How do Nordic Companies' ESG Attributes Impact their Valuation Models Used in M&A?

Martin Klitskov & Luka Kiknadze

Student thesis: Master thesis


This thesis contributes to the valuation of companies examining the effect of Environmental, Social and Governance, the ESG factors in major valuation models as an additional layer treating it as a risk component. Additionally, it looks at the empirical work done to support or disrupt our hypothesis regarding the research. We look at the best percentile stocks that perform high regards to their ESG scores and compare them to the lowest percentile. We look for links in ESG performance and excess returns as well as factor risk into wellestablished valuation models to look for any implications the scores have on firms’ enterprise value. Bridging into our econometric approach, comparing high ESG performing companies with low performing ones, the thesis takes use of the capital asset pricing model and Fama & French multi-factor model integrating ESG as a risk in the model. Additionally, we look at the effects on valuations through discounted cashflow model based on the findings of the two earlier introduced models. This thesis’ main focus lies in observing the aforementioned aspect on the Nordic level but does delve into the country level as well, covering Denmark, Finland, Sweden and Norway in order to pinpoint differences and supporting findings. Furthermore, we analyze the interrelation between the return on invested capital, ROIC, and ESG scores as ROIC can be used as a benchmark for the use of capital in an efficient way. This thesis establishes a connection between winners of tomorrow and the ESG scores on the Nordic level with a significant result from the regressions. Additionally, we find that the companies with higher ESG score have lower cost of equity, affecting their cost of capital and, therefore, the enterprise value of the firm. The thesis also pinpoints a positive relationship between ROIC and ESG scores as when the scores increase by one, the average ROIC in the Nordics increases by 0,1 percentage point. The analysis also found out the relationship between total enterprise value and ESG scores to have a highly positive relationship and to be statistically significant on a one percent level. Overall, our regressions and statistics imply a potential benefit of investing in a company within the top percentile regarding its ESG score. Nevertheless, findings based on earlier studies and the research of thesis reveal a positive relationship between excess returns and ESG scores as well as an effect on a lower cost of capital leading to a higher enterprise value of a company. For the Nordic markets, ESG can be seen as a risk factor and thus is important to be taken into investment decisions. Lastly, this thesis concludes by discussing the importance of corporate governance in the world of mergers and acquisitions in regard to ESG.

EducationsMSc in International Business, (Graduate Programme) Final Thesis
Publication date2021
Number of pages110
SupervisorsKristjan Jespersen