To examine the relationship between ESG performance and financial performance of banks in

the Nordics

1
Chapter 1

INTRODUCTION

1.1 Background of the Study

Based on Gray's (2010) systems-based concept of sustainability, it is arguably difficult to
conceive of sustainability on any other environmental scale than the planetary and species
level. The effect of a single corporation on global sustainability is difficult to quantify. According
to Aras and Crowther (2008), the foundations of sustainability are equity in distribution effects
and efficiency in transformation processes. A management framework that combines
environmental and social management with business, competitive strategy, and management,
and then integrates environmental and social management with economic and business
information is required to manage sustainability performance (Schaltegger and Wagner
2006).Corporate sustainability management calls for an examination of the ways in which social
and environmental initiatives impact bottom-line earnings (Epstein and Roy 2001).

In the last decade, ESG practices have become increasingly important for both decision-makers
and the general public and investors in enterprises (Garcia et al., 2017). Establishing credibility
with one's company's constituents is one way to provide that organization an edge over the
competition. Management choices can be affected by environmental, social, and governance
practices including resource and risk management. There is a cumulative positive effect for
businesses that adopt ESG criteria, including improved productivity, customer loyalty, brand
reputation, financing opportunities, cost savings, and the ability to innovate (Arrive et al.,
2018). More than just investors need to be won over, though. Although there has been a great
deal of press about ESG data and a great deal of research done on the topic, there have been
conflicting empirical results and the field is still in its infancy in terms of both study and
application (Semenova and Hassel, 2016). There are interesting research gaps in the field of ESG
connections that need to be filled. More investigation into the possible link between
environmental, social, and governance (ESG) factors and their impact on FP is necessary
(Nasrallah and El Khoury, 2021).

2
Numerous studies show that integrating all three ESG factors leads to better management and
corporate performance (Tarmuji et al., 2016). Recent studies have restricted their focus to one
ESG dimension and its relationship to FP (Fletcher, 1998). It can be challenging to consider the
demands and desires of both traditional shareholders and other types of stakeholders (those
concerned with environmental, social, and governance (ESG) issues) (Spangenberg, 2004). The
discrepancy between the FP and ESG shareholder perspectives exposes a tension that
influences management decision-making (Xie et al., 2019).

Several theoretical works have attempted to conceptualize the relationship between

environmental performance, social performance, and financial performance. Carroll claimed in
1979 that a company's social responsibility encompasses the financial, legal, moral, and
discretionary expectations that society has of companies at any particular time.

Austin (1994) proposed that we "could emphasize the moral significance of the human
interactions and relationships within organizations" if we referred to the workplace as a "moral
community." According to Wood (1991), the financial performance of a company is one metric
of its overall social performance alongside adherence to social responsibility principles and
social responsiveness procedures.

(CSP) research has recently shifted its attention to the CSP's institutional foundation (Aguilera
and Jackson, 2003). For instance, Campbell (2007) offers a theoretical examination of the
institutional and economic factors that increase the likelihood that businesses will operate in a
socially responsible manner. He offers several theories, one of which is that the likelihood that
businesses will behave responsibly relies on the quantity of competition they encounter.
Companies will have a strong incentive to cut expenses if there is fierce competition because
this would result in poor profit margins, which could lead them to behave in ways that are
socially irresponsible. Additionally, van de Ven and Jeurissen (2005) contend that fierce
competition restricts organization’s ability to adopt a proactive CSP.

3
It has also been hotly discussed for a long time how environmental management and
environmental protection practices affect corporation economic performance. No natural or
mechanical law, according to Schaltegger and Synnestvedt (2002), inherently connects
environmental success with economic performance. The relationship only applies in select
circumstances where environmental and health standards offer significant financial incentives
to businesses to continuously improve their operations. In order to have an effect on the
financial performance of the organization, environmental issues must be of a particular,
perhaps considerable relevance.

