassen (2015) present a study that
concludes empirical results from over 2000 previous studies of ESG factors
and their effects on financial performance. The research contains both portfo-
lio and nonportfolio-based studies. The authors conclude that there is, on
average, a positive relationship between market based financial performance
and ESG factors. The conclusion also includes financial performance of dif-
ferent asset classes and regions. Another meta-study that has compiled the
result of over 200 previous studies shows a similar result. The authors found
that 80 % of the analyzed studies showed a positive correlation between ESG
performance and market based financial performance (Clark, Feiner, and
Viehs 2015). When large American non-financial firms were investigated, a
significantly positive relationship was found between corporate sustainabil-

ity and market based financial performance (Lo and Sheu 2007). The authors
also found a positive relation between corporate sustainability and sales
growth. Furthermore, there was evidence presented that being sustainable
causes firm value to rise.
In a study of the Korean market from 2013, it is found that a firm’s ESG
score measured by MSCI is correlated with both stock returns and Tobin’s q
(J. Kim, Chung, and Park 2013). Another study of the Korean market shows
a slightly different result (Han, H. J. Kim, and Yu 2016). This empirical study
of 94 firms listed on the Korean Stock Exchange shows that different ESG
factors have different relations to market based financial performance. The
governance factor showed a positive relation while the environmental factor
showed a negative relation towards financial performance. The social factor
turned out to be neutral as it showed no significant relationship.
A master thesis from Stockholm School of Economics shows that firms in-
cluding sustainability in their business model outperform companies that
work with sustainability as philanthropy (Broman and Lundqvist 2016). The
authors have collected data from Swedish companies listed on the Nasdaq
OMX Stockholm and divided the companies into different groups according
to how they work with sustainability and their ESG performance. Despite
not finding any connection between ESG score and accounting based fi-
nancial performance, Dahlberg and Wiklund (2018) found a link between
ESG score and market based financial performance measured by Tobin’s q.
This indicates that investors in Nordic stocks value ESG factors and that the
stakeholder theory is supported.
Sahut and Pasquini-Descomps (2015) investigate the connection between a
news-based ESG score and financial performance in the UK, Switzerland
and the US. They find that there is a slightly negative relation, but only
statistically significant in the UK. When they investigate sub-category ratings
of GRI (governance, economic, environment, labor, human rights, society and
products), they find significant relations but only for some sectors and time
periods, which were not the same between the three countries. This study
also finds through non-parametric kernel regression that the link between
financial performance and changes in this news based ESG score is probably
not linear.
Lee, Faff, and Rekker (2013) corroborate the "no link theory" (i.e. that there is
no link between ESG and financial performance) in their study of US stock
portfolios, which shows that there is no difference in financial performance

between investing in a high ESG portfolio compared to investing in a con-
ventional portfolio or a low ESG portfolio. Neither Hartzmark and Sussman
(2018) find any relationship between high Morningstar globe rating (another
sustainability measure, based on data from MSCI) and market based finan-
cial performance, although the study shows that investors prefer funds with
the highest sustainability rating compared to the lowest (Hartzmark and
Sussman 2018). This finding indicates that investors value sustainability
even though no relation between high scores and financial performance was
found.
Risk
Verheyden, Eccles, and Feiner (2016) investigate the relationship between
ESG, risk, return and diversification. They create four different universes of
stocks based on ESG screening, and find that the screening adds 0.16% on
average to annual returns. The risk is also lower, measured by volatilty, draw-
downs and conditional value at risk (CVaR). In three out of four universes
they also find that the added return outweighs the sacrificed diversification,
going against the earlier mentioned "no link theory". The study by Clark,
Feiner, and Viehs (2015) mentioned above that compiled the results from over
200 previous studies about ESG score and financial performance presents the
result that sustainable companies achieve higher profits and are less risky.
2.6 Literature review summary

To summarize the literature review, most previous studies indicate a positive
relation between sustainability and financial performance. However, there
are also studies which show no relationship or a slightly negative one. For
accounting based marked performance we have reviewed five studies indi-
cating a positive relationship and one with no relation. Regarding market
based financial performance, we have summarized eight previous studies
that show a positive relationship, three studies indicating no relation and
two with a negative relation. Note that some of these studies are review
studies. All the previous studies reviewed are summarized in table 2.1 on
page 14.
Author Time- Sample No. Research ESG rating Corr Corr

frame descrip- obs method method fin. acc.
tion perf. perf.
Broman 2012– Large and 4992 Cahart Thomson + +
(2016) 2015 Mid Cap four-factor Reuters
Nasdaq model Asset4
OMX
Stockholm
Clark 1976– World 200 Review Several + n/a
(2015) 2011 study
Dahlberg 2006– Nordic 108 Regression Thomson + 0
(2018) 2016 with ROE, Reuters
Tobin’s q Eikon
Eccles 1993– US firms 180 Propensity n/a + +
(2014) 2009 firms score
matching
Friede 1970– Global 2200 Review n/a + +
(2015) 2014 stud- study
ies
Han (2016) 2008– Korean 94 Regression Bloomberg +/- n/a
2014 stock firms with ROE, disclosure
market Tobin’s q score
Hartzmark 2016– US based n/a Event Morningstar 0 n/a
(2018) 2017 open-end Study Sustainalyt-
funds ics
Kim (2013) 2011 Korean 96 Regression Morgan + n/a
stock firms Market Stanley
market adjusted Capital Int.
return,
Tobin’s q
Lee (2013) 1999– US stocks n/a Fama Sustainability 0 n/a
2007 portfolios French Asset Man-
model agement
Group(SAM)
Lo (2007) 1999– US non 349 Regression n/a + +
2002 financial firms with To-
firms bin’s q
Sahut 2007– UK, US 200 Four factor News based -/0 n/a
(2015) 2011 and Swiss firms model score, Cova-
firms lence
Velte 2010– German 80 Regression Thomson 0 +
(2017) 2014 Prime firms, with ROA, Reuters
Standard 412 Tobin’s q Asset4
obs
Table 2.1: Summary of literature review.

Chapter 3
Method
3.1 Scientific approach
Research design and approach
Since the aim of this study is to investigate the relation between ESG score
and financial performance, a quantitative study seems to suit our purpose
well (Blomkvist and Hallin 2015). To make the problematization researchable,
we use an explanatory research design which means that our study aims to
find for example correlation between potential cause and effect. According
to Blomkvist and Hallin (2015), when choosing a research design it is im-
portant to know what type of empirical material (explanans) will help you
understand the studied phenomenon (explanandum). Our explanandum
is whether sustainable investments, i.e. stocks with higher ESG score, have
higher financial performance than those with low ESG score. In order to
understand the explanandum, we gathered empirical material in the form
of different types of financial data and ESG score, which have been our
explanans.
The research approach can be inductive or deductive, which describes the
relationship between research and theory (Blomkvist and Hallin 2015). In an
inductive approach, it is the empirical material that indicates which theory is
of interest. It may lead to new theories and other frameworks than you first
started from. Using a deductive approach, you will start reading and relate
your research to existing theory. Since this study aims to and analyze and
contribute to existing theory, a deductive approach is an obvious choice.
Literature review method

Continuously during the research process, a literature review has been con-
ducted. The search engines used were Google Scholar, Diva Portal and KTHB
Primo, where we have found relevant books, journals and articles of different
kinds. Keywords used in the literature search can be found in table 3.1 below.
15
16 CHAPTER 3. METHOD
Keywords
ESG score
Firm value
Sustainable investment
ESG and return
ESG regression
Financial performance
Stock market performance
Corporate social responsibility (CSR)
Social responsible investing (SRI)
Ethical investing
Green investing
Stakeholder Theory
Table 3.1: Keywords used in literature research.
Validity and reliability

