The incorporation of ESG information into sell-side analysts’ financial valuation – New institutional theory and institutional isomorphic change

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School of Business | Master's thesis
Degree programme
73 + 10
This study aimed to gain in-depth knowledge of how and why sell-side analysts incorporate Environmental, Governance, and Social (ESG) information into stock valuation. Additionally, the research sought to answer what drives the change in the analysts’ ESG practices. To understand the change new institutional theory was adopted. The phenomenon under study was investigated through three forest industry companies listed in OMX25 Helsinki: Metsä Board, Stora Enso, and UPM. The forest sector was selected as the Environment category of ESG is the most vital of the three in this particular industry and the importance of the Environment dimension has risen due to global climate concerns. Two research questions were formulated as follows: (1) How and why do sell-side analysts incorporate ESG information into stock valuation? and (2) What are the drivers behind the change in sell-side analysts’ ESG practices? This study adopted a qualitative research method, specifically a multiple case study. The primary data collection method was semi-structured interviews of analysts covering the forest companies. The data for the interviews was obtained from prior literature on ESG and analysts supported by the interpretation through the theory. Furthermore, ESG data was gathered from the Refinitiv Eikon database. There were four interviews (cases) in total and all the interviewed analysts were located in the Nordic countries. This study examined a new and uninvestigated phenomenon within an exploratory case study. The main findings of this study suggest that sell-side analysts covering the forest industry companies consider ESG information value relevant, however, the role of ESG is only secondary in comparison to more vital matters such as accounting information. In case the forest companies had ESG-related controversies or incidents, or performed continuously worse than their peers, analysts could lower the multiples or raise the discount rate of such companies. Yet, well enough and homogenous ESG performance in comparison to each other reduces the need to incorporate ESG information into valuation in this precise industry. According to analysts, the most explicit link between ESG and the value of a company appears to be ESG-related investments and potential future regulations that might be imposed on the forest sector due to climate concerns. The Environment category of ESG is expected to support the forest companies and provide future opportunities for them. Thus, this study contributes widely to prior ESG and sell-side analyst literature. In addition, the study adds to the research of Jemel-Fornetty et al., (2011) by arguing that coercive forces play a dominant role in changing analysts’ ESG practices, whereas mimetic and normative pressures do not force or encourage analysts to pay attention to ESG information and integrate it into the valuation.
Thesis advisor
Huikku, Jari
ESG, sell-side analyst, valuation, forest industry
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