European nations are regarded as pioneers in promoting sustainable development (Buallay,

2019). The Nordic financial institutions excel economically, are highly interconnected, are
exposed to comparable risks, and have similar institutions and policies with the rest of Europe
(Aggarwal, 2013). There are few cultural obstacles to visiting the nations of the Nordic region. In
view of growing international concerns surrounding ESG practices and FP, this paper looks at
the history of the connection between these two in the Nordic financial industries.

The dynamic theoretical framework proposed by Schaltegger and Synnestvedt states that for
environmental preservation to be financially beneficial, business leaders must be aware of their
company's unique restrictions, opportunities, risks, and incentives.

The next phase would be to identify objectives and goals, create plans, and take actual action.
A fresh and different environmental profile will then be produced by this new rethinking, which
may lead to cost savings. They argue and provide examples to show that, starting at a certain
level of economic success, every environmental protection initiative will have a negative impact
on the economy, which will likely result in a short-term decline. Economic performance
improves as long as businesses can create environmentally friendly technologies that lower
marginal costs. Different economic results are possible because there could be systematically
different marginal costs of environmental preservation between industries and across nations
(as a result of laws).

4
The amount of economic success may modify the association between environmental
performance and economic success, as shown by the theoretical framework developed by
Schaltegger and Synnestvedt (2002). At some point in environmental performance, the financial
implications of a company's actions may change.Economic and environmental performance, or
"when it pays to be green, “depends in large part on management-influenced internal variables
as well as company-specific external factors (such as regulations). In 2003, Wagner and
Schlesinger put up a neoclassical environmental economics perspective that merged
environmental and social concerns.This point of view holds that the goal of environmental
legislation is to mitigate harmful externalities that reduce social welfare. Environmental
restrictions lessen these undesirable externalities, but they also increase costs and cut into
profits.

They contend that businesses in sectors with more environmental effect suffer from a
competitive disadvantage if strict rules cause them to incur higher environmental expenses
than businesses in other sectors (Epstein, 1996). However, a "revisionist approach" that argues
better economic performance, lower costs, and increased sales can be achieved through
improved environmental performance. Based on this alternative theory, the correlation
between environmental and economic success is best represented by an inverted U-curve
(Wagner and Schaltegger 2004).

Businesses have implemented EMSs to methodically take stock of their environmental

responsibilities and risks, and then deal with them in an efficient and effective manner (Epstein
and Roy 2001). The "revisionist" view holds that, at least in the short-term, innovation and the
creation of new technologies and manufacturing methods are more crucial to economic success
and competitiveness (or potentially even in the short term).

Wining time, in particular during times when it appears that costs are greater than benefits, is a
crucial issue for sustainability, according to Goes (1998). During these periods of ambiguous
duration, best practises may be abandoned as being ineffective financially.

5
Wagner (2007) suggested an integration approach that combines corporate management with
social and environmental considerations. The term "integration" refers to the linking of socio-
environmental management goals and actions with basic managerial tasks in those areas that
are strategically significant to businesses, such as corporate strategy, quality management,
health and safety, and social issues. He broke down economic success into its intermediary
drivers, which he called "efficiency," "market," "image," and "risk." He modifies the standard
operating procedures to include environmental and social management. The integration has led
to a decrease in workplace injuries, the introduction of innovative goods that have gained
significant market share, increased profits, and reduced expenses.

In their 2007 study on the relationship between business success and social responsibility,
Pivato et al. looked at the significance of mediating variables. According to the authors,
researchers should focus on intermediate performance indicators like customer happiness and
brand loyalty. Customers perceive businesses that value environmental preservation, charitable
giving, and ethical business conduct as being good corporate citizens. These businesses are
better able to stand out from rivals and win over customers (Cacioppe et al. 2007).

Direct expenses can be incurred while making adjustments to organizational structures,

procedures, and initiatives such staff training to improve product quality and safety, as reported
by research on the topic of "supporting organization change" (Buchanan et al. 2005). However,
costs and savings are possible outcomes of a well-thought-out CSR strategy that aims to
manage community connections. Indicative of a group's reaction to economic disparity is the
size of its charitable contributions. Godfrey (2005) argues that for philanthropy to increase a
company's value, it must be perceived as an honest reflection of the business's core principle of
social responsibility. This idea is supported by Patten's findings that the market value of
corporations that donated to the tsunami relief effort climbed after the announcement of their
donations (2007). In reality, the relationship between social responsibility and corporate
financial success varies from firm to company based on shareholder influence and situational
factors (Barnett 2007).

