Anjala Dhakal Does Corporate Social Responsibility Improve Financial Performance? Evidence from Nordic companies Vaasa 2025 School of Accounting and Finance Master's Degree Programme in Finance 2 UNIVERSITY OF VAASA School of Accounting and Finance Author: Anjala Dhakal Title of the thesis: Does Corporate Social Responsibility Improve Financial Performance?: Evidence from Nordic companies Degree: Master of Science in Economics and Business Administration Degree Programme: Master's Degree Programme in Finance Supervisor: Janne Äijö Year: 2025 Pages: 110 ABSTRACT: This paper focuses on the influence of corporate social responsibility (CSR) on the financial performance of firms in the Nordic region. The past literatures indicates mixed findings on CSR enhancing profitability and market value especially in highly economies like Nordics. This study is based on a panel dataset of 2,464 firm-year observations of listed companies across 2015 to 2024 in Finland, Norway, Sweden, Denmark and Iceland to examine the connection between ESG performance and accounting based factors and market based factors of firm performance. ESG score and ESG combined score are used to measure CSR performance. Whereas, the firm performance is measured by the return on assets (ROA) and Tobin Q. The analysis uses fixed effects regressions that have firm specific and year specific controls to explain unoserves heterogeneity. The outcomes indicate that there is no significant effect of ESG performance on profitability and market valuation. Interaction models show that the CSR and performance relationship is not particularly different between industries. Although firm size also weakens the ESG and Tobin Q. These findings are stable as checked by robustness tests. In general, the findings indicate that long term sustainability and stakeholder value are the driving force behind CSR practices of Nordic companies rather than short term financial benefits. This study foster the CSR and performance discussion because it is conducted on a region that has a high level of ethical and environmental business practices. KEYWORDS: Corporate Social Responsibility, Firm value, ESG, Financial Performance, ROA, TobinQ, Nordic companies. 3 Contents 1 Introduction 7 1.1 Background of the Study 10 1.2 Problem Statement 13 1.3 Purpose of the Study 14 1.4 Research Objectives 15 1.5 Research questions 15 1.6 Significance of the Study 16 1.7 Research Scope & Delimitation 17 1.8 Structure of the thesis 18 2 Theoretical backgrounds 20 2.1 Corporate Social Responsibility 20 2.1.1 The Development of Corporate Social Responsibility 20 2.1.2 Critical Perspectives and Debates on CSR 23 2.1.3 Corporate social responsibility in the Nordics 25 2.2 Core CSR Theories 28 2.2.1 Agency theory 29 2.2.2 Legitimacy Theory 32 2.2.3 Stakeholder theory 34 2.3 Conceptual Framework 37 2.4 Measuring financial performance 39 2.4.1 Accounting-Based Measures 39 2.4.2 Market-Based Measures 40 2.4.3 Integrating both Measures 40 2.5 Value Creation and its Role in Financial Performance 41 3 Literature Review and Research Hypotheses 45 4 Data and Methodology 66 4.1 Research Methodology 66 4.1.1 Dependent variable 69 4 4.1.2 Independent Variable 70 4.1.3 Control Variable 70 4.1.4 Regression model 72 4.2 Data 74 4.2.1 Discriptive Statistics 76 5 Results and Discussion 79 5.1 Correlation Matrix 79 5.2 Baseline Fixed Effects Regressions 81 5.3 Interaction Models 83 5.4 Robustness Analysis 87 5.5 Diagnostic Tests 90 5.6 Discussion 91 6 Conclusions 94 6.1 Summary of Main Findings 94 6.2 Implications for Nordic firms, Investors and Policymakers 95 6.3 Limitation of the Study 96 6.4 Suggestions for the Future Research 97 References 99 Appendics 106 Appendix 1. Country Distribution Table 110 Appendix 2. Total Selected Countries by Companies 110 5 Figures Figure 1. The Triple Bottom Line Model (Elkington, 1998). 21 Figure 2. The role of Principal-Agent Dynamics in CSR Governance (Eisenhardt, 1989, p. 58). 31 Figure 3. Legitimacy Theory (Suchman, M. C. 1995). 34 Figure 4. Stakeholder Salience Model categorizing stakeholder groups based on power, legitimacy, and urgency (Mitchell et al., 1997). 36 Figure 5. Coceptual framework: CSR and financial performance at Nordic firms. 38 Figure 6. Conceptual framework illustrating value creation through the integration of operational efficiency, innovation, and CSR in Nordic companies (Donaldson, 2023). 43 Figure 7. ESG structure that contribute to overall score. 75 Tables Table 1. List of control variables and reason of choosing them. 72 Table 2. overview of variables represented in the dataset. 75 Table 3. Discriptive statistics of main variables 76 Table 4. Industry distribution and ESG deviations 77 Table 5. correlation matrix 79 Table 6. Baseline Fixed effects regressions 81 Table 7. Fixed Effects Regression: ESG × Industry 83 Table 8. Fixed Effects Regression: ESG × Size 85 Table 9. Robustness check 1: ESG score instead of ESG combined score 87 Table 10. Robustness check 2: Extended controls 89 Table 11. Hausman Test 90 Table 12. Wooldridge's Test 91 6 Abbreviations CSR Corporate Social Responsibility ESG Environmental, Social, Governance ROA Return on Assets CFP Corporate Financial Performance SMEs Small and Medium Sized Enterprises TBL Triple Bottom Line 7 1 Introduction Corporate social responsibility (CSR) is now an essential component of business strategy. Businesses nowadays are not only make profits but also try to contribute the society and the environment. This change indicates the increasing interest in sustainability, social justice, and ethical leadership. Nordic countries mainly the Finland, Sweden, Norway, Denmark and Iceland are characterized by highly committed to CSR. The business culture of their companies usually involves maintaining a balance between financial success and social as well as environmental responsibility. The stakeholders in such countries are increasingly demanding responsible business conduct. Sustainable products are more preferred by the consumers despite being more expensive. Investors have increasingly incorporated the main concept of environmental, social, and governance (ESG) in their investment decisions due to the belief that responsible actions can minimize risks and increase long term values (Rahi, Johansson, & Akter, 2021). Governments also support CSR by controlling and implementing sustainability and transparency. Even though Nordic companies have a well established CSR, there is no clear relationship between CSR and firms financial performance. Previous studies (Fatmy, Äijö and Haavisto, 2025) demonstrate that CSR increases the profitability and value of firms in Europe, which is moderated by industry, culture, and governance. However, their regional perspective does not pay much attention to Nordic-specific dynamics. This paper addresses this gap by targeting a specific discussion of five Nordic nations, based on firm- level panel data with year fixed effects, providing high-quality evidence of a developed CSR background. According to some studies, CSR enhances brand image, customer loyalty and access to capital. Aleknevičienė and Stralkutė (2023) discovered that CSR participation can decreased the cost of debt among Scandinavian companies and they were in a much better financial position and also had an investor confidence. Kangas et al. (2025) also established that CSR practices can enhanced the financial sustainability of Nordic small and medium sized enterprises by improving the connection between the companies and its stakeholders. These results indicate that CSR can be both ethical and 8 strategic. However, the results of research are dissimilar. Certain researchers have reported a positive impact whereas others claim weak or even negative correlations between CSR and corporate performance. Margolis and Walsh (2003) have found that overall results were positive but the differences vary significantly across industries. According to Friede, Busch, and Bassen (2015), the results of over 2,000 studies reviewed showed that the results are highly dependent upon the accounting based or market based measures of financial performance, including return on assets and stock returns respectively. The literature on this topic is often narrow in the Nordic setting. Rahi et al. (2021) analyzed 39 financial institutions and discovered that ESG was positively related to performance, which was small and industry-specific. Hichri and Ltifi (2023) examined the performance of Swedish companies and clearly mentioned that CSR enhances performance in terms of customer loyalty, but their research covered only one country. Kooskora et al. (2019) concentrated on Finnish enterprises and identified CSR to be positively correlated to ROA, but not as strongly as to the other indicators. These examples demonstrate that performance varies with data coverage, industry focus and performance measurement. Vaihekoski and Yahya (2023) have found a clear positive correlations between CSR and financial performance in a broader Nordic sample, which shows the relevance of variable measures but the study provides no information on the industry level disparities and firm size effects which limits the generalizability of the results. Martinez-Conesa et al., (2017) also found a two sided CSR financial performance relationship in SME moderated by internal resources and strategic orientation, which closely aligns with governance related results of Rahi et al. (2021). European literature, including Yousefian et al. (2024) and Arı and Büyukksara (2024) openly demonstrates that CSR has a different impact on productivity and financial performance, depending on industry specific factors, methods of measurement, and sample selection. All these papers show that the effect of CSR is context specific and it can be limited by the sample size, industry coverage, or the choice of financial outcomes. 9 The present study fills such gaps by considering a bigger and more extensive dataset. It consists of 209 publicly listed companies in five Nordic countries between 2015 and 2024 and generating 2,464 firm-years observayions. ESG Combined Score and ESG Score are used to measure CSR. The evaluation of financial performance is carried out based on accounting based (ROA) and market based (Tobin’s Q) measures. Other control variables in the models are the firm size, leverage, and profitability. Fixed effects regressions are used to explain firm and year specific variability and minimize bias and enhance reliability. Besides, research also tests whether CSR has different implications on firm performance by industry and size of firms. These variations are identified with the help of interaction models (ESG × Industry and ESG × Size). Additional firm level controls (cash, intangible assets, employees, and book equity) in robustness checks make sure that the outcomes are stable and credible. This research adds value in three aspects. First, it is based on a wider Nordic sample than the majority of the past studies, including all five nations and various industries. Second, it implements a fixed effects model that identify firm-year variation which is used to solve the methodological bias that can found in previous cross sectional designs. Third, it incorporates interaction and robustness models which indicate the difference in CSR outcomes by firm size and industry which has not been studied in Nordic. A combination of these innovations offers a more valid and transferable insight into the relationship between CSR and company performance. Altogether, this thesis has academic as well as practical contributions. It offers fresh empirical data on one of the most socially responsible regions in the world. Also, it explains whether CSR is associated with financial performance in the Nordic business setting. In addition to that, it provides advice to managers, investors and policymakers who are becoming more dependent on ESG information in their decision making. In doing so, the research contributes to the current debates about whether CSR is to be considered as a cost or a long run investment that would help in improving the value of the firm. 10 There are many master thesis conducted from this topic (e.g., Edirisuriya, 2024; Palonkoski, 2021; Tenhovuori, 2022). These researches are typically limited to single country, less sample size, or less financial performance measure. The current research expands on this previous research by examining various Nordic nations, a greater number of companies and further wider financial performance indicators. 