ESG as a Hedge During Market Downturns : The role of Profitability in the Swedish Equity Market

Sammanfattning

Sustainability integration in finance has become especially important in the practice of asset management, yet the financial justification for this integration remains contested. This study examines whether ESG is associated with downside protection during systematically defined market downturns among Swedish large-cap equities, and whether firm profitability moderates this relationship. A two-way fixed effects panel regression on 120 OMX Stockholm Large Cap firms over 2019-2025 is employed, using three percentile-based downturn definitions and controlling for the Carhart factors. The results indicate a positive association between ESG scores and firm excess returns during market downturns, where no evidence is found that firm profitability moderates the effect. Translated into economic magnitude, the baseline association corresponds to an approximate 14% offset of the average downturn loss. A pillar-level analysis suggests that an aggregated effect of ESG engagement underlies the association rather than any specific pillar. The findings contribute to the literature by extending the downside protection related to ESG beyond specific crisis-windows to a systematic definition in a Nordic market context, with implications for asset managers and researchers in sustainable finance. However, limitations regarding the absence of a causal methodology and the reliance on a single ESG data provider are acknowledged.