This module focuses on how to include sustainability specified as Environmental Social and Governance (ESG)-issues into financial analysis of companies and investment portfolios. The analysis also includes a wider analysis of ESG externalities and how companies, investors and financial institutions recognize these.

The objectives of the course are to give students

• understanding of and competence in sustainability in general, and its overall relevance for a financial perspective
• the ability to identify the specific risks and opportunities that arise from an ESG perspective when analysing and solving on finance problems
• actionable capabilities when addressing ESG-issues whether in a corporate or a portfolio investor role, or on behalf of a financial institution.

Active participation in lectures and group work will give students a useful network after completion of the programme. 

After completing the programme, candidates are expected to have achieved the following overall learning outcomes defined in terms of knowledge, skills and general competence:

Knowledge

The candidate has in-depth knowledge of:

• the main sustainability issues and their relevance to financial analysis and decision-making
• the principles and main references for reporting and documenting sustainability issues at company, investment and portfolio levels
• sustainability risks and opportunities which are relevant for financial analysis in general, and in particular in a portfolio management context

Skills

The candidate is capable of:

• extracting and applying the significant and material information about sustainability for financial analysis conveyed by a company, or other relevant sources, regarding sustainability to do advanced valuation of companies, financial instruments and other assets or liabilities that fully reflect the relevant sustainability risks and opportunities
• specifying and analysing, as well as applying the principles for implementation of, optimal investment portfolio management reflecting the relevant and material sustainability issues

General competence

The candidate is capable of:

• communicating at an advanced level with specialists in both academia and practice about complex issues on understanding and recognizing material sustainability topics when conducting financial analysis

The programme has tre units:

The first session
Part 1: Sustainable business models, materiality and reporting

This covers the first two days of the course. It includes topics related to the nature and characteristics of more sustainable business models. It furthermore addresses the use of materiality analyses to determine which ESG factors are material for specific companies and industries. It finally addresses the practice of sustainability reporting, and the challenges associated with identification, measurement and information quality in such reports.

First day: Sustainable business models and ESG materiality analyses

The focus is on sustainable business models, as an entry point to understand the identification, prioritization, measurement and reporting of ESG factors. The session also covers opportunities and challenges in the use of ESG materiality analyses, as well as industry examples.

Second day: Sustainability reporting

The day starts with opportunities and challenges in sustainability reporting. This builds on the work with ESG materiality assessments on the first day, and discusses the identification, prioritization, measurement and reporting of ESG factors. An important part of this is the EU Taxonomy as well as other key international standards and regulations. Moreover, the session covers the question of how information quality in sustainability reporting can be assessed, enhanced and assured.

Part 2: Integrated valuation using ESG metrics

The second part of this course offers an integrated perspective on valuation that incorporates such externalities. The goal of this part of the course is to explore ways of internalizing the inherent uncertainty about environmental, social, and governance (ESG) issues into a company’s valuation.

Third day: Valuation using ESG metrics and integrated valuation:

Traditional financial valuation models tend to focus on quantifying relatively short-term financial returns and risks, often ignoring externalities that may affect firm value in the long-term, such as resource scarcity, climate change, poverty, or freshwater use. Failing to consider such externalities may result in erroneous valuations. Externalities can cause sudden shocks to a company’s cash flows, lead to stranded assets, and force losses in the company’s productive value.

Investors have been making several efforts to integrate ESG metrics into valuation. A way of doing this is by simply recalibrating traditional valuation methods to reflect a company’s ESG scores (for example, by adjusting the discount rate of companies that score poorly on ESG factors). These models have the advantage of providing a quick approximation to the true long-term value of a company. However, the use of ESG metrics is an imprecise shortcut that may lead to flawed valuations. We will discuss the challenges and limitations of such methods, in order to move towards a more integrated approach.

The second session

Part 3: Portfolio management reflecting ESG

Based on an understanding of fundamental sustainability concepts and criteria, as well as how these are measured and included in valuation models, the final second part of the first weeksession covers how to apply this in a portfolio management context.

Fourth day: Portfolio management reflecting sustainability

In the third part of the course, we will focus on understanding how sustainability could be integrated in portfolio management. This includes a recap of the core portfolio theory models, based on the trade-off between risk and return. We will cover topics like the CAPM, factor models and market efficiency before proceeding to discussing how to create portfolios according to different investment styles, and how to evaluate their performance.
The main part of the day’s programme will be dedicated to the different ESG strategies used by portfolio managers. It will include strategies ranging from negative to positive screening, voting and engagement, risk factor investing and impact investing. The success of each of these different strategies will be analysed by covering the most recent research. Costs and implementation issues will also be discussed.

Fifth Day: Investing in non-equity asset classes reflecting ESG concerns.

Based on the knowledge gathered during the fourth day, the final day will cover how sustainability could enter the analysis and investment into other asset classes, e.g. fixed income/credit, real estate, private equity, and impact investments. In addition, it covers performance measurement and implementation challenges, as well as bank lending.

Sixth Day: – Asset management, group report and additional perspectives

The final day sums up the session with perspectives and experience from asset management companies, and the wider perspectives on the climate challenge on asset management activities. In addition, it prepares the students for their group projects towards the final session. The purpose of the projects is for the students’ to integrate and apply their learning from the week into a specific analytical setting. The topics could include company valuation, portfolio construction, portfolio analysis, fund analysis, or a specific issue related to the inclusion of sustainability in either company, valuation or portfolio assessments. The projects are to result in a report which should be presented and defended in the 2- day session that closes the course.
In addition to the project introduction, we will add a wider perspective on climate risk and its impact on asset management.

The third session

The final 2-day session consists of each group presenting their report and getting a prepared discussion from another group. In addition, we invite experienced practitioners to join the course responsible in discussing each report.

The group report

The programme is concluded by the students’ preparing an independent group report which represents 7.5 ECTS. The report may include a company case or a more generic topic within the scope of sustainable finance, addressing one of the specific learning objectives. The choice of topic is to be approved by the course responsible, and the groups will also receive limited supervision when working on the reports. The report should be based on the teaching in the two first session, and the students are thus expected to prepare it between the first and second sessions in the programme.

The students are assessed on their group reports, and how these are presented and defended. The report also contributes to the requirement for an independent assignment as part of the Executive Master in Applied Finance.