1.1 Background of the study Despite the fact that the issue of environmental impact usually require the world of sustainability discourse. The idea of responsible business practices incorporates far more than just the environment related matters. So, the Nordic business area is not an exception. The main definition of CSR is that a firm purposefully integrates ethical, social and governance concerns into the basic business strategy of the firm (Granum Carson, Fet, & Skaar, 2011). Nordic countries have a strong institutional trust, social unity, and inclusion of governance systems. Thats why CSR is predicted to be integrated into their organization and will not be considered as an optional addition. Firms in this region are no longer judged based on how they treat environmental footprints. But how they prevent labor rights, community welfare and board accountability matter alot. The Environmental, Social, and Governance pillars have become the leading framework through which stakeholders will assess these practices within Nordic firms (Midttun et al., 2015). Furthermore, Businesses exist in an environment where they have to make financial returns that facilitate their survival and development. Society requires business to help improve social and environmental welfare. The bottom line in economic sense is that profits do matter and without them business cannot afford to continue its operations and launch responsible initiatives. The correlation between the financial outcomes and social responsibility is not always opposite one. Instead of assuming that the needs of profitability and ethical business performance are conflicting. One may think of the ways in which adopting sustainability and ethical anti bodies could provide extra competitive advantage and resilience to a firm in the long term perspective. Given the new proactive approach towards corporate responsibility that Nordic businesses have, such a scenario begs another question: is integrating a social and environmental aspect actually doing the firms any financial good, or is it just a burden on them? 11 One theory of business ethics is classical view of business responsibility where the basic role of each organizations is to produce gains to its capital owners. It may be related to the shareholder primacy theory according to which the corporate managers are merely facilitator of the corporate owners and their primary duty is to enhance shareholders value without any consideration of other matters. Within the context of this theory, participation in social projects that decrease profitability of the company is not acceptable because it compromises the resources interest of the owners. Defenders believe that it is up to individual stakeholders to decide whether to engage in such forms of socially responsible activities at their own will and not at the vision of corporates. That is to say, the social issues cannot and must not be resolved by the corporation itself and whatever help can be given to improve the welfare of the society should be done out of personal resources and with personal inclinations rather than at the cost of the business performance. This strategy has carried high controversy especially because it generalizes the profit creating and shareholder profit maximizing as being the only valid purposes of the company, all other aims of the company that involve the rest of the society being secondary or even insignificant (Jensen, 2001). This argument falls in with the discussion of corporate responsibility expanded to say that corporations must take into account a wide scope of entities that will be affected by or affect a company. This extended definition holds that the success of business lies in efforts to manage its relation with various stakeholders such as customers, surrounding communities, employees, suppliers, and regulatory authorities. There are quite distinct to the traditional view which insists that shareholder wealth is prime to all other considerations. This approach implies that overriding the interests of any interested group could endanger the reputation as well as the survival of a firm in the long term. Therefore, business with its active participation and response to the issues of multiple stakeholders sets the foundation of sustainable development and social legitimacy (Donaldson & Preston, 1995). This perspective clearly suggests that corporate social responsibility is a part of supporting these relationships and protecting the future of the 12 business. Nevertheless, it does not answer the question whether being more than simple responsibly practices can have a good impact on financial conditions. The debate continues to analyze whether the firms that heavily incorporate social and ethical issues into their strategies can attain better economic achievements coupled with benefits brought to the society. The connection between CSR and financial performance has continued to capture the attention of academicians over the decades. Yet, more support has been given to the case with the most recent findings. It suggesting that ESG indicators have a helpful role to play in determining the performance of firms in a largely sustainable economy. A noteworthy study by Giannopoulos et al. (2022) investigated the Norwegian listed companies in between 2010-2019 and observed that ESG disclosure was frequently associated with opposite short run results of a worse profitability and marginal profitability (measured as the profitability and in the form of the return on assets), although disclosure was connected to a superior market valuation which was reflected in the Tobin Q. It express a twofold implication as the short term returns could be reduced by the ESG investments, whereas the confidence of investors in the market in the long run is higher. To complement it, Saha and Khan (2024) reviewed records of 899 Nordic companies and discovered that strong ESG performance was linked with strong financial performance in a positive and consistent manner and especially when higher standards of corporate governance were observed. These results support the notion that the financial outcomes of CSR are not only related to ESG scores but also to the management of the governance elements and stakeholder engagements within the Nordic business environment. Although the literature supporting the existence of the link between corporate social responsibility and financial performance continues in an increasing scale, the nature of such relationship is still absolutely relative and variable between regions and industries. The empirical research suggests that, the effects of CSR on firm profitability are not homogenous and its effect influenced by the maturity of the economy, regulatory 13 requirements and awareness levels of the stakeholders in a given country and industry. Moreover, In Nordic countries CSR is not merely a differentiator but a norm of corporate lives and regulatory environment and should be followed as a matter of expectation. Therefore, companies under these circumstances might even have to go beyond minimum CSR requirements in order to realize quantifiable financial gain. On the other hand, in the markets where CSR has not been established, early introducers of ethical business practices can achieve visibility in their competitive business leading to lessons to investors as well as consumers. This thesis is particularly going to use a established CSR environment such as the Nordic region to examine whether there are any economic payoffs to increasing social and regulatory demands of responsibility. Also, whether in highly compliant environments CSR is just a legitimacy strategy instead of generating excess funds. 1.2 Problem statement Corporate Social Responsibility (CSR) is a strategic focus of companies across the globe. More specifically, in the Nordic countries where good institutional frameworks and stakeholders expectations convince businesses to pursue socially and environmentally responsible conducts. Regardless of that normative focus, the connection between CSR and monetary performance is uncertain. Although CSR activities are generally supposed to generate the long-term value by improving stakeholder trust and reputation as well as reducing risks, real world data produces inconsistent findings some reveal a positive impact of CRS, and some indicate no impact or even a negative financial impact (Friede, Busch & Bassen, 2015). This disagreement is specially noticeable in the Nordic setting. Despite a reputation of being a global pioneer when it comes to sustainable business practices, there have been very few studies that have systematically analyzed whether CSR efforts can be translated into better financial performance over a long time period and under this particular institutional environment. Moreover, the existing research generally focused on a limited time period and cross sectional data of different years. And, it does not take into consideration changes in 14 economic times and evolutions in terms of sustainability reporting practices. Due to the increased availability of ESG measures and standard reporting regimes since 2015, it is now possible to re evaluate the relationship between CSR and financial performance by using a much more significant time span of many decades. This study fills these gaps, as it will study a long term, quantitative statistical analysis of publicly traded companies in the Nordics region 2015 to 2024. It can cover significant events in the world economy and far reaching changes in sustainability trends. In doing so, it seeks to add new locally applicable knowledge regarding whether CSR might be a factor in financial success or vice versa in one of the most socially progressive business climates in the world. 1.3 Purpose of the study This paper will determine how the Corporate Social Responsibility affect the financial performance of publicly listed companies in the Nordic region within a 10 year period (2015 to 2024). This thesis addresses the question of whether more environmentally, socially and governance (ESG) active companies are also more financially successful than their less active peers as portrayed in return on assets (ROA), return on equity (ROE) and market valuation. Results of previous meta analyses indicated a generally positive relationship between CSR and the financial outcomes, although ambiguous (Margolis, Elfenbein, & Walsh, 2009). However, little was tested concerning the Nordic region and none of it has been tested over a long time period. This research aims to explain the practical usefulness of the CSR investments in a particular institutional set up through a longitudinal and region focused study. The results will be used in academic body of knowledge to address a geographical and time research gap and will be used to support practices of corporate leaders and policymakers. The main aspiration within this research is to assist the development of a more findings based approach towards the implementation of sustainable corporate strategy within a Nordic countries through linking of CSR practices with financial results. 