A European CSR study about the deviation of valuation

Sammanfattning: For the last decades, public authorities and private firms have emphasized their focus on integrating sustainability into corporate disclosure. The shift towards CSR instead of the traditional profit maximization narratives is evident in increased demand among various stakeholders for sustainability awareness. Thus, financial and non-financial disclosure legislation have become stricter, forcing companies to be more transparent (European Commission, n.d.). This thesis aims to examine CSR research by arguing from a previously unattended perspective of valuation. Thus, the formulated purpose “is to examine if CSR affects the deviation between intrinsic and market value of firms in the energy sector in Europe”. This sector is highly blamed for contributing to global warming by exhausting a large amount of greenhouse gas emissions (Mezher et al., 2010). Furthermore, this thesis distinguishes itself from other valuation articles by arguing from the paradigm of realism. In doing so, we argue that the intrinsic value is the independent reality instead of the market value. The market value is, in contrast, based on investors aggregated perception of the intrinsic value through information. This separation of the two values becomes theoretically evident from the perspective of irrationality. For this aim, a few well-established theories such as the market equilibrium theory and the efficient market hypothesis have been used to theoretically explain the deviation. To establish the empirical difference of deviation, a T-test was conducted on the ten most extreme ESG score firms in the European energy sector. The applied method for calculating the intrinsic value is a perpetuity version of the Residual Earning Method with an aggregated Capital Asset Pricing Model as the discount rate. In accordance with the implied result, we argue for a significant difference in both an absolute and relative deviation in this sector. Contradicting, our second test, regression analysis, could not validate if the stated finding depends on ESG and its components. Instead, the deviation could be viewed from the control variables: Size, risk, and profitability. Thus, a theoretical explanation could be an indirect relationship of ESG towards the deviation; however, further research is needed to verificate the finding. Ultimately, we contribute on two fronts, both towards theoretical and pragmatic knowledge by arguing from an un addressed research perspective, realism and establish that high ESG firms are undervalued compared to low ESG firms.