Validity entails studying the right thing (Blomkvist and Hallin 2015). We
have to make sure our regression analysis measures what we want and can
answer our research questions. Internal validity concentrates on the issue
of causality (Greener 2008). This is an important issue, especially for us,
since correlation can easily be mistaken for causality and vice versa. We
do not attempt to find any causal links between ESG score and financial
performance, we rather investigate the relationship and aim to find the
correlation between them. External validity, more commonly known as
generalizability, concerns whether the results of the study can be generalized
to other contexts and situations (Greener 2008). Since our data sample does
not include all Nordic companies and just one type of ESG score (i.e the
Sustainalytics rank), the limitations of the generalizability of this study must
be considered when applying the results to other contexts.
The validity of the research is obviously connected to the reliability. Reliabil-
ity ensures studying in the right way and the research should be conducted so
the reader can trust the result. High reliability ensures that the study is done
with a method of high transparency and allows for consistency (Greener
2008). It indicates that the results of the study should be repeatable to be
considered reliable. As we use secondary data, but from a reliable source
(Bloomberg/Sustainalytics), the data could be considered reliable. However
since ESG score are subjective and different actors use different methods to
CHAPTER 3. METHOD 17
rank companies, the result can not be guaranteed to be the same when a
different ESG source is used. To maximize reliability, we have tried to be
transparent and include all data manipulation.
Researchers’ bias
Since we use a quantitative method and data from a reliable source, the bias
is minimized. While we have tried to be as impartial as possible in our anal-
ysis, we as authors could still be biased about the subject. To acknowledge
this matter, we here present our thoughts on sustainability and financial
performance so the reader can take our opinions into consideration. We hope
that there exists a positive correlation between sustainability, i.e. ESG score,
and financial performance. We also hope that investing in companies with
higher scores can encourage better environmental, social and governance
contributions to the society in the future. If investors knew that sustain-
able investments gave higher performance, more would invest in them and
contribute to a more sustainable world.
3.2 Designing the regression analysis

In order to investigate whether there exists a relationship between ESG score
and financial performance, we have used a multiple regression model. As a
starting point, we used an ordinary least squares (OLS) multiple regression
analysis, which is an estimation technique that makes quantitative estimates
of an econometric relationship by calculating the coefficients that minimize
the sum of the squared residuals (Studenmund 2014). In our case, the regres-
sion is used to describe the relation between financial performance and ESG
scores, and find a model that gives estimated dependent variables (financial
performance) as close as possible to the observed data for every stock in the
sample. The variables used in our model are explained in the next section
below.
A multiple regression analysis requires certain assumptions to be fulfilled. In
line with Hair et al. (2014), Studenmund (2014) and previous studies (Velte
2017; Dahlberg and Wiklund 2018) we check if the model meets the assump-
tions of linearity, normality of residuals, homoskedasticity, multicollinearity
and independence of residuals. Note that a regression analysis model can
not prove a causal relationship between different variables, no matter how
accurate the results are (Studenmund 2014). For example, a relationship
between ESG and financial performance could depend on correlation with
an unknown variable which is not accounted for in the model. Hence, this
study solely aims to find the relationship between ESG score and financial
performance and therefore no additional causality test will be executed.
After collecting relevant data, the regression model was evaluated using a
series of statistical methods and tests to assess the assumptions mentioned
above. The tests are described in section 3.4 on page 26. We used the
programming language R along with some specific R packages for data
manipulation and statistical tests. Based on available data and test results,
the model was adapted into the final regression model, which is found in
section 3.4 on page 26.
Regression variables
A summary of the regression variables can be found in table 3.2.
Dependent Variables
Return on Assets (ROA) Net Income / Total Assets
Tobin’s q Market Value of Equity and Liabilities/ Book
value of Equity and Liabilities
Return Yearly stock returns
Independent Variables
ESG Sustainalytics rank, i.e. ESG score
E Environmental score
S Social score
G Governance score
Control Variables
BETA The beta factor, calculated as explained below on
page 20, (Systematic risk)
Leverage (LEV) Total debt/total assets, (unsystematic risk)
Size of firm (SIZE) Natural logarithm of total assets
R&D expenses (R&D) R&D expenses from financial statements
2016 Variable for year 2016
Industry Group (IND) Dummy variable for branch of industry (GICS)
Country of stock (COUNT) Dummy variable of country of trade
Table 3.2: Summary of variables.

Dependent variables
As dependent (or response) variables, i.e. variables representing the financial
performance, we have chosen three different measures. We use Return on
Asset (ROA) as the variable for accounting based performance and Tobin’s
q and stock return as the variables for market based performance. As can
be seen in the literature review summary in table 2.1, several earlier studies
with similar methods use the same variables as dependent variables (Velte
2017; Dahlberg and Wiklund 2018; Han, H. J. Kim, and Yu 2016). Both ROA
and Tobin’s q are financial ratios. ROA is the profit a firm earns in relation
to its overall assets. Tobin’s q represents the ratio between market value
and book value, it is a valuation estimator that expresses if a stock is under
or overvalued. If the ratio is below one, it indicates that the cost to replace
the value of a firm’s assets is greater than its stock value, i.e. the stock is
undervalued. A ratio over one indicates the opposite and a ratio of one
indicates that the market value is the same as the asset value. Since we are
also interested in whether there exists any direct relationship to the stock
returns as well, we added yearly stocks returns as the last dependent variable.
The stock returns are calculated from the mid price of the last trading day in
December, year over year. All the dependent variables are defined in table
3.2.
Independent variables
The variables of interest in this thesis are the Sustainalytics ESG score and its
components, so these are used as independent variables in the regressions.
The first independent variable is the total environmental, social and gover-
nance (ESG) performance score. The separate environmental (E) score is used
as the second independent variable, the social (S) score as the third and the
governance (G) score as the fourth. The scores are further described in sec-
tion 2.3 on page 8. All scores and information are collected from Bloomberg
Terminal and Sustainalytics.
We do not believe that the impact of the ESG data on the financial perfor-
mance will occur instantly and therefore we have included a time lag. We
have chosen to lag the data one year in line with previous studies (Velte 2017)
and because it makes the data comprehensible. The financial performance
from year t + 1 will be hence matched with the ESG score from the year t.
Control variables
As control variables we use several variables that have been selected to be in
line with earlier studies, for example Velte (2017) and Dahlberg and Wiklund
(2018). We use the beta factor and total debt over total assets, i.e. leverage, as
the firm risk. The beta factor was calculated for every stock and year with the
R function CAPM.beta from the package Performance Analytics. As input
we used a risk free rate of zero, the daily price of every stock and the stock
index corresponding to the country the stock trades in (OMXS30 for Sweden,
OMXC20 for Denmark, OMXH25 for Finland and OMXO20 for Norway).
The firm size is given by the natural logarithm of total assets in line with
Velte (2017). R&D expenses are reported by companies in their financial
statements. The same way as the ESG data, we lag the control variables one
year so the financial performance from year t + 1 will be matched with the
control variable from the year t. Lastly, we add year variables for 2016, 2017
and 2018. Industry and country are used as dummy variables.
Preliminary regression models

The preliminary regression models are determined to be
ROAit =↵ + 1 ESGit + 2 SIZEit + 3 LEVit + 4 BET Ait
+ 5 R&Dit + 6 2016 + 7 2017 + 8 2018
+ 9 IN D + 10 COU N T + ✏it
T obin0 s qit =↵ + 1 ESGit + 2 SIZEit + 3 LEVit + 4 BET Ait
+ 5 R&Dit + 6 2016 + 7 2017 + 8 2018
+ 9 IN D + 10 COU N T + ✏it
Returnit =↵ + 1 ESGit + 2 SIZEit + 3 LEVit + 4 BET Ait
+ 5 R&Dit + 6 2016 + 7 2017 + 8 2018
+ 9 IN D + 10 COU N T + ✏it
where all variables can be found in table 3.2 above, ↵ is a constant, 1 10 are
the coefficients and "it is the random error term.
3.3 Data collection

Data collection method
Sustainalytics
Sustainalytics is a company that provides ranking of listed companies based
on their ESG performance (Sustainalytics 2018). The companies are ranked
from 0–100, with 100 being the best score. Sustainalytics use a industry
indicator for each company, so the rankings are within a specific industry
groups. This is the ranking we use as ESG score in this thesis.
Bloomberg Terminal
Bloomberg Terminal is a computer software system where you can find for
example real time market data and trade with electronic orders. It also keeps
you updated with the latest news and research (Bloomberg 2018). Erik Penser
Bank uses the Bloomberg Terminal as their everyday tool. Because of that,
and our perspective from a small institution’s point of view, we have decided
to use data available in Bloomberg Terminal in order to make this study as
authentic as possible.
Accessing the data from Bloomberg Terminal