6
1.2 Theoretical Background

Agency Theory
Jensen & Meckling (1976) introduced the concept of agency theory, which states that when a
firm behaves as a principal and another person—in this case, its shareholders and stakeholders
—acts as the company's agent. Agency conflicts between the agents and the principals occur
when the rights of the agents are not upheld. According to agency theory, businesses must give
top priority to satisfying the needs and expectations of their shareholders in order to grow their
wealth and offer an incentive to the shareholders (Rahimi et al., 2016). From a shareholder's
perspective, a company's capital should be put into projects that increase profit and cut
expenses. Alternate objectives would have a negative impact on productivity. Organizations
prioritize short-term gains in shareholder wealth (Shleifer and Vishny, 1997). Agency theory
explains why financial performance indicators like return on invested capital (ROIC) and return
on equity (ROE) show that value is being maximized for shareholders.

Stakeholder theory
Capitalism's Stakeholder Theory highlights the interdependencies of a business's various
constituencies, such as its customers, suppliers, employees, stockholders, and communities.
Value for all stakeholders, not just shareholders, is central to this concept. From the perspective
of stakeholders, businesses have responsibilities to more than just their shareholders.
Employees, clients, vendors, financiers, members of the community, public servants, political
parties, trade groups, and unions are all examples (Rahimi et al., 2016).

The importance of stakeholder ties in articulating a company's social and environmental

commitments yields positive outcomes for businesses (Barnett and Salomon, 2012). Many
people have vested interests in a company's success or failure, and for that reason, it's crucial
that the business meet everyone's needs. Key stakeholder groups have certain expectations
about sustainability practices, or ESG practices as articulated through ESG reporting. Companies
are under pressure to deliver a variety of performances in order to satisfy their diverse
stakeholder base and comply with regulatory requirements. We may investigate ESG practice,
where businesses protect stakeholders' interests, using stakeholder theory.

7
1.5 Research Gap
Because they are dependent on political, social, and environmental variables, sustainability
policies are crucial for businesses. ESG (environmental, social, and governance) principles are
becoming essential for politicians, the general public, and investors in businesses (Garcia et al.,
2017). The use of ESG practices by financial institutions has become a crucial strategy in the
fight to reduce systematic risks (Buallay, 2019). What they found was that sustainable practices
can have positive as well as negative results for FP. Further, the study's authors found an
unfavorable correlation between FP and ESG norms. They suggested more studies be
conducted to see how ESG procedures affect the bottom lines of Nordic financial institutions.

In their investigation into the differences between public and private venture capital, Johansson
et al. (2021) looked at the relationship between sustainable developments in ethical SMEs.
They advise future researchers to look into social and environmental sustainability issues in
greater detail, going beyond the short-term economic objective of financial performance and
financial return on investment. Therefore, the model for the current study was developed using
these gaps, and it looks at how ESG policies affect the financial performance of the Nordic
banking sector.

1.3 Research Objectives

Following are the main research objectives of current study;

1. To examine the impact of ESG score on financial performance of banks.

2. To examine the impact of social score on financial performance of banks.
3. To examine the impact of government score on financial performance of banks.
4. To examine the impact of environmental score on financial performance of banks.

8
1.4 Research Questions
Following are the main research questions of current study;

1. What is the impact of ESG score on financial performance of banks?

2. What is the impact of social score on financial performance of banks?
3. What is the impact of government score on financial performance of banks?
4. What is the impact of environmental score on financial performance of banks?

1.6 Problem Statement

In the current study, the researcher examines the impact of government, social, and
environmental measures on the Nordic banking sector's financial performance. The researcher
defines Nordic as comprising Sweden, Norway, Denmark, Iceland, and Finland. In earlier
research, the researcher examined the impact of ESG sustainability practices on Nordic financial
companies, but in the current study, the researcher focuses on the banking sector to examine
the connection between the banking sector's financial performance and ESG sustainability
practises. Ameer & Othman (2011) looked studied the connection between sustainable
practices and company financial performance, using the biggest firms in the world as their
sample. It has also been hotly discussed for a long time how environmental management and
environmental protection practices affect corporation economic performance.

