Do ESG Rating Changes Contain Incremental Pricing Information? : Evidence from Nordic Equity Markets Using Multifactor Asset Pricing Models

Sammanfattning

Abstract: Background: Environmental, social, and governance (ESG) investing has become increasingly integrated into modern financial markets. Despite the rapid growth of ESG investing, substantial disagreement remains regarding whether ESG-related return patterns represent an independent pricing dimension or primarily reflect investor preferences and underlying firm fundamentals already captured by conventional asset pricing factors. In particular, limited attention has been devoted to ESG rating changes as dynamic information events within Nordic equity markets. Purpose: This study examines whether ESG rating changes are associated with abnormal stock returns in Nordic equity markets within a multifactor asset pricing framework. In addition, the study evaluates whether ESG-related return patterns are more consistent with ESG as an independent priced systematic risk factor, a firm characteristic associated with investor preferences, or a proxy for underlying firm fundamentals. Method: The study employs a quantitative empirical research design combining portfolio sorting techniques, multifactor asset pricing models, and panel data regressions. The empirical analysis is based on a balanced panel dataset consisting of 72 Nordic listed firms observed over the period 2014-2024. The analysis applies the CAPM (Capital Asset Pricing Model), the Carhart four-factor model, and the Fama-French five-factor model augmented with momentum, alongside random effects and robustness procedures including Driscoll-Kraay standard errors and long-short portfolio tests. Conclusion: The findings indicate that ESG rating changes are not associated with statistically or economically significant abnormal stock returns once conventional asset pricing factors are controlled for. The results remain consistent across portfolio analysis, panel data estimation, and robustness tests. While ESG levels exhibit generally negative coefficients across several model specifications, the effects are not consistently statistically significant. Overall, the findings provide limited support for interpreting ESG as an independent priced risk factor and are more consistent with interpretations of ESG as reflecting investor preferences and underlying firm characteristics already captured by traditional asset pricing factors. The study contributes to the ESG asset pricing literature by distinguishing between ESG levels and ESG rating changes within a Nordic institutional context.