15 1.4 Research objectives The main aim of the paper is to test the effect of Corporate Social responsibilities (CSR) on the financial performance of publicly listed companies within Nordics region between 2015 and 2024. Although CSR is commonly known as a moral and strategic responsibility within the sphere of business, its direct financial consequences are subject to the various debates between researcher. This study aims to fill this gap by providing a longitudinal study that takes into account not only the CSR disclosures but also the performance of the company using key financial ratios that include the ROA and Tobinin Q. With this purpose, the research strives to accomplish following goals which are closely related. Firstly, it will examine any changes and trends in CSR reporting and practices of Nordic companies in the given time period. Secondly, it will measure the performance of these firms in terms of financial performance by establishing a ground of the empirical analysis. Thirdly, the correlation between CSR and financial performance will be statistically tested and determine whether CSR initiatives have actually brought financial gains. Lastly, it will also analyse sector and country based differences assuming that institutional contexts and industry performance can balance the connection between CSR and the business performance. 1.5 Research questions This research paper is based on a number of very important questions that will help in executing the investigation. The key issue is whether CSR undertakings by Nordic firms can have a positive impact on its financial performance or not. To be more precise, it attempts answering how the relationship between CSR activities and performance measure can be characterized as well as whether they can always vary among countries, and various industries. Based on this, the key research questions are as follows: 1. Do corporate social responsibility (CSR) increase financial performance of Nordic companies? 16 2. Are CSR disclosures statistically linked to measurements like ROA or ROE to Tobin Q? 3. Does CSR influence the financial performance differently based on industry sector and country? The first research question will determine whether CSR is a strategic tool that increases financial performance of publicly listed companies in Finland, Sweden, Norway, Denmark and Iceland between 2015 to 2024. It explore the issue of even if higher profits and operational efficiency is achieved as a result of gaining constant social responsibility. Likewise, second question examines the statistical connection between CSR disclosures that measured with ESG scores and sustainability report and financial performance variables like ROA, ROE, and Tobin Q. The analysis helps in determining whether CSR is significant in the creation of financial value. The third question focuses on the variance of the CSR impact across the industry and countries. It addresses the concern that if the relationship between CSR and the financial performance is affected by the sector specificities and national institutional variations in the Nordic region. 1.6 Significance of the study This study is valuable to both the academic community and business decision making practice. Academically, it will make a contribution to the growing literature on CSR and financial performance due to the provision of practical evidence in a Nordic region. It has commonly been used as a great example of leadership in sustainability and yet to be thoroughly explored in the context of long term CSR and financial performance studies. This cross national analysis of 10 years is quite valuable in the development and testing of theory because many of the studies on this topic before have dealt with shorter timelines or with only one country. By combining several theories such as stakeholder theory, Agency theoey, legitimacy theory and the resource based view, the study provides a combine overview of how CSR can be ethically and strategically beneficial. 17 In practice, this research is timely and would be useful to corporate managers, investors, and policymakers. To the managers, knowing the answer to the question, whether investments in CSR payoff financially is essential when they have to strategically allocate resources. The findings can guide investors to make inform decisions associated with the global topics of the socially responsible investment (SRI) and environmental, social, and governance (ESG) incorporation. The policy makers can use the results to give an insight into how well the CSR related disclosure regulation and governance standards work. As business environment across the globe is increasingly becoming attracted by the issue of sustainability, this thesis offers strong support to guide in making informed decision on the use of CSR in the fulfillment of business credibility and competitiveness. 1.7 Research Scope & Delimitation This paper explores the correlation between Corporate Social Responsibility (CSR) and financial performance of the publicely listed five firms in the Nordic countries Finland, Sweden, Norway, Denmark and Iceland. The time period is between 2015 to 2024, which forms a complete 10 year panel investigation of long term as well as short term impact of CSR on firm performance. The visibility of listed companies can guarantee available standardized and audited CSR disclosures, ESG ratings, and financial figures that are critical to longitudinal statistical analysis (Cheng, Ioannou, & Serafeim, 2014). The study only applies secondary data and ESG scores available in the databases such as Refinitiv Eikon or MSCI ESG Ratings, as well as financial indicators available in Orbis and Bloomberg. By following the past studies involving CSR and financial performance (Margolis et al., 2009; Velte, 2017), common measuring indicators of the financial performance will be Return on Assets (ROA), Return on Equity (ROE) and Net Profit Margin. Proxies of such indicators are rather suitable in terms of internal profitability and shareholder returns and they correspond to worldwide accounting and financial reporting principles. 18 The study attempts to ignore the some qualitative elements of the CSR (perceptions of the stakeholders and workplace culture) are not within the studies considerations. Rather, it is still focused on quantitative analysis that involves measurable CSR metrics and financial results. This methodological precision is needed to both clarify and increase replicability, as is the ideal of the empirical CSR research in the developed market contexts (Friede, Busch, & Bassen, 2015). 1.8 Structure of the thesis This thesis will have total six chapters, each following the other to create a solid picture of the interrelation between CSR and financial results. In the first chapter, Introduction, background of the research, the problem statement, the objectives, research questions, significance, scope and the general outline of the study are presented. Similarly, Chapter Two consists of concept of Corporate Social Responsibility (CSR), historical development of CSR, key discussions and its controversies in the Nordic business environment. In addition to that, it outlines main theories like stakeholder theory, agency theory and legitimacy theory which clearly support the study’s empirical concept. Besides, the conceptual framework as well as Financial performance measures and role of value creation are presented. Chapter Three consist of literature reviews and research hypotheses. Moreover, chapter four explains the research design, the method of data collection, criteria of the sample and implementation of variables in the research as well as in the statistical analysis. Likewise, the fifth chapter provides the outcomes of the empirical analyses with regard to descriptive data, correlation matrix, fixed effects regressions, results of robustness checks and Diagnostic Tests and discussion. Lastly, Chapter six contain conclusion. It has four sub sections such as summary of findings, implications for nordic firms, investors and policymakers, limitation of the study and suggestions for future research. The combination of these chapters creates a logically arranged and methodologically strong 19 thesis that strives to offer valuable academic and practical contributions in the ongoing controversy regarding the meaning of CSR as a means of increasing firm performance. 20 2 Theoretical backgrounds This chapter provides the theoretical background of the study and it is structured into four major parts. The introductory part addresses the concept of Corporate Social Responsibility (CSR), its historical development, key discussions and controversies of CSR in the Nordic perspective. Furthermore, Section two explores three major theories agency theory, stakeholder theory, and legitimacy theory that supports conduct of CSR research and guide this paper. In the third section, overall Conceptual framework is presented. In the fourth section, methods of measuring financial performance have been reviewed as this is essential to determine the impact of CSR. Lastly, the fifth section covers value creation and the way it helps in connecting CSR activities with financial performance. All these sections offer a strong conceptual framework to study the connection between CSR and financial performance of Nordic companies. 2.1 Corporate Social Responsibility (CSR) This section identifies the underlying values and ethics regarding corporate social responsibility (CSR). It focuses on how it has evolved over time starting as part of classical economics to the practice of a holistic approach and balancing between the social, environmental, and financial issues. The main focus is given on how CSR aligns with the stakeholder theory and how it has been strategic in the Nordic business. 2.1.1 The Development of Corporate Social Responsibility The meaning of CSR has changed tremendously. Friedman (1970) first stated publicly that the main social responsibility of businesses lies in making more profits, which clearly implies a shareholder society ideology. This belief has been increasingly questioned by the mass expectations that require corporate responsibility not only connected with the maximization of profits. Stakeholder theory by R. Edward Freeman (1984/2015) changed the discourse completely stating that corporations have the responsibility to a variety of stakeholders (not just the shareholders themselves but also the employees, customers, 21 suppliers, and the local communities). This practice has placed CSR as a strategic necessity and not a side issue. The turning point in the evolution of CSR occurred when John Elkington (1998) introduced the Triple Bottom Line (TBL) model that states that corporate performance should be measured performance thrpugh three dimensions: People (social equity), Planet (environmental stewardship), and Profit (economic performance). This framework encourages companies to go beyond the financial performance and to look at the bigger society. Figure 1. The Triple Bottom Line Model (Elkington, 1998). Since then, Elkington TBL framework (1998) has become one of the foundations of sustainable business practice and has produced a huge impact on business reporting and analysis of performance. It is also applicable specifically to the Nordic framework where CSR is adopted as transparent institutions where the welfare system has inclusive arrangements and the environment is rigorously regulated. Nordic countries, especially Sweden, have seen CSR as a corporate giving but it is now largely a systemic and internally coordinated scheme of business strategy. Lund- Thomsen and Lindgreen (2014) point at the integration of the CSR provisions of Nordic firms into global value chains as the outsourcing of international norms of international labour standards, environmental standards, and stakeholder governance practices in 22 operations. This is systemic labour process that is promoted by institutional systems such as social democratic welfare states as well as models of cooperation in labour market. Another contribution in this debate has been made by Matten and Moon (2008), who