This thesis investigates the role of sustainable finance in supporting the institutionalization of environmental, social, and governance (ESG) practices and, consequently, sustainable development. The relationship between ESG performance and corporate financial performance has been researched extensively. This thesis aims to fill a research gap by investigating ESG integration into single-company financial analyses and extending the purview to small and medium-sized companies (SMEs). The thesis is organized around three standalone essays under a common theme.
Essay 1, "What's valued by investors gets valued by analysts: Institutional motives of ESG integration into sell-side research", investigates the status of ESG analysis practices among sell-side analysts and equity investors. This research combines a review of equity research reports integrating ESG into the valuation of shares of OMXS-30 businesses by a Swedish bank with interviews of the bank's analysts as well as institutional investors from Sweden and Finland. Single-company financial analysis is the basis of capital pricing decisions and should incorporate financially material ESG factors. Our findings, however, suggest that few of the future effects of financially material ESG issues have been considered by sell-side analysts thus far when transparently assessing businesses. This research shows that investors fail to compensate sell-side research for ESG assessments or systematic examination of the non-financial factors that affect long-term value. This absence of crucial compensation input, together with homogeneous normative ESG evaluation techniques, seems to be the main obstacle to more rapid development in integrated ESG equity research. We suggest that asset owners are in a unique position to drive market development to new levels, and asset managers and intermediaries (brokers) would be able to answer this call, given the right incentives.
Essay 2, "Sustainable finance and SMEs: A systematic literature review," contributes to the field of study of sustainable finance by shifting the focus from large corporates to small and medium-sized enterprises (SMEs). The ESG-corporate financial performance relationship has been extensively researched in the context of large corporates. SMEs, on the other hand, have received less attention. Cumulatively, SMEs make up the majority of corporations, and account for most of the GDP, employment, and environmental impact in the European Union. The green and sustainable transition cannot be achieved without having SMEs on board. Using the Scopus database, we conducted a systematic literature search and found 36 scientific articles exploring the relationship between ESG performance and financial performance of SMEs. The results were coded and divided into nine clusters, highlighting the main ESG driver impacting financial performance. Existing research shows that ESG impacts both the financial performance and access to capital of SMEs. A corollary of essay two is that financially material ESG factors are more country- and culture-bound in SMEs than in large corporates, and as such, needs to be considered in future studies. Furthermore, SMEs financial success is also supported by their ability to dynamically respond to changed circumstances and adopt their ESG strategies accordingly.
Essay 3, "Sustainable finance and institutionalization of ESG: A case study of a Finnish SME," examines how and why sustainable financial considerations impact the case company’s adoption of ESG, and how institutional drivers manifest in the case company’s adoption of ESG. The analysis draws on interviews and company materials and is carried out and drawn against the ESG framework derived from essay two. This research finds out that though some of the case company’s clients have sent sustainability questions to the case company, this is yet to impact the actual business negotiations. Furthermore, most clients, banks, and suppliers had not started engagement on ESG. However, the case company rationalizes institutionalizing ESG into its strategy and operations to retain legitimacy with its key stakeholders in anticipation of increased demands. Financial returns, access to capital, and the cost of capital are implicit key considerations in deciding which ESG factors to invest in while maintaining a focus on key stakeholders.
By investigating fresh and novel business situations through case studies, institutional theory, and sustainable finance perspectives, this thesis adds to the understanding of business management as well as the body of research on sustainable finance. We identify and suggest how banks and investors could accelerate the institutionalization of ESG practices and identify financially material ESG areas for SME owners and managers to explore. We, furthermore, expand the field of study on sustainable finance to the institutionalization of single-company financial analyses and ESG integration in SMEs and suggest several areas for further exploration.Keywords:
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