It is challenging to acknowledge both the requirements and desires of traditional shareholders

and those of other types of stakeholders because ESG and FP are sometimes seen as being
contradictory. European nations are regarded as pioneers in promoting sustainable
development (Buallay, 2019; Johansson et al., 2021). The Nordic financial institutions excel
economically, are highly interconnected, are exposed to comparable risks, and have similar
institutions and policies with the rest of Europe (Aggarwal, 2013). Therefore, it's crucial to
investigate the connection between the Nordic banking industry's financial performance and
ESG sustainability standards.

9
1.7 Significance of the Study
In current study the researcher analyses that how the sustainability practices in which
environmental, social and government practices are include would related with the financial
performance of the banking industry. No natural or mechanical law, according to Schaltegger
and Synnestvedt (2002), inherently connects environmental success with economic
performance. This correlation holds true only when legal requirements for a company's
compliance with environmental and health safeguards provide substantial financial incentives
for ongoing enhancements to the company's operations. Ecological concerns must be of
special, [possibly] substantial relevance to the organization's bottom line for action to be taken.
Numerous theoretical studies have attempted to conceptualize the connection between
environmental performance, social performance, and financial performance. In an earlier paper
from 1979, Carroll claimed that a company's social responsibility encompasses the economic,
legal, ethical, and discretionary obligations of society at any particular time. Consequently, it is
essential for the company's managers and decision-makers to investigate the relationship, as
doing so will certainly improve the company's financial success. Due to the increased financial
performance of the banking sector, agency disputes between managers and shareholders are
also reduced.

10
CHAPTER 2

LITERATURE REVIEW

2.1 Hypothesis Development

Relationship between ESG sustainability practices and the financial performance

Sustainability practices that focus on environmental, social, and governance (ESG) use metrics
and reports to collect non-financial data that they can use to make decisions (Bassen and
Kovacs, 2008; Tarmuji et al., 2016; Yoon et al., 2018 and La Torre et al., 2018). Environmental,
social, and governance (ESG) data includes information about pollution, loss of biodiversity,
greenhouse gas emissions, waste management, renewable energy, energy efficiency, internal
control, board processes, diversity, independence, information transparency, and risk
management (Al-Qudah et al., 2021; Sultana et al., 2018; Xie et al., 2019). FP looks at a number
of things to determine a company's long-term financial health, such as its capital adequacy,
efficiency, leverage, liquidity, profitability, and solvency (Fatihudin and Mochklas, 2018).

Lopez et al. (2007) use economic, environmental, and social indices to look at the relationship
between sustainability and corporate success. Lopez et al. (2007) looked at 55 companies from
the Dow Jones Sustainability Index (DJSI) and 55 companies from the Dow Jones Global Index
from 1998 to 2004. (DJGI). They made a model of the relationship between CSR and PBT, taking
firm size, leverage, and other factors into account. This helped them figure out which way the
cause and effect went. When analyzing the CSR variable, they discovered a negative coefficient.

By contrasting the achievements of organizations in the Information Technology sector with

those in the Petroleum sector, Lopez et al. (2007) examined whether or not companies'
financial performance varied between industries. In our opinion, this is incorrect and leads to
skewed findings.

11
Roberts and Dowling (2002) argue that due to the difficulty in imitating intangibles like a
company's excellent reputation, successful companies are more likely to be able to keep it.
Adam and Zutshi (2004) argue that companies who implement sustainable strategies will have a
leg up on the competition.

According to the marketing canon, a company's capacity to introduce new products and
maximize the effectiveness of its sales personnel directly correlates to an increase in both cash
flow and profitability (Dowling 2001). Cost savings, competitive advantage, reputation and
legitimacy building, and the pursuit of win-win results are the four categories of benefits that
Kurucz et al. (2008) list as possible outcomes for organizations that engage in CSR activities. A
sustainable business's return on assets will improve if it is able to negotiate favorable terms
with its suppliers, employees, and creditors while spending less on contracting and oversight
overall (Roberts and Dowling 2002).

