Why Consider ESG in Valuation?

Different environmental disasters, social unrest and the governance amid COVID-19 makes ESG reports more important to value a company. In order to increase comparability of ESG reports, different institutions include the IFRS foundation, the CFA Institute and the EFRAG are now considering to develop a global reporting standard for ESG reporting. It would benefit valuer by providing a consistent reporting metric, and valuers would need to understand how to incorporate ESG into valuations.

People should see ESG as pre-financial rather than non-financial information. If the business model of a company could be affected by different factors in ESG (e.g. climate change, social practices, etc.), it could be a leading indicator of financial performance in future period. ESG factors represent part of the long-term prospects of the company, so it is substantial to include these when determining the market value of the company.

The 2020 economic crisis is expected to bring a prolonged period of low interest rates. The low interest rates increase the relative value of long-term cash flows when comparing with near term cash flows. The low interest rates hence make ESG factors, which emphasise sustainable financial performance, become more important.

How to Include ESG in Valuation

About Valtech and GreenCo

Valtech Valuation has been working closely with GreenCo to explore the prospective demand in incorporating ESG metrics in valuation study. Although it is yet to become a norm to formally consider ESG adjustment factors in formal valuation, more investors look into better tool and analytics to consider ESG factors in investment.

GreenCo now provide ESG Investment Policy advisory service to fund managers. ESG policy is customised to set up according to the fund’s mandate, target investors, target investment industry, local and international ESG frameworks.

Valtech on the other hand, continue to focus on developing systemic valuation frameworks and enhance the transparency and efficiency in valuation engagements. We continue to invest in database and application developments, getting ready to incorporate ESG metrics into valuation analysis.