The effect of fund exclusion criteria on firm valuation : Connection between valuation and financial performance

Several regulations and guidelines have been enforced in the EU to support sustainable investment objectives, and the Nordic fund market is highly concentrated, particularly in terms of Article 8 funds. This study investigates the effect of fund exclusion criteria on firm valuation and financial performance in 2024. The fund exclusion criteria used in the study are based on the ESMA exclusion criteria guidelines, supplemented with sustainability policies of Sweden’s three largest asset managers. This study finds that firms that are excluded from sustainable funds have a lower valuation measured as the natural logarithm of the price-to-earnings ratio (P/E), controlling for 2025 and 2026 I/B/E/S EPS growth estimates, financial leverage, dividend yield and country effects. This result is in accordance with previous research, which suggests that funds' capital flows can increase the valuation of the firms included in funds, as well as previous research on the effect of ESG engagement on firm valuation. This study also finds that excluded firms have a higher financial performance measured as return on assets (ROA), controlling for firm size, financial leverage and country effects, which is not consistent with previous research on the effect of ESG engagement on ROA.