The best CSP enterprises actively manage their CSP profile and have a reduced cost of equity
capital, proving the importance of CSP from a financial market standpoint (Lee et al., 2009).
Even though there are many positive examples of the relationship between ESG and FP,
researchers often say that the results are unclear and contradictory, showing either positive or
negative relationships or no relationship at all (Revelli and Viviani, 2015; Rowley and Berman,
2000; Van Beurden and Gossling, 2008). (Alareeni and Hamdan, 2020;Orlitzky et al., 2003).

Friede et al. (2015) did a meta-analysis of more than 2,000 studies and found that the vast
majority of the studies found positive links between ESG and FP. Albuquerque et al. (2012) say
that ESG has been suggested as a way for companies to make more money. It also shows that
your business appreciates the trust of its customers and takes its responsibility to them
seriously (Alsayegh et al., 2020; Brown et al., 2009; Buallay, 2019; Steyn, 2014). Sustainable
practices (Lourenco et al., 2012) are being used by a lot of businesses to improve their
productivity and efficiency while making them less vulnerable to systemic risk. This helps them
stay ahead of the competition.

12
This was found to be the case (Albuquerque et al., 2019). Hoepner et al. (2019) found that high
ESG ratings indicated low (or high) business risk, and that ESG practices were found to reduce
organization’s downside risk (Buallay, 2019). Lower operating costs, financial costs, and debt
service costs have all been linked to ESG practices (Eliwa et al., 2019). Increasingly, the financial
community is looking to ESG metrics as a means of gauging a company's potential for long-term
success (Broadstock et al., 2020). But other studies have found the opposite, which suggests
that ESG does not help manage risks well (Duque-Grisales and Aguilera-Caracuel, 2019; Lee et
al., 2009).

Researchers have also found different results when they looked at how different ESG
dimensions affect FP. It's important to think about environmental stakeholders because some
research has found a link between being good to the environment and making money (Salama,
2005; Friede et al., 2015). When environmental stakeholders aren't taken into account enough,
it can lead to conflicts that raise costs and hurt FP (Fauzi et al., 2007 and Arvidsson, 2014).
Other research, though, shows that increasing EP leads to higher costs and lower marginal net
gains (Horvathova, 2010).

The results from various circumstances vary as well. Effects have been shown to vary among
nations and regulatory frameworks (Di Vita, 2009). Additionally, academics stress the
importance of investigating various organizational environments further (Theyel, 2000). Social
practice (SP) and FP research findings are also inconclusive.

When FP and SP are used together, many studies have shown that good things are more likely
to happen (Simpson and Kohers, 2002; Chien and Peng, 2012; Servaes and Tamayo, 2013). SP
has the potential to bring in money and give the company the tools it needs to stay ahead of
the competition (McWilliams and Siegel, 2000). Also, research shows that investing with a social
conscience might help FP (Shahzad and Sharfman, 2017). Other research, on the other hand,
has shown that there are downsides to SP investment, such as the fact that it takes money
away from other spending that could be more profitable (Smith and Sims, 1985; Peng and Yang,
2014). More than one study has also found that SP and FP are not linked (Fauzi et al., 2007;
Weston and Nnadi, 2021).

13
Studies that looked at the link between GP and FP came up with contradictory and weak results
(Setia-Atmaja, 2009). Higher concentration of ownership is linked to lower FP (Shan and McIver,
2011). Several studies have found positive links between things like high levels of concentration
of ownership and FP (Xu and Wang, 1999; Nasrallah and El Khoury, 2021).

