Long- and short-term dynamics of Nordic ESG equity markets : cointegration analysis and Granger causality

Abstract

As concerns about climate change intensify, there is a growing interest in sustainable and environmentally responsible investments. This thesis investigates the long- and short-term dynamics of Nordic Environmental, Social, and Governance (ESG) equity markets, aiming to determine the potential for diversification within the equities markets for socially responsible investors. Utilizing cointegrating analysis using vector autoregressive (VAR) modeling and Granger causality analysis, the study examines the existence of cointegration relationships between and predictive power of ESG indices in Denmark, Norway, Sweden, and Finland.

Motivated by the growing cooperation in sustainable finance across the Nordic region, this research addresses the need to understand the interconnectedness of these markets and the associated risks for socially responsible investors. Despite a growing body of research on overall stock market index cointegration, there remains a gap in the literature concerning ESG market dynamics within the Nordic context.

Findings reveal the absence of cointegrating relationships among Nordic ESG equity markets, consistent with prior studies in other regions. However, Granger causality tests demonstrate the predictive power of certain ESG stock indices, indicating unidirectional predictability of returns between Swedish ESG markets and those of Denmark and Finland, Denmark and Norway, and Norway and Sweden.

This study contributes to the literature by extending empirical research on ESG markets in the Nordic region and on a broader scale on socially responsible investing. For investors, it highlights diversification opportunities within Nordic ESG markets, aiding in portfolio management and risk mitigation. For policymakers, it underscores the importance of monitoring market dynamics for crafting effective policies to foster sustainable financial systems.