Umeå universitets logga

As European companies are adapting to the new sustainability reporting taxonomy in linewith the implementation of the EU directive Corporate Sustainability Reporting Directive(CSRD), the environmental, social and governance (ESG) topic has never been more rele-vant for the European market. Our thesis aims to study the relationship between availableESG ratings and risk premium, in order to investigate how sustainability factors are re-lated to financial performance in the European market. This relationship is investigated byperforming fixed effect panel data regressions, using stock prices from European companiesbetween 2018 to 2024. Further, through evaluating the dependency variation across timeperiods, sectors, countries, different fixed effect estimators, and ESG rating providers, weexpect to get a clearer picture of these relationships.

The results given from our data sets, suggests that Sustainalytics ESG ratings have ahighly significant relationship to the risk premium in our model, where poorly rated com-panies are associated with higher risk premiums with P-values < 0.01. However, serialcorrelation was found in our models, which would require further studies to verify our re-sults. We also find indications that the relationship between Sustainalytics ESG ratingsand risk premium could be sensitive to market changes, but this would also require furtherstudies to conclude.

The results show that the choice of ESG rating can have considerable impact when usedin risk premium models, when comparing the use of LSEG ESG score with SustainalyticsESG risk score on smaller sample sizes. Our sector and country model results are incon-clusive on its specific levels, but small indications are found for consistent differences in theregression when sample sizes are selected using sectors or countries.