separate the terms explicit CSR from that of implicit CSR. Explicit CSR describes corporate policies voluntarily adopted, whereas implicit CSR is a characteristic practice in Nordic countries and exists within the institutional framework as well as expectations of the society. The rationale behind the deep integration of CSR in business strategy in the Nordic companies is more embedded in approach than by any other region. CSR evolution has also seen an upward trend in its formalization or standardization, mostly in the form of global reporting frameworks and certifications. The input of organizations (Global Reporting Initiative (GRI) and UN Global Compact) made the CSR practices to align to the ethical principles, especially in such areas as human rights, labor conditions, environmental safety, and anti-corruption. Innovations in technology and emergence of digital transparency are also some factors that have promoted the evolution of CSR by enabling various stakeholders to observe and control corporate behaviors. Companies are increasingly responsible to their behavior regarding the environment and social performance due to social media, open data platforms, and digital activism. The past few years have seen CSR become ever more strategic with issues of environmental, social, and governance (ESG) factors being considered in investment decisions. According to a meta analysis conducted by Friede, Busch, and Bassen (2015) in relation to more than 2000 empirical studies, there are positive links between the ESG performance and financial returns. It can be reflected in view of Sullivan and Mackenzie (2017), who point out the positive effect of ESG integration on risk management and long term value creation. Besides, the COVID-19 pandemic has become a factor that support the importance of CSR. Those firms that have been able to remain standing strong and caring towards 23 employees, local communities, and supply chains during the crisis show increased capacities in holding stakeholders to overcome the crisis and emerge faster. As a result, CSR has evolved to become a proactive and strategic approach to attaining competitive advantage, particularly in destination locations such as the Nordics where society and governance conditions allow sustainable business practices to be achieved. Nordic CSR model can therefore be considered a continuously developing benchmark in terms of embracing ethical responsibility and business innovation. 2.1.2 Critical Perspectives and Debates on CSR Since Corporate social responsibility (CSR) is commonly known as a win-win solution. companies are helping with the societal and environmental issues, but can also profit financially. But behind this positive narrative there is a very lively discussion over whether CSR actually does what it promises or is merely a convenient corporate mask. This discussion is especially applicable to Nordic businesses, whose area is known to be exceptionally high in terms of sustainability, but at the same time subject to global market pressure and buyer demands. Among the most solid criticisms, it can be said that CSR may be rather symbolic, with companies resorting to the so-called greenwashing, i.e., engaging in the creation of a sense of responsibility without practicing it (Delmas & Burbano, 2011). Greenwashing may include passing on selective releases of positive information to advertising and promotional campaigns hyping up environmental or social advantage. Although these can be used to increase short-term reputation, such strategies destroy the long-term trust and shareholder value when discrepancies are detected. According to Seele and Gatti (2015), greenwashing does not merely discourage people to have any kind of confidence but also effects the companies that have their heads in the right head direction as it makes the stakeholders more sceptical than ever about any CSR claims. Additionally, Lyon and Montgomery (2015) emphasize that greenwashing could be a logical adaptation to the market forces in the existing industry where green credentials, however, superficial pay off consumers and investors. 24 Another controversial reaction is CSR measurement. No single standard has been established to measure CSR performance and the CSR performance rating from environmental, social, and governance (ESG) providers can be exceedingly absent due to a massive difference. According to Berg, Kölbel, and Rigobon (2022), this is what is known as aggregate confusion and it demonstrates how and when it comes to the same company different scopes and evaluation schemes and systems of weighting can result in the same company getting vastly different ESG scores. According to Christensen, Serafeim, and Sikochi (2022), more disclosure may not necessarily be the solution to this problem; in fact, in a few instances, it can escalate disagreement due to differences in the interpretation of the information by raters. To the researchers and investors, this implies that the performance of CSR cannot be reliably compared making decision- making and academic data analysis harder. CSR literature has also been criticised as theoretically divisive using various frameworks including the stakeholder theory, the legitimacy theory and the resource based view but it is not theoretically coherent. Depending on the nature of the intellectual resources, such a theoretical diversity can be intellectually rich. Yet, more difficult to incorporate coherent predictions on when and why financial outcomes are going to be enhanced by CSR. The problem with most CSR financial performance research is empirical: they are endogenous: the successful firms will have greater freedom to invest in CSR which can give a false sense of causality (Orlitzky, Schmidt, & Rynes, 2003). It is hard to conclude whether CSR promotes financial success or is simply an indication of it due to the lack of substantial identification methods, like instrumental variables and natural experiments. Corporate social responsibility programs are costly and these funds may be used in other areas. This causes the arguments on trade-offs and opportunity cost. Huang, Sim, and Zhao (2020) report that CSR and financial performance correlation depends on economic cycles, the structure of industries, and the nature of CSR activity. A good example would be CSR programs internally like employee training and safety issues at the workplace might lead to more productivity as opposed to external charity. However, in Nordic 25 settings, the potential risk of greenwashing may be minimised due to the high level of institutional support of sustainability but it does not prevent the need to be careful in prioritising its CSR activities in line with corporate strategy. These controversies bring out three important facts to Nordic firms. To begin with, transparency is not sufficient unless it will have independent verification. It is because stakeholders will continue to lose confidence in the legitimacy of CSR claims. Second, a critical attitude towards the assessment process should be adopted and it is necessary to understand that various measures may be used to lead to different inferences. Third, CSR should not be considered merely a strategy that should be applied with the same measure. Since, not all CSR activities will deliver in the same measure as financial goals and social licence to operate recognises. Dealing with these criticisms both directly in a corporate strategy and in scholarly analysis not only enhances the credibility of the claims but also offers a more detailed answer to the question of whether and under what circumstances CSR can actually lead to an improvement in financial performance. 2.1.3 Corporate social responsibility in the Nordics Nordic countries, which consist of Sweden, Denmark, Norway, Finland and Iceland are known all over the world as the countries with particularly good practice of Corporate Social Responsibility (CSR). The fact that they regularly appear at the top of sustainability rankings and in the lists of leaders in responsible business practices indicates a unique regional model characterized by the combination of strong institutional environments, a high degree of deeply rooted cultural values, and innovative corporate policies. In the Sustainable Development Report 2023, Nordic countries are some of the best countries globally, in which Finland, Sweden, and Denmark able to scored above 85 out of 100 in promoting the United Nations Sustainable Development Goals (SDGs) (Sachs et al., 2023). Such brilliant performance demonstrates that CSR is not only the marginal practice, it is the core of the Nordic corporate governance and social policy. Nordic countries at the institutional level have adopted some of the strictest regulatory settings in the world with regard to social welfare, environmental protection and corporate transparency. 26 These regulatory structures ensure that the companies should engage in aggressive sustainability reporting and make their operations comply with strict ethical rules. Such as the tough Environmental Code in Sweden and climate legislation in Denmark all declare binding targets of a carbon-free future, defining a step downward toward which business feels compelled to jump with a proactive safety net. Additionally, the policies of the government also pay more attention to stakeholder interaction and social dialogue, which contributes to a strengthening of the hope that businesses should help the improvement of the wellbeing of society in a profit making process (Husted & de Jesus Salazar, 2020). Such institutional discipline leads to the evolution of CSR in the Nordic region away and beyond voluntary corporate philanthropy to business as usual corporate strategy that promotes the wellbeing of the community. The Nordic culture contributes to the practice of CSR greatly as a complement to institutional pressure. The societies of this region are high on social trust, equal opportuity, and a collective sense of responsibility, and this flows through corporate ethos and its management styles (Gjølberg, 2010). This cultural situation promotes openness, inclusiveness, and ethical business decision making. On the one hand, companies in the Nordics tend to focus on the concerns of employee well being, gender equality, diversity, and work life balance, which is a particular focus of society across the region. For instance, the Nordic corporations, such as Ericsson and Vestas, focus on gender equality and have favorable policies in regard to work flexibility and employee health, representing societal values within the corporate culture. Such high correspondence between the norms of the society and corporate actions increases trust between businesses and their stakeholders, which serves to reinforce the validity and efficiency of the CSR activities. At a strategic level, Nordic companies are integrating CSR in the innovation and core business models and not treating it as an addition. It is partially enabled by the changing worldwide issues of climate change, supply chain transparency, and digital ethics that can only be solved systematically. Such as the case 27 of Novo Nordisk, the global pharmaceutical organization in Denmark incorporates sustainability as a major factor within its operation and strategy. According to the 2024 annual report by Novo Nordisk, the healthcare company sets out ambitious goals that include eliminating greenhouse gas emissions, phasing out plastic waste, and supporting equal access to medicines on a worldwide scale (Novo Nordisk, 2024). Similarly, Nordic Semiconductor, a Norwegian based company recently achieved recognition through the Science Based Targets initiative (SBTi), with science based emissions reduction targets in accordance with the Paris Agreement parameter of 1.5° C (Nordic Semiconductor, 2024). These companies are representative of the phenomenon of how major Nordic firms can use CSR to develop