In Bloomberg Terminal we have accessed a world full of data but the most im-
portant for our study is the Sustainalytics rank (i.e. ESG score). In Bloomberg
Terminal we also found the individual components of the Sustainalytics rank:
an environmental rank, a social rank and governance rank. This meant that
we could separate the E, S and G in our study.
Important to know is that Bloomberg Terminal did not provide the whole
Sustainalytics universe, just a part of it. For our specific choice of sample,
Nordic stocks, the data found in Bloomberg Terminal was estimated to
approximately two thirds of the Sustainalytics universe. In addition to
the Sustainalytics rank, we also accessed all kinds of market and company
reported data that we needed for our regression analysis.
Sample selection
Population
We decided to select a sample from the population of Nordic stocks, since
we found few studies conducted on such a sample. Other reasons to in-
vestigate Nordic stocks is that this study was done in cooperation with a
small, Swedish bank with an interest in the Nordic market and that we are
interested in how the Nordic market compares to other studies with different
samples. For example, we can compare our results with Velte (2017) who
has done a similar study on the German market or Han, H. J. Kim, and Yu
(2016) who have done a comparable study on the Korean market. We can
also compare our results to Dahlberg and Wiklund (2018) who have also
used the Nordic market as their sample but with a different source of data
and ESG score.
The population was determined to be all the stocks which are part of the
indices:
• OMX Stockholm All Shares (OMXSPI)
• OMX Copenhagen All shares (OMXCPI)
• OMX Helsinki All shares (OMXHPI)
• Oslo Børs All-share Index (OSEAX).
Sample construction
We selected the stocks from the indices above which had both an ESG score
from Sustainalytics reported in the Bloomberg terminal and data for the
independent and control variables. However, during this stage of the data
collection we discovered that very few companies reported their R&D ex-
penses, and hence we had to exclude R&D as a control variable. The sample
can be found in AppendixB.
Financial firms were excluded from the sample since their properties are
very different regarding for example the control variable leverage (LEV). A
leverage level that is normal for a financial firm could be a sign of distress
for a non financial firm. Removing financials is a common practice in quanti-
tative research and also in line with previous studies (Velte 2017; Dahlberg
and Wiklund 2018; Han, H. J. Kim, and Yu 2016). Since the data in this study
is of panel structure, we also removed stocks with less than three years of
data, to obtain a more balanced panel.
Our final sample contains 267 stock-year observations. Table 3.3 shows the
number of stocks per year in the sample, and how the different modifications
affected the sample size.
Year 2014 2015 2016 2017 2018

Dataset before lag 83 86 90 86 83
Added lag 1 year 82 85 85 83
Removed financials 68 69 69 67
Removed few obs stocks 66 68 68 65
Table 3.3: Overview of sample.
Exploring the data

First, we want to know how the companies in our sample are ranked in
general. The distribution of Sustainalytics rank (i.e. the ESG score) for all
stock-years in the final sample is shown in figure 3.1. Note that the sample is
very skewed to the right, with more than 80 of the stock-year observations
being of companies which are ranked 100, and an absolute majority being
ranked above 80.
Figure 3.1: A histogram of the Sustainalytics rank observations in the sample
Descriptive statistics
The descriptive statistics of all dependent and independent variables before
processing the data sample are presented in table 3.4 below. R&D is excluded
Min q25 Median Mean q75 Max SD

ROA -14.01 3.30 5.65 8.65 10.18 97.23 12.70
Tobin’s q 0.89 1.36 1.67 2.30 2.35 12.02 1.81
Return -0.5 -0.1 0.1 0.8 0.3 1.1 0.2
ESG 15.4 76.7 87.4 83.3 95.7 100.0 16.3
E 6.4 67.2 82.2 77.3 91.9 100.0 19.9
G 14.4 68.8 85.4 79.4 93.1 100.0 18.6
S 26.3 78.0 86.5 82.6 92.7 100.0 15.6
Size 9.11 10.78 11.35 11.37 12.00 13.82 1.01
Lev 0.00 0.15 0.24 0.24 0.32 0.85 0.13
Beta -7.84 0.00 0.06 0.13 0.19 10.87 1.30
Table 3.4: This table shows descriptive statistics of the sample before processing
for the analysis. q75 and q25 are the quartiles, i.e. the values that delimit the 25%
largest and smallest value. SD is the standard deviation of the variables.
Min q25 Median Mean q75 Max SD

ROA w
-14.01 3.22 5.59 7.51 9.42 42.31 8.56
log(Tobin0 s q)w -0.06 0.30 0.51 0.66 0.85 2.31 0.53
Returnw -0.35 -0.09 0.05 0.07 0.25 0.69 0.23
ESG 15.4 76.7 87.4 83.3 95.7 100 16.3
ESG 6.4 67.2 82.2 77.3 91.9 100 19.9
S 26.3 78 86.5 82.6 92.7 100 15.6
G 14.4 68.8 85.4 79.4 93.1 100 18.6
Sizew 9.15 10.78 11.35 11.36 12 13.75 1.01
Levw 0.01 0.15 0.24 0.24 0.32 0.7 0.13
Betaw -5.63 0 0.06 0.1 0.19 3.5 0.85
Table 3.5: This table shows descriptive statistics of the processed sample used in
the regression analysis. q75 and q25 are the quartiles, i.e. the values that delimit
the 25% largest and smallest value. SD is the standard deviation of the variables.
Superscript w means the data is winsorized using levels (0.01, 0.99). The description
of the data processing is found in section 3.4.
and financial stocks were removed, as mentioned in section 3.3. The ESG,
E, S and G score scale is from 0 to 100. The beta factor was calculated as
mentioned above in section 3.2 on page 20. The descriptive statistics of the
processed sample used in the regression analysis could be found in table 3.5
on page 24. The data manipulation of the sample is explained in section 3.4.
Correlation Matrix
The correlation matrix of the non dummy variables is presented in figure
3.2 on page 25. As expected, the social, governance and environmental
scores are highly correlated with the total ESG score, which is natural since
ESG is the aggregated score of its components. But the correlations are not
one, which means it is meaningful to test the components individually. The
correlation between the social/environmental score and the total ESG score
is higher than between the governance and ESG score. This indicates that the
environmental and social factors are more in line with the total ESG score
than the governance factor is.
Figure 3.2: Correlation matrix. The correlations in colored squares have a p-value of
<0.05, and the correlations in white squares are non significant.
We also notice that the size is negatively correlated to Tobin’s q, i.e. market
based financial performance, and slightly positively correlated to the ESG
score, which could suggest that larger firms have higher ESG scores. We
also note that the variables Beta and Return do not have any significant
correlation with any variable. This is a bit surprising since Return ought to
have a correlation to both Beta and Tobin’s q.
3.4 Development of the final regression models

Statistical tests used in model diagnostics
In order to do a multiple regression analysis, we need to check certain
assumptions. In line with Hair et al. (2014), Studenmund (2014) and previous
studies (Velte 2017; Dahlberg and Wiklund 2018) we check if the model
meets the assumptions of linearity, normality of residuals, homoskedasticity,
multicollinearity and independence of residuals.
We check the linearity assumption by assessing the residuals vs fitted values
plot for each regression, looking for indications of nonlinear patterns. We
use the same plot to check the homoskedasticity assumption by looking
for a widening of variance pattern (cone shape). We also use the Breusch-
Pagan heteroskedasticity test from the lmtest R package. The normality
of the residuals is checked by assessing the normal Q-Q plot of residuals
and a histogram of residuals visually. We also use the Shapiro-Wilk test of
normality from the stats R package.
For serial correlation of errors, we first visually examine the sequential
plot of residuals for unusual patterns or drift of errors. Then we use two
statistical tests as well, namely the Durbin-Watson test for panel models
and the modified Bhargava/Franzini/Narendranathan (BFN) Panel Durbin-
Watson test (both from plm R package). The modified BFN Panel Durbin-
Watson test does not provide a p-value, instead Bhargava, Franzini, and
Narendranathan (1982) advises to look for test statistics < 2 to avoid serial
correlation in larger samples.
Lastly, correlation is checked by making a correlation matrix of the model
variates and the residuals. Collinearity is checked with the VIF test together
with assessing the correlation matrix of the data (figure 3.2).
Modifications of the regression models

In this section, we summarize what changes were made from the initial
regression model to the final regression model.
Earlier studies, for example Velte (2017), used R&D as a control variable,
which we also wanted to do. However, as mentioned in section 3.3, there
were not enough data available for this variable and R&D was therefore
excluded from the model.
Because of selection bias noticed in the sample (see for example figure 3.1),
differences in variance between countries and industries and the fact that
we had to exclude R&D as a variable, we believe there is unobserved hetero-
geneity in the sample. Therefore we used a fixed effects regression model.
We believe that this type of regression model is the most suitable for our
data and type of problem. A fixed effects model is used also because we
are only interested in analyzing the impact of variables that vary over time.
To explain fixed effect regression briefly, it measures the the relationship
between predictor and outcome variables within a unit (i.e. within a stock).
Each stock has its own particular characteristics that may or may not affect
the predictor variables (Torres Reyna 2007). Since fixed effects models do
not take variables into account if they do not change over time, the dummy
variables for country and industry are no longer needed in the model.
To reduce heteroskedasticity in the regressions with Tobin’s q as dependent
variable, we decided to use log(Tobin’s q) instead. We also used winsorizing
with levels 0.01, 0.99. This reduced, but did not eliminate, the heteroskedas-
ticity evident in the residuals (see figure 4.2). We then decided to use robust,
individually clustered standard errors to account for heteroskedasticity and
the panel structure of the data. For the dependent variables ROA and stock
returns, winsorizing them and the control variables (we used the quantiles
0.01 and 0.99) to reduce outliers proved to be the most effective technique for
better model fit. For the ROA regressions, we also decided to exclude five
very extreme observations of ROA > 70%, which we knew were due to tech-
nical accounting issues because of company splits or sales. The observations
were removed before winsorizing.
Final regression models

