Environmental Outcomes of Sustainable Investment Strategies : A Study of Financial Costs and GHG Emissions Among Firms in the Nordic Market

Sustainable investing has evolved into a driving force in shaping the global capital market anda global sustainable transition. Over recent decades, ESG has become a dominant screeningtool in sustainable investment strategies, guiding portfolio construction and firm valuation.However, the efficiency of these strategies has increasingly been challenged due tocounterproductive environmental outcomes resulting from weak and misallocated sustainableincentives. This study tests these concerns using a sample of publicly traded Nordic firmsbetween 2014 and 2023. Drawing upon the highly acclaimed framework developed byHartzmark and Shue (2022), the results reveal heterogeneous firm behavior and responsesbetween brown and green firms in relation to market conditions, driven by sustainableinvestment strategies. As expected returns and the cost of capital rise, brown firms getfinancially disincentivized to reduce emissions, while already green firms are incentivized toexpand. Non-financial incentives reveal similar asymmetry, with brown firms receivingdisproportionate improvement in ESG scores despite their actual environmental improvements.In contrast, green firms often benefit from trivial but relative environmental improvements.While emphasizing the role of ESG in promoting sustainable perspectives, this study highlightsthat more sophisticated sustainable investment strategies are necessary to achieve meaningfuland market-wide environmental impact.