competitive advantage, innovation and value in the long term. Furthermore, the area also embraces innovative practices of circular economy and sustainable supply chains as a part of the approach to CSR. Vestas is a Danish company, which is the leading wind turbine manufacturer globally, and all their products are designed with lifecycle assessments and end-of-life (EOL) recycling to allow resource optimization and environmental responsibility (Vestas, 2024). These practices minimize environmental footprints, and also generate emerging business opportunities via green innovation. It is also seen that the Nordic companies are involved in community development and social equity projects and is indication of the wider social welfare ethos present in the area. Nordic countries are struggling to maintain and develop the practice of CSR yet they are leaders in this practice on global level. The change between implicit CSR based on the social norms and institutional demands to explicit and formal CSR practices in accord with the international frameworks remains to be under development. Moreover, the new areas of digital privacy, social inclusion, and climate adaptation will make Nordic businesses constantly adopt new groundbreaking methods and involve stakeholders. As pointed out in the most recent Sustainable Development Report 2023, 28 the capacity of Nordic business to align these new agendas will be critical to sustaining their dominance in good business practices (Sachs et al., 2023). To summarize, the Nordic region gives a unique example of CSR which integrated within power, cultural belief systems and strategic corporate governance. This has been through their strict regulation climate, high societal demands, active corporate leadership that provides a rich habitat where good business methods thrive. Pharmaceutical, electronic and wind energy companies like Novo Nordisk, Nordic Semiconductor, and Vestas are some of the examples of companies that have successfully incorporated CSR in business strategy to tackle global challenges in a competitive and a sustainable growth oriented manner. The Nordic region provides a wellspring of effects to international corporate responsibility practice and interest as the region continues to adjust to the changing needs around sustainability. 2.2 Core theories in CSR Corporate Social Responsibility (CSR) is a complex phenomenon which cannot be properly understood without an array of theoretical approaches. The most recognizable theories under CSR research are the Legitimacy Theory (Suchman, 1995), Agency Theory (Jensen & Meckling, 1976) and Stakeholder Theory (Freeman, 1984) which have different explanations on the behaviour and subsequent performance of the companies. The concept of Agency Theory is based on the relationship between the principal and agent where shareholders and managers are chief agents and assume that conflicts of interest can occur when managers make plans by investing in CSR, and it does not necessarily reflect shareholder wealth maximisation interests at the present time (Jensen & Meckling, 1976). To extend the scope, Stakeholder Theory looks at a wider range of actors rather than shareholders, and it is important to note that managing stakeholder interests is vital to corporate success (Freeman, 1984). On the other hand, the theory of Legitimacy suggests that organisations participate in CSR to achieve conformity with the societal norms as a means of keeping themselves within the air to operate by looking desirable 29 in the eyes of the stakeholders and the overall community (Suchman, 1995). This thesis will focus on the three theories because they all shed light on the internal governance problems and the external social demands guiding CSR participation. They are particularly applied in the case of the Nordic setting where favorable institutional conditions and socially responsible corporate cultures converge in determining the correlation of CSR and financial performance. The following sections present a clear discussion of each of the theories in detail. 2.2.1 Agency theory The agency theory, by Jensen and Meckling (1976) explains the natural occurrence of disagreement between the principals and agents of the company in the context of corporate governance. In essence, the theory gives an understanding of how agency problems can arise due to dispute of interest between stockholders and the management team which may result in agents are focusing on their own self-interests or short term goals rather than maximizing the value of the shareholders. According to Jensen and Meckling (1976), agency relationship happens where one or more people (principals) hire another (the agent) to execute a service on his behalf in which some decision-making authority is delegated to the agent. The risks associated with this delegation are risks to information asymmetry and moral hazard because normally the agent has more information than the principal and since the agent may act on this information in an opportunistic way. When it comes to the impacts of Corporate Social Responsibility (CSR) and its relationship with financial performance, it is necessary to adopt such relevant hypothetical theoretical perspectives as agency theory that can be used to address the motivations of managers regarding CSR practices. Conventional agency views hold CSR activities with suspicion and may consider them as possible agency expenses when the managers of a business perform CSR, to boost their reputations or carry on their personalized agenda at the cost of shareholder value (McWilliams & Siegel, 2001). Such distrust is based on the assumption that CSR can turn away funds towards activities that 30 will generate profits hence affecting the financial performance adversely, particularly within short-term perspective of shareholders on a quarterly basis (Friedman, 1970). Nonetheless, current developments of the agency theory acknowledge that CSR may even be strategically referred to long-term shareholder to minimize risks, enhance corporate reputations, and promote sustainable competitive advantages (Hart & Zingales, 2017). Particularly in Nordic firms where corporate governance focuses more on stakeholder involvement and transparency, agency conflicts might differ from what can be observed in more shareholder oriented markets. Nordic companies can tend to act under institutional frameworks in which there is a sense of social and environmental responsibility that are backed by regulatory organs and culturally conditioned stakeholder expectations (Gjølberg, 2010). This establishes conditions under which the CSR behaviors of managers might not only be colored by individual preference but also by formal and informal constraints of accountability, which in turn may resolve traditional agency issues. Therefore, the structure of the CSR and economic performance relationship should be studied in Nordic firms in light of such peculiar forms of governance that may bring the managers and stakeholders interests more closely allied than in other countries. Critically, besides the danger of unregulated managerial discretion in terms of CSR expenditure that the agency theory reveals, there is an understanding that well-devised incentive schemes including CSR-related performance measures can align the action of the agent with the long-term value creation interests of principals (Margolis & Walsh, 2003). Empirical research supports this two-sided view: on the one hand, some studies reveal that CSR investments do increase the value of firms decreasing operational risks, enhancing reputation and generating innovation (Flammer, 2015), whereas, on the other hand, others warn about the possibility of these investments being a manifestation of management excess energy, and, as a result, a source of financial underperformance (Krüger, 2015). In the case of Nordic companies, where stakeholders have strong 31 influence, and high aspect of governance transparency, the agency theory is claimed to be less of a CSR-financial performance, with reduced agency costs and an increased possibility of CSR functioning as a value maximizing strategy. Figure 2. The role of Principal-Agent Dynamics in CSR Governance (Eisenhardt, 1989, p. 58). This diagram illustrates the role of agency theory as to understanding the relationship between the principals and agents regarding decision making process in CSR. It demonstrates that there is managerial heterogeneity in CSR efforts so that agency costs may be involved or it can be aligned with shareholder and stakeholder interests through careful management of managerial discretion through incentives and surveillance. This frame is directly relevant to this study because it points out the importance of CSR practices on financial performance via governance systems at Nordic companies. Overall, the agency theory offers a refined insight into helping to understand this study through the lens it uses to focus on governance instruments that influence the implementation of CSR and financial results. It supplements the stakeholder theory by laying emphasis on the internal corporate dynamics and congruences (or lack of congruences) between managerial and shareholder interests. In Nordic countries where social responsibility is entrenched institutionally, the agency theory shows that instead of expecting CSR to be an agency cost, CSR should be expected to be a strategic resource 32 contributing to the long-term financial success. Therefore, incorporating the agency theory into this study deepens knowledge of the circumstances under which Nordic companies can boost their financial performance through CSR. 2.2.2 Legitimacy Theory Legitimacy Theory offers an interesting perspective to evaluate how the concept of corporate social responsibility (CSR) can reconcile business practices with the expectations of the society. It argues that survival of an organization is determined by how much the stakeholders perceive the operation of the organization as being legitimate (Suchman, 1995). The perception of legitimacy is influenced by the conformity of the corporate actions to the emerging cultural norms, values and institutional standards (Deegan, 2002). Legitimacy Theory more specifically applies in cases like the Nordic region where the principles of sustainability and transparency are more ingrained in the social fabric of society, explaining the interest of the firms in CSR that is not based on the need to comply or turn a profit. Nordic countries present a particularly fertile ground with regard to the investigation of Legitimacy Theory because they strongly institutionalize the aspects of ethical governance, environmental responsibility, and stakeholder inclusivity. In Finland, Sweden, Norway, and Denmark, companies work in an environment of very high societal demand not only to simply adhere to regulations, but live out a further socialized and environmental agenda (Strand et al., 2015). In such circumstances, CSR can be seen as a means of gaining a social license to operate, where companies use strategies to stabilize their image with the region, which is based around sustainability. Nordic firms can improve their legitimacy and hence the stakeholder trust and performance in the marketplace by displaying proactive CSR, which could be by making promises of carbon- neutral productions or by ethical labor sourcing. Firms will use both symbolic and substantive strategies to keep on to legitimacy. Publishing sustainability reports or adherence to international norms such as the UN 33 Global Compact are examples of such symbolic activities that are used as communicative instruments to signal to the community to change their perceptions (Michelon, Pilonato, & Ricceri, 2015). Meanwhile, substantive CSR, i.e., the activities that are measurable in terms of organizational changes, can include cyclical economy implementation or a commitment to renewable energy backing. According to the Legitimacy Theory, the higher the level of scrutiny among the stakeholders particularly in industries that exhibit a big environmental imprint the more weight will be put on substantive actions. In the case of Nordic companies working in the energy sector or industrial sector this may often mean transparent reporting and results based environmental performance gains. Another dynamic feature of the Legitimacy Theory is that it acknowledges the fact that legitimacy is never a fixed concept; it changes with the expectations of the society. Conditions like climate change awareness, ESG-based regulation, and consumer culture change the industry effect on what might be acceptable in corporate behavior. The fact is that Nordic companies perform in one of the environmentally aware and socially liberal markets, and there is a persistent pressure upon them to change their CSR strategies so that they could comply with the increasing expectations (Suchman, 1995). Failure on such might attract reputational losses, loss of investors or loss in competitive advantage. 