The final fixed effects regression models for the total ESG score are presented
below.
ROAw
it =↵i + 1 ESGit + w
2 SIZEit + w
3 LEVit + w
4 BET Ait +
+ 5 2016 + 6 2017 + 7 2018 + "it
log(T obin0 s q)w

2 SIZEit + w
3 LEVit + w
4 BET Ait +
+ 5 2016 + 6 2017 + 7 2018 + "it
Returnw
2 SIZEit + w
3 LEVit + w
4 BET Ait +
+ 5 2016 + 6 2017 + 7 2018 + "it

For each dependent variable we test E, S and G individually as well as the

total ESG score, which means we do in total twelve fixed effects regressions.
Table 3.6 summarizes the different regressions performed. All regression
variables are described in table 3.2 above, w means winsorized, ↵i are the
individual fixed effects constants, 1 7 are the coefficients and "it is the
clustered robust standard error term.
Combinations of dependent and independent variables:

ROAw and ESG
ROAw and E
ROAw and S
ROAw and G
Log(T obin0 sq)w and ESG
Log(T obin0 sq)w and E
Log(T obin0 sq)w and S
Log(T obin0 sq)w and G
Returnw and ESG
Returnw and E
Returnw and S
Returnw and G
Total number of regressions: 12
Table 3.6: Summary of all regression variable combinations.

Chapter 4
Empirical results
4.1 Regression summary
In summary, our regressions do not indicate any significant relationship be-
tween financial performance and the total ESG score, nor between financial
performance and any of the E, S or G components. Only the E component
showed a slightly negative significant relationship with log(Tobin’s q) (esti-
mate -0.0031, p-value < 0.05). For a full summary of the results, see table 4.1.
The confidence intervals for the coefficients for the total ESG score, E, S and
G are found in table 4.2. In Appendix A, the full R output of the regression
with total ESG score can be found, including all plots and test statistics not
presented in this chapter.
4.2 ROA regressions

Results
With ROA as the dependent variable, we have performed four regressions
for the variables of interest ESG, E, S and G. Neither of them had an effect on
ROA significantly different from zero. ESG, E and S have slightly positive but
insignificant coefficient estimates, and G has a slightly negative insignificant
coefficient estimate. Only the variable beta has a significant effect on ROA in
these regressions, with an estimated coefficient of approximately 0.7 for all
of the regressions.
Model diagnostics
The model diagnostics tests show the same results for the four ROA regres-
sions, why the comments below apply to all four of them. First, we look at
figure 4.1 which shows residuals plotted against the fitted values. In the plot,
we do not see clear signs of heteroskedasticity, and the Breusch-Pagan test
does not find significant heteroskedasticity either. There is a clear cluster of
residuals around the fitted ROA value of five. We do not think this pattern
29
30 CHAPTER 4. EMPIRICAL RESULTS
ROA log(Tobin’s q) Stock returns

ESG 0.0456 (0.0429) -0.0017 (0.0029) -0.0069 (0.0038)
Size -4.5464 (3.7903) -0.3252 (0.1412)* -0.2448 (0.2823)
Lev 5.8152 (13.9436) 0.3759 (0.4694) 0.7589 (0.6236)
Beta 0.7396 (0.1059)*** -0.0020 (0.0099) -0.0300 (0.0069)***
2016 -0.1246 (0.6189) -0.0023 (0.0200) -0.0129 (0.0514)
2017 0.4283 (0.8826) 0.0875 (0.0269)** 0.0877 (0.0501)
2018 0.7424 (1.1111) 0.0983 (0.0346)** -0.0570 (0.0451)
E 0.0144 (0.0371) -0.0031 (0.0015)* -0.0015 (0.0026)

Size -4.5360 (3.8343) -0.3043 (0.1379)* -0.2500 (0.2773)
Lev 5.8605 (14.2160) -0.2873 (0.4721) 0.7270 (0.6815)
Beta 0.7101 (0.1019)*** -0.0047 (0.0104) -0.0246 (0.0096)*
2016 -0.0868 (0.6173) -0.0040 (0.0196) -0.0186 (0.0520)
2017 0.5710 (0.8887) 0.0823 (0.0249)** 0.0657 (0.0510)
2018 0.9103 (1.1165) 0.0905 (0.0326)** -0.0814 (0.0472)
S 0.0116 (0.0033) -0.0011 (0.0025) -0.0052 (0.0033)

Size -4.3945 (3.7313) -0.3296 (0.1407)* -0.2631 (0.2792)
Lev 6.0829 (14.1080) -0.3735 (0.4627) 0.7816 (0.5972)
Beta 0.6919 (0.0889)*** -0.0004 (0.0106) -0.0238 (0.0073)**
2016 -0.1169 (0.5961) -0.0011 (0.0216) -0.0062 (0.0518)
2017 0.5057 (0.8593) 0.0884 (0.0306)** 0.0949 (0.0502)
2018 0.8579 (1.0944) 0.0976 (0.0350)** -0.0573 (0.0452)
G -0.0212 (0.0393) 0.0008 (0.0017) 0.0017 (0.0028)

Size -4.4481 (3.6487) -0.3272 (0.1394)* -0.2581 (0.2736)
Lev 5.7136 (14.6185) -0.3746 (0.4800) 0.7163 (0.6895)
Beta 0.6775 (0.0909)*** 0.0003 (0.0116) -0.0214 (0.0109)
2016 -0.0706 (0.6243) -0.0044 (0.0190) -0.0199 (0.0521)
2017 0.6541 (0.9292) 0.0792 (0.0243)** 0.0596 (0.0542)
2018 1.0040 (1.1562) 0.0892 (0.0351)* -0.0873 (0.0517)
Table 4.1: Summary of the results of the twelve fixed effects regressions. The first
row shows which dependent variable the results below are associated with. First
number presented is the estimate of the coefficients for each regression. The numbers
presented within parentheses is the clustered and robust standard errors. The symbols
*, ** and *** indicate significance levels of 5%, 1% and 0.1% respectively.
CHAPTER 4. EMPIRICAL RESULTS 31
ROA log(Tobin’s q) Stock returns

5% 95% 5% 95% 5% 95%
ESG -0.025 0.117 -0.006 0.003 -0.014 -0.001
E -0.047 0.076 -0.006 -0.001 -0.006 0.003
S -0.042 0.065 -0.005 0.003 -0.011 0
G -0.086 0.044 -0.002 0.004 -0.003 0.006
Table 4.2: This table shows the confidence intervals of the regression estimates of
how the ESG score and its components affect the financial performance measures
ROA, Tobin’s q and stock returns.
10
5
residuals_ROA
−5
−10
0 10 20 30 40
fitted_values_ROA
Figure 4.1: Residuals vs fitted values for the regression with ROA as response
variable and ESG score as variable of interest.
indicates non-linearity, because it corresponds to the distribution of the ROA

data. For comparison, the median ROA is 5.7% and the distribution can be
found in section 3.3, see table 3.4.
By inspecting the Q-Q plot and histogram of residuals, we can see that the
distribution of residuals has too heavy tails to be normally distributed. The
Shapiro-Wilk test also rejects the hypothesis of normality.
The Durbin-Watson and modified BFN Durbin-Watson tests do not indicate
any serial correlation of residuals. The sequential plot of residuals show that
some residuals form lines. Due to this and the panel structure of the data,
we have used individual stock clustered errors.

