This thesis aims to explore the impact of Environmental, Social, and Governance (ESG) performance on corporate bond yields in the Nordic markets, focusing on Sweden, Norway, Finland, and Denmark. That is since they rank among the highest in the global leaderboards when it comes to ESG performance. While ESG pillars appear to become an increasingly important factor in financial markets, their influence on fixed-income investments remains underexplored in this region. This study aims to fill this gap by investigating whether higher ESG scores are associated with lower corporate bond yields.

The study uses a dataset of 460 fixed-coupon bonds issued by 47 firms. The research applies Ordinary Least Squares (OLS) regression with cluster-robust standard errors to answer the research question How does ESG performance affect corporate bond yields in the Nordic markets? The analysis includes the control variables credit risk, modified duration, coupon rate, green bonds, and issuer type. A stepwise regression approach was used, adding the control variables one at a time to evaluate how the relationship between ESG performance and corporate bond yields changed with the inclusion of additional control variables. Furthermore, the main analysis was conducted using a symmetrically trimmed model to address outliers and enhance robustness and validity.

The empirical findings demonstrate a negative correlation between ESG performance and corporate bond yields, suggesting that greater ESG performance is associated with lower corporate bond yields in the Nordic markets. Moreover, the findings suggest that firms with stronger ESG performance benefit from lower cost of debt, likely due to reduced perceived risk among investors. The findings can be interpreted through the lens of stakeholder theory and signaling theory, aligning with the risk-return tradeoff principle.