The influence of an ESG factor on portfolio performance

Abstract

Sustainability gets more important each day, requiring companies to adapt on a much larger scale than before. Environmental, Social, and Governance (ESG) is a global annual rating covering multiple measures, sectors and areas of sustainability given to companies by institutions with ESG expertise, such as Refinitiv Eikon, MSCI, or Sustainalytics. The purpose of this thesis is to analyze and evaluate the influence of an ESG factor on portfolio performance. Ten portfolios are constructed based on the size of the Swedish firms. The time series regressions analysis, which covers the period between 2019-2023, is used. The dependent variables are the firms’ performance, and the independent variables are ESG factor, market index factor (OMXSPI), and several macroeconomic factors, such as GDP growth, inflation, interest rates, and exchange rates. The results indicate that the ESG factor is not significant for any of the ten portfolios generated with stocks from the Swedish stock market, OMX Nasdaq Stockholm. The market index factor, and macroeconomic factors, show strong significant values, highlighting its importance in portfolio returns. Our results go in line with expectations and past research, indicating that an ESG factor is not as crucial as macroeconomic factors in portfolio returns in the Swedish stock market.