The attention to the role of ESG in finance is growing. Previous research has produced conflicting results, some arguing for a relationship and other arguing against a connection. In this thesis we examine the relationship between ESG and financial performance in the Nordic countries by constructing risk factors based on ESG scores and incorporate them in extended versions of the three-factor model by Fama and French (1993). We test whether the inclusion of ESG risk factors improve the explanatory power of the model. Included in the research are 152 listed Nordic firms in the timeframe 2017-2022.
The two extended models incorporating the ESG factors based on the social and governance scores produce the most promising results, with improvements over the standard three-factor model according to several measurement methods. The extended models incorporating the factors based on the combined and governance ESG scores show far less improvement, if any at all. Our findings indicate that during the 2017-2022 period, factors related to social and governance aspects improved the explanatory power of the Fama and French three-factor model