34 Figure 3. Legitimacy Theory (Suchman, M. C. 1995). From a methodological standpoint, legitimacy can be operationalized using ESG ratings from agencies such as Sustainalytics or MSCI, media sentiment analysis, or inclusion in sustainability indices. These indicators serve as proxies to evaluate how stakeholder perceptions of legitimacy correlate with financial indicators such as return on assets, stock performance, or cost of capital. For instance, Ioannou and Serafeim (2015) find that firms with high CSR visibility are more likely to receive favorable investment recommendations, particularly in contexts where CSR is institutionally embedded—such as the Nordic markets. In summary, Legitimacy Theory is essential to this study’s theoretical framework as it explains CSR not merely as a strategic tool but as a societal necessity. It provides a macro- institutional lens through which one can understand how firms respond to normative pressures and seek social approval. In doing so, it complements Stakeholder Theory’s micro-level focus on individual groups and Agency Theory’s economic assumptions, thus creating a more holistic understanding of CSR behavior in Nordic firms. By linking institutional legitimacy with financial performance, this theory reinforces the argument that aligning business practices with societal values can yield both reputational and financial dividends. For instance, Neste Oyj’s renewable energy initiatives have been widely interpreted as a legitimacy-seeking strategy aligned with Nordic sustainability expectations. 2.2.3 Stakeholder theory According to the Stakeholder Theory, firms are under an obligation to meet the needs of every stakeholder impacted by the operations, such as employees, their suppliers, customers, communities and regulators, rather than just the shareholders (Freeman, 1984). This pluralistic accountability framework diversifies conventional profit- maximization models by inserting the social and environmental aspects. According to CSR studies, Stakeholder Theory defends sustainability efforts as positioning measures 35 to meet stakeholder demands, which is allied to the institutional norms of the Nordic countries, where the corporate purpose embraces more than generating profits (Strand & Freeman, 2015). Nordic business environment is defined by equal welfare systems, ecological pronouncement and collaborative administration; this context provides an ideal environment to use Stakeholder Theory. Finnish, Swedish, and Norwegian companies are supposed to consider the stakeholders as a value co-creator. As an example, Ericsson has included the stakeholder dialogue as part of its sustainability strategy including the climate targets, supply chain ethics and digital inclusion to show the company continues to follow the wishes of the stakeholder (Ericsson, 2024) The 2023 Annual Report by Neste mentioned strong financial results in addition to lowering carbon emissions and increasing their partnerships with stakeholders, demonstrating the relationship between CSR and stakeholder interests as both reputation management and profitability (Neste Oyj, 2024). Stakeholder Theory highlights two main drivers of engagement, i.e., normative obligation and strategic advantage. Normatively, the firms have the moral responsibility to respect and react to the affected stakeholders who are moved by their endeavors (Donaldson & Preston, 1995). This corresponds with the Scandinavian traditions of the corporate leadership which codifies the social responsibility and ethical leadership. Instrumentally, proactive stakeholder engagement may be financially rewarding, in terms of reputation, reducing risk and spurring innovation (Jones, 1995). The instrumental case of CSR has been supported by an empirical study that has found a positive correlation between stakeholder-oriented CSR and firm value conducted in the Nordic setting (Catasús, Ersson, & Wallerstedt, 2007). A concept closer to the Nordic approach of governance and prominence focuses on the attributes of power, legitimacy, and urgency (Mitchell, Agle, & Wood, 1997) known as stakeholder salience. An example is the situation of Finnish firms, where unions or employee representatives are involved in board level, which would imply that labor stakeholders are highly salient. The 36 stakeholders of the environment and communities also have large means of influence in the forest or energy industries and largely affect CSR policies and priorities in strategies. Figure 4. Stakeholder Salience Model categorizing stakeholder groups based on power, legitimacy, and urgency (Mitchell et al., 1997). Quantitative stakeholder evaluation is usually based on ESG scores (e.g. MSCI, Sustainalytics), stakeholder satisfaction measures and company sustainability reports. They are proxies used in regression studies that investigate the correlation between the stakeholder responsiveness and financial performance. Interestingly, the Nordic companies that have the highest stakeholder alignment like Neste Oyj and Vestas have shown more stability in their stock prices and improved shareholder confidence particularly during the market shocks and are related to the long-term financial health of the company (Sustainalytics, 2024). To sum up, Stakeholder theory provides a normative and instrumental rationale of CSR involvement, especially in the Nordic institution where the role of a stakeholder is strategically important. With the main focus on the stakeholder interests, Nordic companies promote not only the values that are held by the society, but also the environment in which the financial sustainability can be achieved. Combined with 37 Agency and Legitimacy theories, Stakeholder theory becomes a vital component of an efficient theoretical framework for this study that explains the relationship between CSR and financial performance in Nordic companies. 2.3 Conceptual Framework The conceptual framework of this study incorporates the concept of Corporate Social Responsibility (CSR) as the independent variable, financial performance as the dependent variable, and identified some of the mediating mechanisms that explain the relationship. Furthermore, it explain that CSR and financial performance of the corporations in the Nordic countries are related to the reduction of the risk factors, a better reputation, and a better accessibility to the funds. The framework combines elements of Agency Theory, Legitimacy Theory, and Stakeholder Theory, each offering the perspective under which the given impact of CSR on the financial performance can be realized. According to the Agency Theory, CSR programs may serve as means of ensuring managers work for shareholders benefits, in turn, lowering down the agency costs and, possibly, positively impacting the financial performance. The legitimacy Theory assumes that companies have to stimulate CSR so that people accept them and help firms to get a good reputation which, in turn, brings better financial results. Stakeholder Theory focuses specifically on the need to manage relationships with the different stakeholders using CSR, something that could reduce risks and also improve financial outcomes. Empirical research carried out between 2015 and 2024 adds a layer of support to these theoretical viewpoints. A recent study by Saha and Khan (2024) on a sample of 899 Nordic companies provides a clear confirmantiom of the strongly established relationship between ESG initiatives, the dimensions of corporate governance and the performance indicators of their companies . Results obtained by Uzhegova et al. (2019) in the study of 141 Finnish SMEs demonstrate that practicing CSR increases firm 38 resilience and performance levels, which points to the role CSR plays in risk reduction and building up of reputations. Coceptual framework: CSR and financial performance at Nordic firms. Figure 5. Coceptual framework: CSR and financial performance at Nordic firms. Figure 5 depicts the theorized links in this framework, which indicates that CSR has direct and indirect impact on financial performance through the mediating factors of the reduction of risks, rise of reputation and ascendancy of access to capital. This framework gives the empirical study a clear theoretical foundation and establishes a connection between the research question and the theory andrecent findings in the related research fields, which guarantees theoretical rigor and practical relevance of the study. CSR (Independent Variable) Access to capital Reputation Risk Reduction Financial performance (Dependent Variable) 39 2.4 Measuring financial performance Financial performance is an important metric of the ability of an organization to make profits and add value to its shareholders. It reflects the ability of a company to manage its resources to have a sustainable economic performance. Financial performance is a multidimensional concept that uses both accounting and market performance that reflects the experiences of the past and the expectations of future growth among investors (Nguyen & Nguyen, 2020). The following sub sections cover various financial performance measures. 2.4.1 Accounting-Based Measures Financial measures of accounting focus mostly on the information that is extracted using financial statements, e.g., income statements and balance sheets. Some of the most popular ones include Return on Assets (ROA) and Return on Equity (ROE). ROA measures the effectiveness with which a company employs its asset base to generate profits by taking the net income divided by the total assets (Corporate Finance Institute, n.d.). The higher the ROA the better the asset utilization. On the same note, ROE is used to determine profitability against shareholder equity which gives an indication into returns offered to investors (Corporate Finance Institute, n.d.). Although accounting ratios are concrete indicators of profitability, they are backward- looking, in terms of being based on historical data. In addition, these metrics are prone to accounting conventions and policies as industries as well as geographical locations may require different conventions affecting the comparability (Kolk, Rivera-Santos, & Rufin, 2014). As an example, it is likely that companies in an intense capital rather than service-oriented sector will have a different asset structure which will influence the ROA levels. Moreover, accounting measures tend to exclude non-financial assets like brand value, intellectual property and human capital which are significantly augmented in the present-day knowledge-based economy (Nguyen & Nguyen, 2020). 