Environmentally Responsible Investing in the Nordic Stock Market

Abstract: The study uses positive screening technique to select equities with high environmental scores in the Nordic Stock market. Variant portfolios of the top 10 to 40 stocks were formed using di↵erent weighting schemes and their returns and risk measures compared to that of the OMX Nordic 40 Index. From 2007 to 2014, the strategy of weighting the largest 40 Nordic firms’ stocks with their aggregate environmental scores earned a highly significant four-factor Carhart (1997) risk adjusted return of 8.2% per year and a raw return of 14.8% over the entire period of observation. That is, the environmentally friendly portfolio had higher return with lower risk than the benchmark index. Decarbonizing the top 40 portfolio with the same strategy achieved a statistically significant risk adjusted return of 7.9% per year and annualized return of 14.5%.