Expert internal physicians can help alleviate financial and economic problems (Nasrallah and El
Khoury, 2021). There is evidence that higher levels of insider ownership improve performance
by reducing agency costs (Xu and Wang, 1999; Shan, 2019). Some GP worries have been
evaluated inconsistently. To begin, while some research suggests that larger boards reduce FP
(Cheng, 2008; Bebeji et al., 2015), other research suggests that they improve FP by making it
easier for people to get the information they need (Dalton et al., 1999; Badu and Appiah, 2017;
Puni and Anlesinya, 2020). Debt service expenses are reduced, secondly, when boards have
both independent directors and audit committees (Anderson et al., 2004). Consequently, an
independent board is more effective, and this can help reduce agency difficulties by limiting
management's ability to act in a self-serving manner (Haniffa and Hudaib, 2006; Kyere and
Ausloos, 2020).

Nonetheless, not all studies have shown a causal link between board independence and FP
(ROE and ROA) (Fooladi and Nikzad Chaleshtori, 2011). To sum up, there is a wealth of prior
research on ESG practise and FP, both generally and in terms of the ESG's many aspects (Rowley
and Berman, 2000; Van Beurden and Gössling, 2008; Hoepner and McMillan, 2009; Revelli and
Viviani, 2015; Friede et al., 2015).

The sustainability efforts of a corporation cannot be evaluated, measured, or followed due to

the lack of any generally recognized methods or criteria for doing so. External audits, third-
party awards and certification processes, benchmarking of codes and standards (Singh et al.
2009), indices (Lopez et al. 2007), and non-quantifiable sustainability activities (Sze'kely &
Knirsch 2009) are just a few of the various ways sustainability can be measured. The physical
environmental performance indicators can be used to define a company's environmental
performance (Wagner and Schaltegger 2003).

14
The ESV strategy integrates environmental results with those that affect stock price (Wagner
and Schaltegger 2004). Besides environmental ratings, other empirical indicators include
hazardous waste recycling rates (Al-Tuwaijri et al., 2004), toxic discharges (Patten, 2002), and
work-related injury rates (Epstein, & Roy, 2001). (e.g., Dow Jones Sustainability Index). By
combining ratings for process and outcomes with those for internal and external elements,
Henri and Journeault (2010) are able to provide a comprehensive assessment of environmental
performance. They argue that the meeting point of these two measures provides a structure for
organizing the many vantage points on environmental performance. Epstein and Roy's list of
sustainability performance measures includes diversity in the workforce, effects on the
environment, bribery and corruption, involvement in the community, ethical sourcing, human
rights, product safety, and usefulness (2001). Schaltegger and Synnestvedt came up with a way
to measure environmental protection based on the type and number of environmental
safeguards put in place (2002). Their ideas are similar to Warhurst's (2002) proposal for
measuring sustainability, which calls for measuring sustainable development in two stages:
first, a review of the progress made in a number of selected individual fields (in our case, four
dimensions), and then, an evaluation of the overall progress made toward sustainability as
determined by a combination of these fields. Bansal also suggested a model for corporate
sustainable development based on the three principles of economic integrity, social fairness,
and environmental integrity (2005). From the books and articles listed above, it seems likely
that;

H1: ESG score positively and significantly related with the financial performance of Nordic
banking industry.

H2: Social score significantly related with the financial performance of Nordic banking industry.

H3: Governance score significantly related with the financial performance of Nordic banking
industry.

H4: Environmental score significantly related with the financial performance of Nordic banking
industry.

15
2.2 Theoretical Framework
The current study analyses the Nordic banking industry's financial performance through the
lenses of return on invested capital (ROIC), return on equity (ROE), return on assets (ROA), and
profits per share (EPS) (EPS). The current study employs the usage of control variables including
company size, firm leverage, unsystematic risk, and systematic risk beta.

1 ESG Score
1 ROIC (Return on Invested
2 Social Score
Capital)
3 Governance Score
2 ROE (Return on Equity)
4 Environmental Score
3 ROA (Return on Assets)
Independent Variables 4 EPS (Earning per Share)

Dependent Variables

1 Beta (Systematic risk)

2 Unsystematic Risk
3 Firm Leverage
4 Firm Size

Control Variables

16
CHAPTER 3

METHODOLOGY

3.1 Data descriptions and methodology

In current study the researcher analyses the relationship between the ESG sustainability
practices and the financial performance of the banking industry of the Nordic region. For the
Nordic region the researcher takes Sweden, Norway, Denmark, Iceland and Finland. Current
study is secondary in nature. Panel data technique has been applied in current study because
current data is panel in nature.