Lastly, none of the independent variables are correlated with the residuals,
and the VIF test does not indicate multicollinearity.
4.3 Tobin’s q regressions

Results
When log(Tobin’s q) was used as dependent variable (see section 3.2 for
motivation for the log-transform), four regressions were performed for E, S,
G and the total ESG score. No significant effect was discovered for either of
them except for the environmental (E) score, which had a slightly negative
effect on Tobin’s q with a significance level of 5%. The other insignificant
coefficients estimates are also slightly negative except the governance factor
(G), which seems to have a rather small positive effect, although it is not
significant. Other significant coefficient estimates are the variables size and
years 2017 and 2018. The size variable seems to have a slightly negative im-
pact on Tobin’s q, with an estimated significant coefficient of approximately
-0.3 for all regressions. This indicates that larger stocks seem to have lower
Tobin’q and hence be less overvalued compared to their asset values.
Model diagnostics
The model diagnostics tests show the same results for the four log(Tobin’s
q) regressions, why the comments below apply to all four of them. First,
we look at figure 4.2 with residuals plotted against the fitted values. In
the plot, there is a classical cone shaped heteroskedasticity pattern, and the
Breusch-Pagan test indeed rejects the homoskedasticity hypothesis. Hence,
taking the logartithm of Tobin’s q did not completely remedy the hetero-
skedasticity problem. However, we use robust standard errors which are
heteroskedasticity consistent. In the plot there is also a clear cluster of
residuals between the fitted log(Tobin’s q) values 0-1. We do not think this
pattern indicates non-linearity, because it corresponds to the distribution of
the log(Tobin’s q) since the Tobin’s q data is skewed towards lower values.
For comparison, the distribution can be studied in the descriptive statistics
in table 3.4.
distribution of residuals is too peaked and has too heavy tails to be normally
distributed. The Shapiro-Wilk test also rejects the hypothesis of normality.
CHAPTER 4. EMPIRICAL RESULTS 33
residuals_tobins_q 0.3
0.0
−0.3
−0.6
0.0 0.5 1.0 1.5 2.0
fitted_values_tobins_q
Figure 4.2: Residuals vs fitted values for the regression with log(Tobin’s q) as
dependent variable and ESG score as variable of interest.
The Durbin-Watson and modified BFN Durbin-Watson tests do not indicate

any serial correlation of residuals. The sequential plot of residuals show that
some residuals form lines. Due to this and the panel structure of the data,
we have used individual stock clustered errors.
4.4 Stock return regressions

Results
The results for the return regressions follow almost the same pattern as for
the log(Tobin’s q) regressions. This seems reasonable since both Tobin’s q
and returns are related to market value. As can be seen in table 4.1 there
are slightly negative but insignificant results for the total ESG score, E and
S. For the governance factor (G), there is a slightly positive but insignificant
relationship. This is in line with the results of the log(Tobin’s q) regressions.
However, for the return regressions the beta variable and its coefficient
estimates are slightly negative and significant for E, S and ESG, but not for G.
Model diagnostics
0.50
residuals_return
0.25
0.00
−0.25
−0.50
−0.2 0.0 0.2 0.4
fitted_values_return
Figure 4.3: Residuals vs fitted values for the regression with stock returns as
dependent variable and ESG score as variable of interest.
The model diagnostics tests show the same results for the four returns re-
gressions. First, we look at the figure 4.3 with residuals plotted against the
fitted values. In the plot, we do not see clear signs of heteroskedasticity, and
the Breusch-Pagan test does not find significant heteroskedasticity either. In
these residuals, we see no clustering or any signs of non-linearity.
distribution of residuals has a too heavy upper tail to be normally distributed.
The residuals also look a bit skewed to the left in the histogram. The Shapiro-
Wilk test rejects the hypothesis of normality, in line with our interpretations
of the plots.
The Durbin-Watson test shows no sign of serial correlation. The modified
BFN Durbin-Watson test on the other hand has a value of 1.99 which is very
close to 2, the threshold value for indicating serial correlation (Bhargava,
Franzini, and Narendranathan 1982). The sequential plot of residuals show
some clustering of errors. Due to this and the panel structure of the data, we
have used individual stock clustered errors.
Chapter 5
Discussion & Analysis

5.1 Total ESG score and financial performance
The primary purpose of this thesis was to investigate the relation between
the total ESG score and financial performance, which was done in accordance
with our method section. To answer the first research question, i.e. what the
relationship is between ESG score and financial performance, three different
regressions were performed. The first regression used return on assets (ROA)
as dependent variable, the second used log(Tobin’s q) and the third used
stock returns. These three different dependent variables were used to see
if there exists a difference in the effect of ESG score between accounting
based and market based financial performance. As can be seen in chapter
4, Empirical results, we found no significant effect of the total ESG score on
any of the three dependent variables. The lack of significant relationships
indicates that no conclusions can be drawn about financial performance
based on the ESG score used in this study.
If one were to draw any conclusions from the empirical results despite them
being non-significant, there may be a slightly positive relation between total
ESG score and accounting based financial performance (i.e. ROA). There
may also be a slightly negative relationship between the total ESG score and
market based financial performance (i.e. Tobin’s q and stock returns).
The result is in line with some of the previous studies examined in our liter-
ature review. For example Velte (2017), who performed a similar study on
the German market, found no significant relationship between ESG score
and market based financial performance. With a similar method, Dahlberg
and Wiklund (2018) did not find any significant relationship between ESG
score and accounting based performance either. Neither Hartzmark and
Sussman (2018) nor Sahut and Pasquini-Descomps (2015) found any relation-
ship between ESG and market based financial performance, although they
used different methods compared to ours. Also Lee, Faff, and Rekker (2013)
contributed to the support of the "no linkage theory".
35
36 CHAPTER 5. DISCUSSION & ANALYSIS
However, our results also differ from some of the previous studies which
used similar methods. For example Velte (2017) presented a significant
positive relation between ESG and ROA, and Dahlberg and Wiklund (2018)
presented a significant relationship between and ESG and Tobin’s q. This
could depend on difference between samples, different types of ESG scores or
a slight variation in method. For example both Velte (2017) and Dahlberg and
Wiklund (2018) used the ESG score provided by Thomson Reuters whilst we
have used the ESG score provided by Sustainalytics. The scoring methods are
not transparent, and can therefore be subjective and differ between providers.
Also the methods used in previous literature may not be exactly the same as
our regression analysis performed. We know for example that we have some
problem with normality in our model diagnostics, which previous studies
have not mentioned. The limitations of our study are further discussed in
section 5.3 below.
To relate our results to the theoretical foundation of why ESG scores could
have an impact on performance, our empirical results can neither strengthen
the stakeholder theory nor the shareholder theory. According to stakeholder
theory, we should expect ESG scores to correlate with financial performance.
According to shareholder theory, CSR activity would be an unnecessary cost
for a company and we should therefore see a negative correlation. As our
results indicate that there should be no difference in financial performance
from investing in low versus high ESG scores, the stakeholder theory is
not supported. But neither is the shareholder theory, since no negative
relationship between high ESG score and financial performance was found.
But we believe that together with previous research, there is a stronger
support for stakeholder theory. For example, Hartzmark and Sussman (2018)
found no link between sustainability score and financial performance of
mutual funds, but they found that investors still value high sustainability
score since the inflow of capital to high sustainable funds was larger than to
lower rated funds, indicating that investors do make choices of where to put
their money based on their ESG profile.
5.2 Effect of individual ESG components

As the secondary purpose of this thesis was to investigate whether any of the
E, S or G components have a stronger relation to financial performance, nine
different regressions were performed where E, S and G were individually
tested for relationships with ROA, Tobin’s q and stock return. As can be seen
CHAPTER 5. DISCUSSION & ANALYSIS 37
in table 4.1, only the environmental score (E) had a significant coefficient
with log(Tobin’s q) as the dependent variable. The relationship was slightly
negative. Interesting to note is also that although not significant, the gov-
ernance factor (G) seems to have the reverse relationship compared to the
other factors for all three dependent variables.
As our only significant result is the Environmental score (E) in the Tobin’s
q regression, the environmental factor is the one with strongest relation to
financial performance. However, the relation is slightly negative (-0.003),
indicating that environmental aspects has a somewhat negative impact on
market based financial performance. The regression with E and ROA did
not show any significant result, hence this implication does not hold for
accounting based financial performance.
Velte (2017), Han, H. J. Kim, and Yu (2016) and Dahlberg and Wiklund (2018)
have done similar studies and separated E, S and G but their conclusions
differ from ours. Velte (2017) presented a result where all separate ESG
variables had a positive relation to ROA. Han, H. J. Kim, and Yu (2016) found
that governance (G) had the most impact and Dahlberg and Wiklund (2018)
stated that the environmental factor (E) had the most significant positive
relation to Tobin’s q. One can ask why the results differ so much between
the different studies. An explanation could be the samples differ. Velte (2017)
and Han, H. J. Kim, and Yu (2016) have used samples from Germany and
South Korea respectively, quite different from our Nordic sample. In their
studies all data also comes from a single country, while we have data from
four different countries.
Dahlberg and Wiklund (2018) use a sample from the Nordic countries, a
very similar sample compared to ours. However their presented result is the
opposite of ours, since they found a positive significant relationship of E and
Tobin’s q. This seems strange at first sight, but it might depend on that the
sample used is not exactly the same and above all Dahlberg and Wiklund
(2018) use a different type of ESG score. They used the ESG score from Eikon
by Thomson Reuters and we have used Sustainalytics rank. As mentioned
before, there is no exact standard for measuring sustainability and different
types of ESG score can vary. This could be a possible explanation for why
our results differ so much.
38 CHAPTER 5. DISCUSSION & ANALYSIS
5.3 Critical review

