Entela Benz, Ellen Orr
The Hong Kong University of Science and Technology (ST52A-PDF-ENG)
May 06, 2018
In December 2015, Susan Chen, an equity analyst, prepared a valuation for Hong Kong power company China Light and Power Holdings (CLP). In Part A of the case, Susan considered ways to incorporate environmental, social and governance (ESG) factors into stock valuation. She believed that including these factors in the valuation framework could help identify undervalued stocks if markets did not fully account for ESG factors. Susan decided to focus on the ESG Key Performance Indicators (KPIs) for the utility industry and assess those that are financially important to assess the CLP. As such, she planned to create a “materiality matrix” that plots size versus probability of the impact of each KPI on stock price. Part B of this two-part case focuses on the evaluation process. It describes ways to include environment, social affairs and governance (ESG) in the valuation of the company. First, Susan would use the materiality matrix. Only those KPIs that are large and have a high probability of occurrence should be integrated into the evaluation process.
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