40 2.4.2 Market-Based Measures Market-based measures complement the accounting data by showing the overall opinion of the market of how a company will perform in the future and how much risk it faces. Such metrics add in presumptions about the prospects of future cash and growth opportunities which are imperative in the studying the long run financial performance (Orlitzky, Schmidt, & Rynes, 2003). Market Capitalization is the most straight forward market measurement, being the number of outstanding market value of shares of a business. However, it doesn't give the complete picture on its own, without the contextual comparisons. Market-to-Book Ratio measures the market price of equity with its book value indicating investors appreciation of a company relative to the assets that the company has recorded (Fama & French, 1997). A ratio of above one usually suggests that the investor has faith in future earnings or intangible asset value. Tobin Q is another influential indicator and it measures the market value of a company with the replacement cost of the company assets. When Tobin Q is greater than one, the market is assuming the company possesses high future profits or high value intangible assets since it is paying more than the cost of its significant assets (Chung & Pruitt, 1994). In contrast, a Tobin Q that is less than one can be either undervalued or belong to inefficient use of assets. Nevertheless, market-based measures can be unstable and depending on outside factors, such as macroeconomic fluctuations or shareholder sentiment, they can be far off what the economic reality of the company is (Nguyen & Nguyen, 2020). 2.4.3 Integrating both Measures Financial performance should be measured using a set of both accounting and market- based measures because of the synergies between their important strengths and weaknesses. Accounting ratios provide a tangible history of profitability and efficiency 41 of operations, whereas market indicators will give a future impression and risk analysis (Orlitzky et al., 2003). This mixed method would prove to be very resourceful in assessing the effects behind the CSR initiatives. Although engaging in CSR ultimately can be costly to short-run accounting profitability, it can help build reputation, mitigate risk and foster positive relations with stakeholders, which can ultimately have a positive effect on the market valuation in the long run (Kolk et al., 2014). Therefore, a pure accounting metric may not be sufficient to estimate the monetary value of CSR, and a balanced system of performance measures has a role to play. Financial performance measures should be applied with the consideration of both industry characteristics and geographical situations. The both Sustainability and CSR are frequently promoted in Nordic companies, and such practice can have a specific impact on accounting outcomes as well as market perception in contrast to companies in other locations (Kolk et al., 2014). In addition, the structure of assets vary between industries and it can affect the applicability of ratios such as ROA or Tobin Q. 2.5 Value Creation and its Role in Financial Performance One of the aspects in tracking down how Nordic companies have managed to maintain a higher level of financial performance, mainly through incorporation of Corporate Social Responsibility (CSR) into their principal business strategies, is value creation. Essentially, value creation can also be defined as the capacity of the firm in terms of both tangible and intangible resources to generate goods or services which consumers will find more precious than their production. This causes economic benefits and long term financial prosperity. In Nordic markets, the cultural norms of business ethics, transparency and sustainability increase the value creation process by integrating CSR, together with operational efficiency and innovation as driving strategic capabilities. 42 In Nordic firms, the pillar of operational Efficiency continues to be an important value creation pillar. These companies have given an emphasis on streamlining their internal processes and supply chains in order to reduce wastage and maximize returns so that they can achieve a good cost structure when compared to global markets. The difference between Nordic firms, as compared to other firms, lies in the fact that upgrading such aspects through sustainability principles has been directly incorporated in such operational improvements. An example would be the investments in energy saving technologies, waste minimization program, and fair sourcing, which are not just cost saving initiatives, but also help to increase stakeholder confidence, brand recognition, and market access of companies that support sustainability. This creates a situation of a two bottom line in which a company will create both financial value and social value (Donaldson, 2023). Innovation also increases the creation of value as Nordic firms are able to create sustainable products and services that satisfy the customers and high environment related regulations of the continent. Such an innovation does not apply only to the product characteristics but also to business models and processes that generate long- term differentiation and access new sources of revenue. Studies have shown that the CSR-inspired innovation in Nordic companies increases employee interest, level of creativity and results in the improved organization reputation with the result of subsequent improvement in financial performance (Donaldson, 2023). The Strategic driver of CSR plays a central role in Nordic value creation. Nordic companies are deeply integrating or incorporating CSR in corporate governance and strategic decisions as opposed to considering CSR as a peripheral or humanitarian endeavor similar to the traditional perspective. These firms reduce regulatory compliance risk and a loss of reputation, which would eventually reduce the shareholder value through paying attention to environmental stewardship, social equity, and transparent governance. CSR initiatives build trust among the customers, investors, other stakeholders and they tend to translate to increments in market value and an easier 43 access to capitals. As empirical data within the Nordic environment indicates, a strong CSR involvement of companies will result in higher financial performance in the long- term perspective of the company, which highlights the fact that CSR should be viewed not as a cost structure but as a value driver (Donaldson, 2023). Figure 6. Conceptual framework illustrating value creation through the integration of operational efficiency, innovation, and CSR in Nordic companies (Donaldson, 2023). In order to think of these integration, Figure 5 demonstrates how Nordic companies leverage their financial, human, and natural resources by the means of the strategic levers of operational efficiency, innovation, and CSR. These elements enhance each other to form competitive advantages and economic value addition in a sustainable manner. Traditional value drivers are reinforced through integration of CSR through mitigation of risks exposure, innovation, and strengthening of stakeholder relationship, which is a key element with the Nordic institutional environment. To sum up, value creation at the Nordic companies is a comprehensive and complex process in which efficiency in operations, innovation, and CSR work hand in hand in promoting sustainable financial results. CSR is no longer about compliance or reputation management but a strategic requirement that fits well within the Nordic cultural beliefs and stakeholder expectations. As a result, Nordic companies who incorporate CSR in 44 their value creational systems can be well placed to achieve better and sustainable financial results, which validates the thesis that CSR improves financial performance. 45 3 Literature Review and Research Hypotheses Corporate social responsibility (CSR) is now increasingly being seen as a strategic part of the business and not just a moral duty. Researchers have examined how CSR has affected firm financial performance and the findings have been mixed across industries, geography and aspects of CSR. These effects are comprehended through the use of various performance metrics. An analysis of CSR to CFP connections in particular organisations like Nordic firms can provide deeper understanding on how social responsibility can create economic and social value. In this chapter, the study aims to summarize numerous empirical studies with regards to CSR and financial performance conducted by various scholars. The research conducted by Bolstad and Blindheimsnes (2021) targeted deeply studying how internationalization, CSR and financial performance interrelate among Norwegian companies that conduct international operations. The scholars used a quantitative design, in which they targeted 500 companies in Norway across more than 20 industries to get a wide range of business opinions. The study relied on the electronic distribution of a survey. The results obtained in the study clarified that there was no clear positive direct relationship between internationalization level, CSR involvement and financial performance, however, there were some subtle learnings. They concentrated on Norwegian companies only, which did not allow much generalization to the Nordic area. Their analysis did not provide very strong controls on firm heterogeneity, and it might not address the causality of CSR and performance comprehensively. This thesis extends to several Nordic nations and uses fixed-effects panel regression, which offers more extensive and stronger information. It is also interesting to note that companies operating in different sectors always considered CSR as an essential element of their businesses and most of them were characterized by high ethics. This is in line with the increasing trend of CSR in business world with the consideration of ethics gaining a lot of weight in global business strategies. 46 The motivational force behind the internationalization was highly based on the desire to expand into new or bigger markets, compared to CSR activities that were highly fueled by factors related to building of corporate reputation. The above results indicate that although the factors behind internationalization and CSR might be dissimilar, they are both part of the strategic intent of Norwegian firms. Also, the research indicated that firm size, in terms of the number of employees had a positive impact on both CSR engagement and financial performance. Such observation can endorse the idea that bigger companies have more resources and abilities to apply and to receive CSR initiatives which might result in improved financial performance. To complement this point of view, Aleknevičienė and Stralkutė (2023) conducted an examination of the financial repercussions of CSR on Scandinavian public firms, in the cost of the debt. The results of their study suggested that a company with better scores about its ESG disclosure enjoyed considerably lower interest rates on loan. This indicates that strong CSR particularly through transparent ESG reporting contributes to the credibility of a firm in the eyes of its creditors and can possibly translate into quantifiable financial benefits implying a stronger relationship between CSR and the financial performance than those of Bolstad and Blindheimsnes. The analysis was limited to investigating the cost of debt in Scandinavian pulic companies, and the general financial performance were not addressed. The main gap of the research is that it is very limited in its scope and causal discussion. This thesis fills this gap by analyzing the broader financial performance impacts of CSR in Nordic firms through fixed effects regression. On the contrary, Alkhalili and Namayanja (2021) considered the CSR and CFP relationship in listed Swedish financial institutions. By using 2015-2019 panel data, they determined that the CSR activities had no significant influence on financial performance. This finding underlines the possibility that the success of CSR in creating financial payoffs could be industry-specific or a function of the extent of integration into business