Although we have tried to maximise the reliability by being transparent and
including all data manipulation and statistical tests, all the results discussed
above must be considered in light of the limitations of this study, which are
discussed in this section.
General limitations of multiple linear regression are for example that it
assumes that the relationship is linear, and of course only captures informa-
tion that is easily measurable. Regarding linearity, the study by Sahut and
Pasquini-Descomps (2015) finds that the relationship between another ESG
score (not the Sustainalytics rank) and stock performance is probably not lin-
ear, so the linearity assumption is a possible weakness of our study. It could
also be a weakness of the ESG score as a predictive measure, because the
exact shape of the relationship is not revealed neither in our study nor in the
previous research. Regarding hard to measure factors, examples of factors
not included in our regression model could be company culture or credibility
of the company board, which both could affect the financial performance of
a company. However, using fixed effects regression is a way to account for
this problem. Regression can also be sensitive to outliers, though we have
tried to minimize that sensitivity by using winsorizing and by excluding
observations with extreme values of ROA.
Another limitation of our model is that a potentially asymmetrical relation-
ship between ESG and market based performance is not taken into account.
We believe that it is possible that investors react more strongly to negative
ESG score changes (for example in the case of an environmental scandal)
than to positive changes, a phenomenon known as negativity bias.
There are also limitations that arise from the data sample. For example, the
study uses data from only a few years, and the Nordic companies in our
sample seem to have very high ESG score which indicates that the results
might not be representative for companies with lower ESG scores. The ESG
score in it self is also a limitations, as we use Sustainalytics rank and there are
other scores that might rank the companies differently. These factors limit
the generalizability of the study.
Limitations of our final regression model (presented in section 3.4) is for
example that we have heteroskedasticity in the residuals for the log(Tobin’s
q) regressions. Further, none of the regressions for either ROA, log(Tobin’s q)
or stock returns have normally distributed residuals. These two problems
CHAPTER 5. DISCUSSION & ANALYSIS 39
indicate that the regression does not capture all of the relevant information
to explain the response variables.
5.4 Implications for academia and industry

Most of the previous research have used Thomson Reuters Eikon ESG score
or its predecessor Asset4. Thus, we have contributed by complementing
the research using another measure, the Sustainalytics rank. We have also
contributed with adding a study of a Nordic sample, which we believe only
one previous study has done before (Dahlberg and Wiklund 2018).
As for the implications regarding the financial industry, we have delivered a
study that indicates no relation between ESG score and financial performance.
We believe that since our results show no link between ESG and financial
performance, and previous research either shows the same or a positive link,
that if you choose between two otherwise equal stocks you can therefore
pick the one with higher ESG score. In our view it is a widespread belief
among investors that you have to choose between return and conscience, so
an advantage of this result is that a financial institution can cater to the needs
of their environmentally conscious customers, probably without sacrificing
performance of the portfolio.
To relate our results to the screening methods found in section 2.4 in the
literature review, a best in class method (positive screening) would not yield
a lower performance. On the other hand, since excluding sin sectors might
decrease the performance of a portfolio, a combined approach might not be
beneficial. According to our results, the positive effect on performance from
the best in class approach would not be there to cancel out the negative effect
from excluding sin sectors.
Chapter 6
Conclusion
6.1 Answering the research question
What is the relationship between ESG score and financial performance?
Our empirical result concluded no significant relationship between ESG
score and financial performance, neither market or accounting based. This
indicates that no conclusion can be drawn about financial performance based
on the ESG score.
What part of the ESG score shows the strongest relation to financial per-
formance?
The environmental factor (E) showed the strongest relation to financial per-
formance, however slightly negative and only significant to the log(Tobin’s
q) variable, which means the connection is only seen in one of the measures
of market based financial performance. Since there was only one significant
result found, we do not believe our results should be used to draw any
conclusions about the financial performance of a stock based on the ESG
score components E, S or G.
6.2 Recommendations
Since our research indicates no significant relationship between ESG score
and financial performance, we recommend to invest in the highest ESG
ranked company in the case of choosing between two otherwise similar
stocks.
6.3 Future research

We would suggest for someone with access to the full Sustainalytics database
to replicate our study, since we only had access to part of it through
Bloomberg Terminal. At this time, we do not know how the sample from
40
CHAPTER 6. CONCLUSION 41
Bloomberg Terminal was selected and that obviously creates an unknown

sample selection bias. The Sustainalytics will also update their current ESG
rank and replace it with a new ESG risk measure (Sustainalytics 2018). A
study performed with the new ESG score could be interesting to see.
As described in section 5.3, our regression model is probably missing some
relevant information. Therefore a suggestion for future research is exploring
different types of regression models that could fit the type of data we used
better.
Very few of the companies in both our study and the other study of Nordic
companies by Dahlberg and Wiklund (2018) reported R&D expenses, so that
measure was excluded from the analysis. It would therefore be interesting
to construct a sample of Nordic companies that do report R&D expenses
and are rated by some ESG score, and investigate whether the model fit is
different with R&D data available.
To investigate possible causal links, an event study could be preformed. Such
a study could research the impact of a change in ESG score on the financial
performance. This would be interesting to add as a complement to our study,
which only presented correlations between the variables.
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social responsibility and financial performance: the impact of the MSCI
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asset-owners-2018-survey.pdf.
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Petersson, Jenny (2018). “Experten sågar hållbara fonder - bara risk för
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Appendix A
Regressions with ESG score

A.1 Response variable: ROA
Summary of model
## Oneway (individual) effect Within Model
##
## Call:
## plm(formula = ROA ~ sustainalytics_rank + size + leverage + Beta +
## factor(Year), data = lagged_winsorized_data_ROA_adj, model = "within",
## index = c("Ticker", "Year"))
##
## Unbalanced Panel: n = 68, T = 2-4, N = 263
##
## Residuals:
## Min. 1st Qu. Median 3rd Qu. Max.
## -8.947719 -1.496360 -0.045275 1.077156 10.529357
##
## Coefficients:
## Estimate Std. Error t-value Pr(>|t|)
## sustainalytics_rank 0.045642 0.045017 1.0139 0.311936
## size -4.546427 2.224715 -2.0436 0.042388 *
## leverage 5.815213 5.599606 1.0385 0.300369
## Beta 0.739554 0.248601 2.9749 0.003316 **
## factor(Year)2016 -0.124596 0.567336 -0.2196 0.826409
## factor(Year)2017 0.428183 0.629892 0.6798 0.497485
## factor(Year)2018 0.742371 0.666743 1.1134 0.266946
## ---
## Signif. codes: 0 '***' 0.001 '**' 0.01 '*' 0.05 '.' 0.1 ' ' 1
##
## Total Sum of Squares: 2052.3
## Residual Sum of Squares: 1885.2
## R-Squared: 0.081457
## Adj. R-Squared: -0.2801
## F-statistic: 2.38172 on 7 and 188 DF, p-value: 0.023489
Clustered robust standard errors

##
## t test of coefficients:
##
## Estimate Std. Error t value Pr(>|t|)
## sustainalytics_rank 0.045642 0.042871 1.0646 0.2884
## size -4.546427 3.790307 -1.1995 0.2318
## leverage 5.815213 13.943560 0.4171 0.6771
## Beta 0.739554 0.105883 6.9847 4.791e-11 ***
46
APPENDIX A. REGRESSIONS WITH ESG SCORE 47
## factor(Year)2016 -0.124596 0.618906 -0.2013 0.8407

## factor(Year)2017 0.428183 0.882566 0.4852 0.6281
## factor(Year)2018 0.742371 1.111113 0.6681 0.5049
## ---
## Signif. codes: 0 '***' 0.001 '**' 0.01 '*' 0.05 '.' 0.1 ' ' 1
Confidence interval of point estimates

