In the Proliferation of Sustainable Investing Factoring Sustainability in Conventional Fundamental Analysis

Abstract

With huge surge in sustainable funds inflows and empirical studies showing a better risk-adjusted return, interest in sustainable investing has burgeoned. However, how to fully reflect sustainability issues in the valuation of firms is rather unknown. Consequently, the research question of “How to factor sustainability performance of a firm in fundamental analysis?” has been raised. This leads naturally to the discussion of conventional fundamental analysis and why it has been missing its relevance in the modern context. Grounded on Stakeholder theory as well as the Triple Bottom Line, and by following the structure of conventional fundamental analysis, a sustainable fundamental analysis model, which aims to accounts for sustainability performance, has been formulated. The model theorizes that when examining a firm’s impacts on all its stakeholders and on economic, social and environmental dimensions, the materiality of those impacts would unfold. A material impact would then become a strategic value driver. By aggregating the strategic value drivers’ material impacts on the financial value drivers, a firm’s value from a sustainability perspective could then be determined by following the standard valuation approaches. In order to elaborate on the transition from sustainability performance to firm value, a case study, which is a valuation of Vestas Wind Systems A/S, has been performed to exemplify the implementation of the proposed model in a real-life context and how sustainability issues drive value creation.