activities. The absence of monetary implications at the time of evaluation highlights the need to have long-term views to access CSR initiatives. Also, they focused on the effect of CSR on 47 financial performance of Swedish financial institutions, which narrows the results to only one industry and country. The major gap is that there is no cross industry and cross country findings. This thesis addresses the gap by analyzing several Nordic industries and countries using fixed effects panel regression to gain wider understanding. In a meta-analysis involving 95 empirical studies in the United States, Margolis and Walsh (2003) found a mostly positive connection between CSR and corporate financial performance. Nevertheless, they clearly observed that there was significant variance depending on an industry, analysis process, and a period of time. Their output indicates that although CSR may be correlated with improved financial performance, the intensity of this association is dependant on a variety of situational elements. The study has some weakness such as it has used secondary data, unequal methods and the global nature that does not capture regional contexts. The major gap is the absence of country specific observation. This thesis discusses it through the analysis of Nordic firms with fixed effects regression. When combined, these studies really portray a mixed picture of the situation. CSR activity is generally considered to be a strategically beneficial activity, but finding a precise association between CSR activity and firm financial performance depends on region, sector, firm size, and evaluation method. Both reputational (Aleknevičienė & Stralkutė, 2023; Bolstad & Blindheimsnes, 2021) and financial advantages (Bolstad & Blindheimsnes, 2021) are emphasized by the Scandinavian studies, whereas common financial advantages cannot be assumed (Alkhalili & Namayanja, 2021). The meta- analysis data in the U.S. (Margolis & Walsh, 2003) puts in a more general support that CSR is also able to improve financial performance especially within contextual favorable conditions. Vaihekoski and Yahya (2023) examined the correlation between Environmental, Social, and Governance (ESG) variables and financial performance in the firms of the Nordic nations. In publicly listed companies, they determined that there is a positive correlation 48 between the ESG performance and their financial performance with a special note to the governance being a key to their financial success. This research implies that companies with a better ESG performance, particularly in the governance aspect, have greater chances of realizing a higher level of profitability and market valuation, and this supports the claim that strategic integration of ESG can improve firm competitiveness and stakeholder confidence. They discussed the effect of ESG on the performance of firms in Nordic countries but focused more on aggregate scores of ESG, which did not provide much information on the components of CSR. The research also incomplete in respect to firm level heterogeneity. The thesis bridge this gap by examining the detailed dimensions of CSR and by applying firm, industry, and year fixed effects to obtain strong results. Conversely, Chih, Chih, and Chen (2010) determined corporate social responsibility (CSR) in 520 financial companies in 34 nations. What they found out is that the size of the firm, market competitiveness and the institutional context factors like law enforcement and self regulation are some of the factors that influence CSR participation. More interestingly, they found no direct relationship between CSR activity and current financial performance indicating that companies might undertake CSR because of strategic or ethical considerations as opposed to current profit. In addition, more powerful shareholder rights showed a negative relation with CSR engagement, which shows that institutional pressure can stimulate or constrain socially responsible action. They are paying more attention to the variables affecting the CSR instead of the effect of CSR on the financial performance. The primary gap of their study is that there is no clear results that CSR is associated with firm financial outcomes. However, This thesis fills this gap by analyzing the impact of CSR on financial performance in Nordic companies through a fixed effects panel regression. Contrasting the two studies exhibited convergence as well as the divergence in the CSR or ESG performance discourse. Both articles understand the role of governance or institutional considerations to be influential: Vaihekoski and Yahya (2023) discuss how 49 governance positively contributes to financial performance, whereas Chih et al. (2010) reveal how governance structure and legal environment impact the level of CSR participation. But Vaihekoski and Yahya (2023) show a direct positive impact of ESG on financial performance, and Chih et al. indicate that it may not be true that what is good for the CSR is good to the financial situation. Such difference could be due to regional context (Nordic countries, as compared to the global sample), the length of ESG and CSR actions, and the temporal horizon concerned in testing the performance. An empirical study was carried out by Latapí Mauricio et al. (2021) to obtain and classify the barriers to the implementation of Corporate Social Responsibility (CSR) by Nordic energy firms. This study conducted semi-structured interviews with top managers working in the largest energy companies of the Nordic region and created a model that divides the barriers into three levels: individual, organizational, and institutional. It has been found out that Nordic energy corporations encounter numerous disruptions in the implementation of CSR. At individual level, barriers to CSR consist of lack of awareness and understanding of CSR by employees. Organizational barriers include this lack of resources, inappropriate means of integrating CSR into the business strategies and opposition to change. Barriers at institutional level include regulatory constraints, pressure of the market and society expectations which might not support CSR goals. Another difference presented by Latapí Mauricio et al. (2021) is between direct and indirect barriers, according to which direct barriers immediately affect the implementation of CSR, whereas indirect ones affect CSR activities through organizational culture and external relationships. They concentrated on problems more than financial results. The primary gap of their research is that there is no clear findings to support the relationship of CSR with the firm performance. This thesis fills the gap by analyzing the impact of CSR on financial performance among Nordic firms through fixed effects panel regression. 50 Martinez-Conesa et al. (2017) focused on discussing an intricate and bidirectional connection between corporate social responsibility (CSR) and the financial performance in case of small and medium sized enterprises (SMEs) established in Spain. Based on the analysis of a panel data (2002-2010) using a dynamic panel estimator (GMM), the authors address the issue of endogeneity and present a solid confirmation of the reciprocal correlation between CSR and financial performance: CSR positively affects financial performance and a better financial performance, in its turn, stimulates further use of CSR. This methodological rigor sets up their work in contrast with other work that was being done previously and was limited in causal inferences as they were often based on cross sectional data. They restricted results to small and medium sized businesses and a particular setting. The primary gap of their research is the unavailability of data of bigger companies and regional comparisons. This thesis fills this gap by considering the impact of CSR on financial performance among Nordic firms through fixed effects panel regression model. The theoretical premise of the study is based on the investments in production and resource-based view (RBV) and the stakeholder theory. As RBV strategy, CSR may be conceptualized as an intangible strategic asset able to develop competitive advantage due to a better reputation, trust of stakeholders and operational performance. Stakeholder theory augments this by recommending that satisfying stakeholders creates loyalty, eliminates conflict, and improves the financial performance. Unlike the results by Latapí Mauricio et al. (2021), where structural and institutional obstacles to the implementation of CSR in Nordic energy companies are noted, Martinez-Conesa et al. (2017) indicate that in case a company has enough financial slack, these barriers can be overcome, and CSR investments can continue at the same level. Moreover, although Chih et al. (2010) found that the drivers of CSR in the financial sector can easily be externally imposed, using regulatory rules as well as reputations, the authors of this study detect the internal resources capacity as the determining factor of CSR commitment in the case of SMEs. 51 Rahi et al. (2021) analyze the fine-grained links between Environmental, Social, and Governance (ESG) practice and the financial performance of Nordic financial companies. The study sample consists of 152 firm-year observations and 39 companies in 2015-2019 and uses both statical and dynamic estimators to show a dual effect that ESG practices as a whole has a negative impact on financial performance calculated based on ROIC, ROE, and EPS, whereas, good governance practices are correlated positively with ROA. This difference highlights the crucial nature of internal controls and managerial accountability, along with corporate governance, in having ESG efforts support the financial performance in meaningful ways. They targeting a single industry. The primary gap of their research is a lack of cross industry results. This thesis will fill this gap by examining how CSR influences financial performance in various Nordic industries with firm, industry, and year fixed effects regression. These results are consistent with stakeholder theory and institutional theory that indicate ESG use could promote stakeholder trust and legitimacy at the cost of short- term expense that can deflate immediate shareholder returns. However, governance mechanisms enable the transfer of ESG engagement into financial value, given the significance of internal structures to sustainability performance. Interesting contrasts come up when it is compared to other studies. As an example, Vaihekoski and Yahya (2023) obtain an explicit positive association between CSR practices and financial performance in Nordic settings, which may have resulted due to the extensive representation of firms and variable measures. Likewise, in their article, Chih et al. (2010) focus on institutional and firm-level drivers of CSR to exclude direct relations to finances, as on this point, Rahi et al. (2021) point to the idea that ESG does not necessarily realize immediate returns. With SMEs, Martinez-Conesa et al. (2017) observes a dualistic association of CSR into financial performance wherein internal resources and strategic orientation are the key factors noting similarity with the governance remark of Rahi et al. (2021). 52 Comprehensively, the article developed by Rahi et al. (2021) makes a great contribution to the CSR/ESG body of knowledge in showing that even though ESG total engagement in the aggregated incidence might create difficulties with short-term financial performance, there might be good governance structures that will convert ESG practices into quantifiable financial advantages. This shows that companies should integrate ESG tactics with strong domestic oversight in order to produce sustainable results. Saha and Khan (2024) developed an empirical study that focuses on the links between environmental, social, and governance (ESG) factors and financial performance among the Nordic business enterprise