## 5 % 95 %
## sustainalytics_rank -0.02522438 0.1165085
## size -10.81180037 1.7189473
## leverage -17.23347966 28.8639064
## Beta 0.56452977 0.9145777
## factor(Year)2016 -1.14764730 0.8984557
## factor(Year)2017 -1.03069686 1.8870637
## factor(Year)2018 -1.09429715 2.5790389
Heteroskedasticity test
##
## studentized Breusch-Pagan test
##
## data: fixed_model_ROA
## BP = 9.6523, df = 7, p-value = 0.2091
Residuals plotted against fitted values
10
5
residuals_ROA
−5
0 10 20 30 40
fitted_values_ROA
48 APPENDIX A. REGRESSIONS WITH ESG SCORE
Normal Q-Q plot of residuals

10 Normal Q−Q Plot
Sample Quantiles
5
0
−5
−3 −2 −1 0 1 2 3
Theoretical Quantiles
Histogram of residuals
40
30
20
10
−10 −5 0 5 10
residuals_ROA
Shapiro-Wilk test for normality of residuals

##
## Shapiro-Wilk normality test
##
## data: residuals_ROA
## W = 0.94524, p-value = 2.401e-08
Serial correlation of errors tests

Sequential plot of residuals
10
5
residuals_ROA
0
−5
0 50 100 150 200 250
Index
Durbin-Watson test for serial correlation in panel models

##
## Durbin-Watson test for serial correlation in panel models
##
## data: ROA ~ sustainalytics_rank + size + leverage + Beta + factor(Year)
## DW = 1.9864, p-value = 0.5067
## alternative hypothesis: serial correlation in idiosyncratic errors
Modified BFN Panel Durbin-Watson Test

##
## modified Bhargava/Franzini/Narendranathan Panel Durbin-Watson
## Test
##
## data: ROA ~ sustainalytics_rank + size + leverage + Beta + factor(Year)
## DW = 1.0968
Error term correlation with variates

## residuals
## ROA 3.134732e-01
## sustainalytics_rank 4.520189e-17
## size -3.333400e-16
## leverage -1.502424e-16
## Beta 1.482236e-17
## factor.Year. 4.595377e-17
## residuals 1.000000e+00
VIF test for multicollinearity

## GVIF Df GVIF^(1/(2*Df))
## sustainalytics_rank 1.255265 1 1.120386
## size 1.133918 1 1.064856
## leverage 1.112592 1 1.054795
## Beta 1.043336 1 1.021438
## factor(Year) 1.039813 3 1.006528
A.2 Response variable: Tobin’s q

Summary of model
##
## Call:
## plm(formula = log_tobins_q ~ sustainalytics_rank + size + leverage +
## Beta + factor(Year), data = lagged_winsorized_data, model = "within",
##
##
## Residuals:
## -0.5699860 -0.0478501 -0.0024424 0.0516223 0.4763154
##
## Coefficients:
## sustainalytics_rank -0.0016653 0.0017291 -0.9631 0.3366976
## size -0.3252217 0.0874891 -3.7173 0.0002641 ***
## leverage -0.3758449 0.2210423 -1.7003 0.0906880 .
## Beta -0.0019613 0.0098413 -0.1993 0.8422437
## factor(Year)2016 -0.0023144 0.0223865 -0.1034 0.9177656
## factor(Year)2017 0.0875083 0.0246101 3.5558 0.0004746 ***
## factor(Year)2018 0.0983173 0.0260274 3.7775 0.0002113 ***
## ---
## Signif. codes: 0 '***' 0.001 '**' 0.01 '*' 0.05 '.' 0.1 ' ' 1
##
## R-Squared: 0.16363
## F-statistic: 5.36607 on 7 and 192 DF, p-value: 1.2489e-05

##
##
## sustainalytics_rank -0.0016653 0.0029076 -0.5727 0.567491
## size -0.3252217 0.1412363 -2.3027 0.022369 *
## leverage -0.3758449 0.4693631 -0.8008 0.424263
## Beta -0.0019613 0.0099418 -0.1973 0.843817
## factor(Year)2016 -0.0023144 0.0200358 -0.1155 0.908158

## factor(Year)2017 0.0875083 0.0268952 3.2537 0.001346 **
## factor(Year)2018 0.0983173 0.0345713 2.8439 0.004939 **
## ---
## Signif. codes: 0 '***' 0.001 '**' 0.01 '*' 0.05 '.' 0.1 ' ' 1

## 5 % 95 %
## sustainalytics_rank -0.006471127 0.003140495
## size -0.558661097 -0.091782348
## leverage -1.151621600 0.399931798
## Beta -0.018393345 0.014470715
## factor(Year)2016 -0.035430236 0.030801387
## factor(Year)2017 0.043055063 0.131961516
## factor(Year)2018 0.041176946 0.155457727
##
##
## data: fixed_model_tobins_q
## BP = 30.079, df = 7, p-value = 9.184e-05
0.3
residuals_tobins_q
0.0
−0.3
−0.6
0.0 0.5 1.0 1.5 2.0
fitted_values_tobins_q

0.4
0.2 Normal Q−Q Plot
Sample Quantiles
0.0
−0.6 −0.4 −0.2
−3 −2 −1 0 1 2 3
40
20
−0.6 −0.3 0.0 0.3

residuals_tobins_q

##
##
## data: residuals_tobins_q
## W = 0.94096, p-value = 7.173e-09

0.4
0.2
residuals_tobins_q
0.0
−0.6 −0.4 −0.2
0 50 100 150 200 250
Index

##
##
## data: log_tobins_q ~ sustainalytics_rank + size + leverage + Beta + factor(Year)
## DW = 1.961, p-value = 0.4246

##
## Test
##
## data: log_tobins_q ~ sustainalytics_rank + size + leverage + Beta + factor(Year)
## DW = 1.2853

## residuals
## log_tobins_q 2.018911e-01
## size -4.101191e-16
## leverage -2.576518e-16
## Beta 3.507740e-17
## factor.Year. -5.173143e-18

## size 1.135514 1 1.065605
## leverage 1.113367 1 1.055162
## Beta 1.043902 1 1.021715
## factor(Year) 1.041474 3 1.006796
A.3 Response variable: Stock returns

Summary of model
##
## Call:
## plm(formula = return ~ sustainalytics_rank + (size) + leverage +
## Beta + factor(Year), data = lagged_winsorized_data, model = "within",
##
##
## Residuals:
## -0.445771 -0.117468 -0.013389 0.105892 0.632459
##
## Coefficients:
## sustainalytics_rank -0.0069164 0.0030263 -2.2854 0.02338 *
## size -0.2447498 0.1531272 -1.5983 0.11161
## leverage 0.7589437 0.3868777 1.9617 0.05124 .
## Beta -0.0300315 0.0172247 -1.7435 0.08284 .
## factor(Year)2016 -0.0128587 0.0391819 -0.3282 0.74313
## factor(Year)2017 0.0876877 0.0430736 2.0358 0.04315 *
## factor(Year)2018 -0.0569572 0.0455542 -1.2503 0.21271
## ---
## Signif. codes: 0 '***' 0.001 '**' 0.01 '*' 0.05 '.' 0.1 ' ' 1
##
## R-Squared: 0.14327
## F-statistic: 4.58674 on 7 and 192 DF, p-value: 9.2237e-05

##
##
## sustainalytics_rank -0.0069164 0.0038445 -1.7990 0.07358 .
## size -0.2447498 0.2822499 -0.8671 0.38695
## leverage 0.7589437 0.6235660 1.2171 0.22506
## Beta -0.0300315 0.0069339 -4.3311 2.388e-05 ***
## factor(Year)2016 -0.0128587 0.0514040 -0.2501 0.80274

## factor(Year)2017 0.0876877 0.0500512 1.7520 0.08138 .
## factor(Year)2018 -0.0569572 0.0450790 -1.2635 0.20794
## ---
## Signif. codes: 0 '***' 0.001 '**' 0.01 '*' 0.05 '.' 0.1 ' ' 1

## 5 % 95 %
## sustainalytics_rank -0.013270605 -0.0005621072
## size -0.711260448 0.2217608390
## leverage -0.271704041 1.7895913885
## Beta -0.041492000 -0.0185710446
## factor(Year)2016 -0.097820663 0.0721032608
## factor(Year)2017 0.004961658 0.1704136830
## factor(Year)2018 -0.131465046 0.0175506890
##
##
## data: fixed_model_return
## BP = 9.2258, df = 7, p-value = 0.2368
0.50
0.25
residuals_return
0.00
−0.25
−0.2 0.0 0.2 0.4

fitted_values_return

0.6
0.4 Normal Q−Q Plot
Sample Quantiles
0.2
0.0
−0.4
−3 −2 −1 0 1 2 3
30
20
10
−0.50 −0.25 0.00 0.25 0.50

residuals_return

##
##
## data: residuals_return
## W = 0.98263, p-value = 0.002454

0.6
0.4
residuals_return
0.2
0.0
−0.4
0 50 100 150 200 250
Index

##
##
## data: return ~ sustainalytics_rank + (size) + leverage + Beta + factor(Year)
## DW = 2.4996, p-value = 1

##
## Test
##
## data: return ~ sustainalytics_rank + (size) + leverage + Beta + factor(Year)
## DW = 1.9903

## residuals
## return 8.209425e-01
## size -1.392411e-16
## leverage -1.520523e-16
## Beta 4.250310e-17
## factor.Year. 1.770975e-17