3.2 Populations
In current study top listed banks of Nordic region (Sweden, Norway, Denmark, Iceland and
Finland) has been taken for analyzing the relationship between the ESG sustainability and
financial performance. In current study all the listed banks of the Nordic region has been taken.
Total 258 banks are listed in the Nordic region.

3.3 Sample Size

In current study convenient sampling size has been selected. Total 258 banks are listed in the
Nordic region so; researcher selected those banks which have provided data easily on their
official website.

3.4 Time Period

Total 11 year of data from 2011-2021 data has been collected for the current study.

3.5 Data Collection

Data has been collected from the Thomson Reuters Eikon data base. In this data base all the
data of the banking industry has been given.

3.6 Data Type

Current study is secondary in nature. Thomsan Reuters has been used to collect the data.

17
3.7 Variable Descriptions

3.7.1 Return on invested capital

ROIC stands for the return on investment capital. The return on the investment shows that how
much the company should earn from the invested capital of the company.

EBIT∗(1−Tax)
ROIC i ,t =
Average total capital + Short term debts+ Long term debts

3.7.2 Return on Equity

Return on equity shows the relationship between the net profit and the total invested capital of
the company that how much the company should earn from the invested capital.

Net Profit
ROEi , t = '
Shareholde r sEquity

3.7.3 Return on Assets

Return on assets shows the relationship between the net profit and the total assets of the
company. It shows that how much the company should earn the profit from the invested assets
into the company.

Net Profit
ROA i ,t =
Total Assets

3.7.4 Earning Per Share

Earning per share is the most important factor to measure the financial profitability status of
the company.

EPS i ,t = Profit Allocated ¿ each shareholders

3.7.5 ESG Score

Long-term environmental, social, and governance concerns are generally ignored in
conventional financial studies, but can be quantified with an ESG score.

ESG i ,t = ESG practice score collected by the Asset 4 database by Thomson Reuters

18
 3.7.6 Environmental Score
The program's organization-specific environmental score adjusts the level of a vulnerability to
an asset. You can determine the severity of an asset's vulnerability for your organization by
setting this score. Setting impact levels to the following three metrics yields the answer:
Confidentiality.

ESi , t = EP of Banks obtained ¿ Asset 4 ¿ Thomson Reuters

3.7.7 Social Score

Finding and controlling business effects on people—both positive and negative—is a key
component of social sustainability. Relationships and interaction with stakeholders must be of a
high caliber for a company to succeed.

SSi ,t = SP of Banks obtained ¿ Assets 4 of Thomson Reuters

3.7.8 Governance Score

With the help of sustainable governance, an organization may strengthen its connections to its
external stakeholders, implement its sustainability strategy across the company, oversee its
goal-setting and reporting procedures, and guarantee its overall accountability.

GS i ,t = GP of Companies obtained ¿ Assets 4

3.7.9 Beta Systematic Risk

Beta is the standard CAPM metric for gauging systematic risk. The correlation between a
security's return and the market's total return is calculated using this metric. In this context,
beta can be thought of as a measure of the security's volatility relative to the whole market.

BSRi ,t = Beta factor ban k ' systemtic risk

19
 3.7.10 Unsystematic Risk
Unsystematic risk refers to the dangers present in a particular business or sector. Diversification
could be able to prevent it. Beta does not assess irrational risk; it only measures systematic risk.
For instance, favorable macro events, like economic booms, are likely to produce bigger
advantages for all businesses.

Total Debts
USR i ,t =
Total Assets

3.7.11 Firm Leverage

One way that investors try to increase their returns is through the use of leverage, which
involves the use of various financial instruments or borrowed currency. Another way to define
leverage is as the quantity of debt used to finance a company's assets.

Total Debts
FM i , t =
Total Equity

3.7.12 Firm Size

A business firm's size is determined by the size of its business unit. It refers to the size or
quantity of work produced by a particular company. A company's size has a big impact on its
productivity and profitability, therefore understanding it is crucial.

