Norsif Academic Collaboration on a Guide to ESG in Valuation

Annie Bersagel. Photo by CF Wesenberg.

This article is the first of the NordicSIF blog series 2020 hosted by Finsif.

In 2020, Norsif established a new working group for ESG integration in valuation, led by Annie Bersagel (Folketrygdfondet), along with Isabelle Juillard Thompsen (Gjensidigestiftelsen) and Marte Siri Storaker (KLP Kapitalforvaltning). Through a partnership with the Norwegian School of Economics in Bergen (NHH), the working group has now published the first iteration of a guide of the same name. The guide will be on the syllabus for the new specialization course on Sustainable Financial Analysis, organized by NHH and the Norwegian Society of Financial Analysts (NFF).

Norsif caught up with Annie to discuss the new guide and this unique collaboration between Norsif, NHH and NFF.

What was the inspiration for the new guide?

Two of the working group members, Isabelle and I, also sit on the NFF committee that developed the new specialization course in Sustainable Financial Analysis. As we were drafting the course syllabus, we realized there was a lack of material available on how to incorporate ESG in valuation. The main valuation textbooks do not really discuss ESG. We wanted a resource designed for investment professionals and analysts who know valuation, but who do not have much experience with ESG.

How did Norsif get involved?

Marte, Isabelle and I got in touch with the Norsif board in March to see if this was a project they would be willing to support. It seemed natural to us that Norsif was the obvious home for this project, given the members’ experience and competence in ESG. The board expressed their support immediately and approved our proposal for funding to bring an academic partner on board.

Were you able to find an academic partner relatively quickly?

Yes, we received multiple proposals for our bid – all very good – but ultimately awarded the grant to the team from NHH (Aksel Mjøs, Carsten Bienz and Jose Albuquerque de Sousa). We divided up the work so that the Norsif working group wrote the first half of the guide, focusing on how to use ESG analysis to make cash-flow adjustments. The NHH group wrote the second half, looking more into the specific valuation techniques available.

Maybe the best part of the project so far has been the collaboration with NHH. Every time we have a new editorial meeting on the latest drafts, both sides learn something new. I think there is a tendency when we talk about ESG integration to think of it as a one-way street, that ESG professionals need to teach our finance colleagues about ESG. In our experience, gaining a deeper understanding of academic finance makes us better ESG analysts – both in terms of identifying material issues and analyzing what these might mean for a specific valuation.

I understand the Norwegian Society of Financial Analysts also provided comments on the draft?

Yes, the NFF Committee on Financial Information publishes an annual comment on listed companies’ financial information. Last year, they included a section on companies’ ESG reporting, so we knew they were interested in the topic. The committee includes investors, sell-side analysts, and accounting and IR professionals, all with extensive experience from the market.

Which topics generated the most debate?

The most controversial topic was the use of adjustments to the cost of capital to account for ESG. This is extremely common in sell-side analyst reports, e.g. reducing the discount rate for a “green” company, but the practice has very weak academic support. Basically, to argue for a lower cost of equity, you need to use the arbitrage pricing model instead of CAPM. The problem is that there just is not much empirical support for the existence of a systematic ESG factor the way you see, for example, with momentum or the small cap premium. To be fair, part of that may reflect the difficulty in finding a common definition of “ESG” to begin with.

It’s easy to understand why analysts make this adjustment: it is a simple way to take account for a lot of difficult to quantify considerations. Nevertheless, the NHH team provides in Part II of the guide a compelling argument for why best practices include adjusting for ESG in the cash-flows, rather than in the discount rate.

You, Marte, and Isabelle must be relieved to be finally finished with the guide!

Well, we are not quite finished, actually. We will test run the guide with the first Sustainable Financial Analysis class, which begins on October 15th. After that, we will hold a joint Norsif/NHH/NFF webinar (in English) on November 9th from 1 to 3pm CET to get feedback from our co-authors’ academic colleagues on the document. The Nordic Sifs will be invited to that, by the way. Look out for the invitation from Norsif.

Based on feedback from the course and the webinar, we plan to publish a final draft of the guide by the end of the year.

So we should all save the date for the webinar on November 9th then?

Absolutely. I should add, however, that if anyone is unable to attend, but wants to provide feedback, do not hesitate to send your comments to Both positive and critical comments are welcome. Pia will make sure the working group receives your message.

Pia Rudolfsson Goyer

Norsif Guide to ESG Integration in Fundamental Equity Valuation