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With the rising global focus on the Environmental, Social, and corporate Governance (ESG) factors, companies are under increasing pressure to demonstrate their sustainable and responsible performance. Incorporating ESG factors into business valuation has become a vital component to the modern business landscape. Therefore, we developed several suggestions for the inclusion of ESG factors in valuation practice.

Data Availability

One of the key challenges in appropriately relating the company's ESG performance to its value is data availability. The various type of ESG-related data needs to be provided by the company, alongside its financial data. To ensure comparability, this data must be well-defined and audited, such as through a sustainability report under the Global Reporting Initiative (GRI) or Corporate Sustainability Reporting Directive (CSRD) standards. The availability of ESG data remains a challenge due to the different degree of companies’ engagement with the ESG topic, varying state of sustainability reporting standards and ESG ratings.

Strategic Analysis

Another important aspect of the business valuation process is strategic analysis. It provides context for future decisions by considering ESG factors as market shapers. In the light of global climate initiatives and circular economy regulations, the strategic analysis must address the variability of target markets, resources, and revenues in relation to:

·        Physical and transitional climate risks

·        International trade-related carbon pricing measures

·        Impact of circular economy on business models and supply chains

·        Current and upcoming ESG regulations.

These aspects must be taken into account when analysing the company's business plan, financial forecast, conducting financial market analysis and market sector analysis, and Strengths, Weaknesses, Opportunities, and Threats (SWOT) analysis. 

Sample Composition

The Market Multiple Valuation method involves valuing a company by multiplying performance measure and the multiplier-related to the same measure of similar enterprises. A sample of comparable companies, considering factors like risk, profitability, growth size, and geographical sector, must be selected for estimation. This can be improved by considering the ESG performance of comparable companies within the selection process.

Goodwill/Badwill

The Asset-based Valuation method suggests that an enterprise is worth the value of its assets, including goodwill or excluding badwill. ESG factors can be relevant to both the value of assets and goodwill/badwill. When valuing assets (real estate, equipment), resource efficiency and compliance with regulations should be considered. Furthermore, land valuation should take into account pollution parameters for regulatory compliance or adjustment expenses. While calculating the goodwill, a premium (via multiplier) could be considered for well-performing ESG companies.

It's important to note that business valuation is not an exact science, and only generates a range of values representing the current cost of a certain business. The specific selling price is estimated during negotiations between the owner and buyer. Given the growing importance of ESG with the emergence of global and national policies prioritising ESG, its inclusion in the business valuation process will provide additional arguments for a higher selling price for good ESG performance or a discount for poor ESG performance. As an advisory with comprehensive expertise in transforming businesses, we can become a reliable ally supporting you in navigating ESG labyrinths and incorporating ESG into your business valuation process.