ESG genuinely does have an impact on the valuation of companies. Recent studies by Deloitte that compare the value of the company to its ESG performance using the multiple and DCF valuation methods support that claim. It turns out that there is a direct impact on the financing cost and the value of the company. “Data shows that ESG is more than just a buzzword. There is a real financial benefit to having a good ESG rating.”
We hardly need to point out that ESG has evolved considerably. Once upon a time, only a small number of investors used the term ‘sustainability’, but the issue has now become a priority among companies that place it at the heart of their strategy, as well as among investors and the entire stakeholder community. A strong ESG proposition generates long-term value in top-line growth, increased productivity, and investment and asset optimisations, and indicates that the company is opting for every aspect of sustainable growth: in people, resources, the supply chain, customers, and the products or services that the company delivers.
Many surveys focus on stakeholder opinions; studying value creation in relation to the impact of ESG is still a fairly recent development. “ESG is not easy to quantify,” Peter Van Assche, Director of Valuation & Business Modelling at Deloitte Belgium, tells us. “However, a CFO needs to know whether to make additional investments to further improve the company’s ESG rating.”
“Specifically for ESG due diligence, we conduct an analysis of the company’s attitude to ESG,” Van Assche continues. “By degrees, we are seeing an increasing focus on ESG for valuation. If you only consider private equity players, you will see that the focus on ESG has become enormous.
That makes sense, because the amount invested in ESG is increasing every year, partly on the assumption that it is associated with a potential increase in value. So ESG is clearly doing what it is supposed to do: that is another conclusion we can draw from the study. Targeted investments in ESG implementation increase business value, but the communication between rating agencies needs to improve in order to align companies’ ESG scores better.”