## size 1.135514 1 1.065605
## leverage 1.113367 1 1.055162
## Beta 1.043902 1 1.021715
## factor(Year) 1.041474 3 1.006796
Appendix B
List of stocks
Ticker Namn GICS Industri Sector Name
ABB SS Equity ABB Industrials
AKA NO Equity Akastor Energy
ALFA SS Equity Alfa laval Industrials
ALIV SS Equity Autoliv Consumer Discretionary
ASSAB SS Equity Assa Abloy Industrials
ATCOA SS Equity Atlas Copco A Industrials
ATCOB SS Equity Atlas Copco B Industrials
AZN SS Equity Astra Zenica Health Care
BOL SS Equity Boliden Materials
CARLA DC Equity Carlsberg A Consumer Staples
CARLB DC Equity Carlsberg B Consumer Staples
CHR DC Equity Chr hansen Materials
COLOB DC Equity Coloplast Health Care
DANSKE DC Equity Danske Bank Financials
DNB NO Equity DNB Nor Financials
DSV DC Equity DSV Industrials
EKTAB SS Equity Elekta Health Care
ELISA FH Equity Elisa Communication Services
ELUXA SS Equity Eletrulux A Consumer Discretionary
ELUXB SS Equity Elektrulux B Consumer Discretionary
EQNR NO Equity Equinor Energy
ERICA SS Equity Ericsson A Information Technology
ERICB SS Equity Eriscsson B Information Technology
FORTUM FH Equity Fortum Utilities
GEN DC Equity Genmab Health Care
GETIB SS Equity Getinge Health Care
GJF NO Equity Gensidige Försäkring Financials
GR4SEC DC Equity G4S Industrials
HEXAB SS Equity Hexagon Information Technology
HMB SS Equity Hennes Mauritz B Consumer Discretionary
62
APPENDIX B. LIST OF STOCKS 63
HUSQA SS Equity Husqvarna A Consumer Discretionary

HUSQB SS Equity Husqvarna B Consumer Discretionary
ICA SS Equity Ica gruppen Consumer Staples
INDUA SS Equity Industrivärden A Financials
INDUC SS Equity Industrivärden C Financials
INVEA SS Equity Investor A Financials
INVEB SS Equity Investor B Financials
ISS DC Equity ISS Industrials
KINVA SS Equity Kinnevik A Financials
KINVB SS Equity Kinnevik B Financials
KNEBV FH Equity Kone Industrials
LUPE SS Equity Lundin Petroleum Energy
MAERSKA DC Equity Mearsk A Industrials
MAERSKB DC Equity Mearsk B Industrials
METSO FH Equity Metso Industrials
MHG NO Equity Marine Harvest Consumer Staples
MIC SS Equity Millicom Communication Services
NESTE FH Equity Neste Energy
NHY NO Equity Norsk Hydro Materials
NOKIA FH Equity Nokia F Information Technology
NOKIASEK SS Equity Nokia S Information Technology
NOVOB DC Equity Novo nordisk Health Care
NRE1V FH Equity Nokian Renkaat Consumer Discretionary
NZYMB DC Equity Novozymes Materials
ORK NO Equity Orkla Consumer Staples
ORNAV FH Equity Orion A Health Care
ORNBV FH Equity Orion B Health Care
ORSTED DC Equity Orsted Utilities
PNDORA DC Equity Pandora Consumer Discretionary
SAMPO FH Equity Sampo Financials
SAND SS Equity Sandvik Industrials
SCAA SS Equity SCA A Materials
SCAB SS Equity SCA B Materials
SCHA NO Equity Shibstedt A Communication Services
SCHB NO Equity Shibstedt B Communication Services
SEBA SS Equity SEB A Financials
SEBC SS Equity SEB B Financials
SECUB SS Equity Securitas Industrials
SHBA SS Equity Handelsbanken A Financials
64 APPENDIX B. LIST OF STOCKS
SHBB SS Equity Handelsbanken B Financials

SKAB SS Equity Skanska Industrials
SKFA SS Equity SKF A Industrials
SKFB SS Equity SKF B Industrials
STEA SS Equity Stora Enso Materials
STEAV FH Equity Stora Enso Materials
STER SS Equity Stora Enso Materials
STERV FH Equity Stora Enso Materials
SUBC NO Equity Subsea Energy
SWEDA SS Equity Swedbank Financials
SWMA SS Equity Swedisch match Consumer Staples
TEL NO Equity Telenor Communication Services
TEL2A SS Equity Tele2 A Communication Services
TEL2B SS Equity Tele2 B Communication Services
TELIA SS Equity Telia S Communication Services
TELIA1 FH Equity Telia F Communication Services
TRYG DC Equity Trygg Hansa Financials
UPM FH Equity UPM Kymmene Materials
VOLVA SS Equity Volvo A Industrials
VOLVB SS Equity Volvo B Industrials
VWS DC Equity Westas Vind system Industrials
WDH DC Equity William Demant Holding Health Care
WRT1V FH Equity Wartsila Industrials
YAR NO Equity Yara International Materials
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EXAMENSARBETE INOM INDUSTRIELL EKONOMI,

E, S or G? A study of ESG score

Master of Science Thesis TRITA-ITM-EX 2019:12

Examensarbete TRITA-ITM-EX 2019:12

E, S or G? A study of ESG score

E, S eller G? En studie om ESG score,

5 Discussion & Analysis 35

A Regressions with ESG score 46

A.2 Response variable: Tobin’s q . . . . . . . . . . . . . . . . . . . . 51

4.1 Residuals vs fitted values for the regression with ROA as

3.1 Keywords used in literature research. . . . . . . . . . . . . . . . 16

4.1 Regression results summary . . . . . . . . . . . . . . . . . . . . 30

Measuring sustainability is complex

ESG - the dominating concept for measuring sustainability

Regulation pressure banks to take interest in ESG

This proposed regulation shows that sustainability measures in some form

and an undefined scope of measuring sustainability, it is hard to know which

1.3 Purpose of thesis

1.4 Research questions

1.5 Defining and delimiting the scope

1.6 Contribution to research field and industry

2.2 Corporate Social Responsibility

Should CSR affect financial performance?

2.3 Measuring CSR by different scores

The environmental factor

The social factor

conflict management, health and safety are of great importance.

The governance factor

2.4 Screening methods in sustainable investing

public transport, education, environmental technology and renewable energy

Combined approach example

2.5 Links between CSR activity and financial

Accounting based financial performance

Market based financial performance

significantly positive relationship was found between corporate sustainabil-

portfolios, which shows that there is no difference in financial performance

2.6 Literature review summary

Author Time- Sample No. Research ESG rating Corr Corr

Table 2.1: Summary of literature review.

Literature review method

Table 3.1: Keywords used in literature research.

Validity and reliability

3.2 Designing the regression analysis

Table 3.2: Summary of variables.

Preliminary regression models

ROAit =↵ + 1 ESGit + 2 SIZEit + 3 LEVit + 4 BET Ait

+ 5 R&Dit + 6 2016 + 7 2017 + 8 2018

T obin0 s qit =↵ + 1 ESGit + 2 SIZEit + 3 LEVit + 4 BET Ait

+ 5 R&Dit + 6 2016 + 7 2017 + 8 2018

Returnit =↵ + 1 ESGit + 2 SIZEit + 3 LEVit + 4 BET Ait

+ 5 R&Dit + 6 2016 + 7 2017 + 8 2018

3.3 Data collection

Accessing the data from Bloomberg Terminal

Year 2014 2015 2016 2017 2018

Table 3.3: Overview of sample.

Exploring the data

Figure 3.1: A histogram of the Sustainalytics rank observations in the sample

Min q25 Median Mean q75 Max SD

Min q25 Median Mean q75 Max SD

3.4 Development of the final regression models

Modifications of the regression models

Final regression models

+ 5 2016 + 6 2017 + 7 2018 + "it

log(T obin0 s q)w