Sell-side analysts’ valuation method choices and the role of ESG information in renewable energy valuations: Case Neste Oyj

Abstract

The objective of this research was to gain understanding of the drivers behind sell-side analysts’ valuation method choices for valuing a particular company, which have largely remained unknown. The phenomenon was explored through a renewable energy case company Neste Oyj. Additionally, due to the context of renewable energy valuations, the study sought to investigate how environmental, social and governance information influence valuations. The main research question of the study was: What affects analysts’ valuation method choices directly linked to a firm's target price? The secondary research question, to address the context of renewable energy valuations, was: What is the role of environmental, social and governance information in the context of renewable energy valuation?

This research followed a qualitative research approach. Empirical data was gathered from 6 indepth semi-structured interviews of sell-side analysts covering the case company Neste Oyj. The interviews were based on the content analysis of the interviewed analysts’ latest valuation reports on Neste Oyj. Further, the interviews were constructed acknowledging prior research. The interviewees were based in the UK and the Nordics. Interviews were conducted either face-to-face or by phone. Thus, complimentary research material obtained from interviewees’ was considered. Further, the research approach was abductive.

The findings of the research supported the acknowledgement that the decision-environment that analysts face is multidimensional, having various drivers affecting choices made. First, the findings corroborated prior empirical evidence on factors influencing valuation method choices, such as client preferences. Secondly, the research found indications of theoretically suggested factors and thirdly, identified new factors. The factors influencing valuation method choices were categorized under four groups of valuation method drivers, constructing a framework for assessing the phenomenon: 1) employer related, 2) market deriving, 3) method characteristics and personal preferences and 4) firm specific drivers. Additionally, the research noted analysts’ changing valuation method preferences: the shift from the dominance of PE to preference of enterprise value multiples. Secondarily, the research found ESG information to play a secondary role in the context of renewable energy valuations and noted UK and Nordic analysts differing perceptions on the valuation relevance of ESG-information. ESG did not influence valuation method choices or target prices explicitly. However, for Nordic analysts, ESG-information could influence the stock recommendation and be present in screenings or reports.