Can you turn the Trade-off into a Win-Win situation? A study on implications of incorporating ESG's informative value into portfolio management

Abstract: Using data on Nasdaq Nordic stocks between 2016-2020, the thesis empirically analyzes how information about Environmental, Social, and Governance efforts derive implications for portfolio management. Our results reveal that ESG has no predictive value for firm fundamentals, except the social pillar proxied as local community impact assessment. Furthermore, the study can not conclude that market participants value information about a firm's sustainable efforts. Moreover, the factor model analysis reports that our proxies for ESG and Governance efforts have individual explanatory value for stock returns which can be integrated into predictions to attain a more realistic estimate. Finally, the thesis discusses if ESG's informative value can be exploited in portfolio construction. Through the construction of an ESG efficient frontier, we visualize the implications of ESG inclusion and discuss if the trade-off between a performing and sustainable portfolio can be diminished. We relate the results to research in the area of Sustainable Responsible Investment and conclude that our findings partly contradict those of previous empirical analysis. The discussion hence covers what contributing insights our study conveys.