FSi ,t = ln (Total Assets)

3.8 Econometric Equation

In current study researcher analyses the relationship between the ESG sustainability practices
on the financial performance of the banking industry of Nordic region. Following equations has
been used in current study;

ROIC i ,t = β 0+ β 1 ESG i ,t + β 2 Betai , t + β 3 USR i ,t + β 4 Lev i ,t + β 5 FSi , t +∈i ,t (1)

ROEi , t = β 0+ β 1 ESG i ,t + β 2 Betai , t + β 3 USR i ,t + β 4 Lev i ,t + β 5 FSi , t +∈i ,t (2)

ROA i ,t = β 0+ β 1 ESG i ,t + β 2 Betai , t + β 3 USR i ,t + β 4 Lev i ,t + β 5 FSi , t +∈i ,t (3)

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EPS i ,t = β 0+ β 1 ESG i ,t + β 2 Betai , t + β 3 USR i ,t + β 4 Lev i ,t + β 5 FSi , t +∈i ,t (4)

ROIC i ,t = β 0+ β 1 SSi , t+ β 2 Betai , t + β 3 USR i ,t + β 4 Lev i ,t + β 5 FSi , t +∈i ,t (5)

ROEi , t = β 0+ β 1 SSi , t+ β 2 Betai , t + β 3 USR i ,t + β 4 Lev i ,t + β 5 FSi , t +∈i ,t (6)

ROA i ,t = β 0+ β 1 SSi , t+ β 2 Betai , t + β 3 USR i ,t + β 4 Lev i ,t + β 5 FSi , t +∈i ,t (7)

EPS i ,t = β 0+ β 1 SSi , t+ β 2 Betai , t + β 3 USR i ,t + β 4 Lev i ,t + β 5 FSi , t +∈i ,t (8)

ROIC i ,t = β 0+ β 1 GS i , t+ β 2 Betai , t + β 3 USR i ,t + β 4 Lev i ,t + β 5 FSi , t +∈i ,t (9)

ROEi , t = β 0+ β 1 GS i , t+ β 2 Betai , t + β 3 USR i ,t + β 4 Lev i ,t + β 5 FSi , t +∈i ,t (10)

ROA i ,t = β 0+ β 1 GS i , t+ β 2 Betai , t + β 3 USR i ,t + β 4 Lev i ,t + β 5 FSi , t +∈i ,t (11)

EPS i ,t = β 0+ β 1 GS i , t+ β 2 Betai , t + β 3 USR i ,t + β 4 Lev i ,t + β 5 FSi , t +∈i ,t (12)

ROIC i ,t = β 0+ β 1 ESi , t + β 2 Betai , t + β 3 USR i ,t + β 4 Lev i ,t + β 5 FSi , t +∈i ,t (13)

ROEi , t = β 0+ β 1 ESi , t + β 2 Betai , t + β 3 USR i ,t + β 4 Lev i ,t + β 5 FSi , t +∈i ,t (14)

ROA i ,t = β 0+ β 1 ESi , t + β 2 Betai , t + β 3 USR i ,t + β 4 Lev i ,t + β 5 FSi , t +∈i ,t (15)

EPS i ,t = β 0+ β 1 ESi , t + β 2 Betai , t + β 3 USR i ,t + β 4 Lev i ,t + β 5 FSi , t +∈i ,t (16)

In current study researcher use four proxies to measure the financial performance of the Nordic
region banking industry and four independent variables to measure the sustainability practices
in Nordic region so, overall 16 models has been used in current study. Return on equity (ROE) is
the rate at which investors recoup their initial capital investment; return on assets (ROA)
measures the rate at which investors recoup their initial capital investment plus any dividends
or capital gains. "Earnings per share," or "EPS," is a common financial metric. The letters "ES"
and "GS" stand for "social" and "governance," respectively; "USR" and "GS" denote
"unsystematic risk," and "Beta" and "systematic risk," respectively.Lev stands for the company's
leverage, FS for its size, for its error term, I for its number of banks, and t for its time frame.

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