How ESG has an impact on the valuation of your company

ESG as a new dimension in valuation

It is not easy to include ESG factors in valuation models. It's not just an extra element or figure to be added into a financial model. It is about integrating a new external dimension into the totality of a valuation. The lack of uniform legislation and reporting standards for usually subjective ESG factors adds to the complexity.

After all, there is still little consensus on how companies should deal with, quantify and report on ESG factors. Some factors are difficult to express in figures anyway: how do you measure good governance and, by extension, a good corporate culture, and then how important should this factor be in a valuation?

Eventually, Moore believes that different standards will emerge in different industries, which will provide more clarity and uniformity in processes and reporting. Until those are in place, Moore recommends to look at ESG issues as a strategic action point in order to develop processes and to meticulously substantiate the relevance of the choices made and to document each step as well as possible.

Worth less ... or actually more?

Whether this evolution makes your company lose or add value largely depends on how you deal with the aforementioned factors. Do you have an ESG action plan with concrete action points? Do you already have ESG reporting that monitors the most relevant ESG data and evolutions? How accessible is that information to your stakeholders? Those are all key questions.

Every day, Moore witnesses positive impacts on the valuations of companies that pay attention to sustainability, incorporate social responsibility and genuinely take good governance on board. Moreover, practice shows that a good ESG score makes it easier for companies to borrow money and attract investors.

However, our experts also frequently witness how vulnerable companies are in acquisitions and mergers if they fail to manage ESG factors properly. Professional acquirers are increasingly paying attention to ESG processes and reporting. The absence or inconsistency of these is becoming a dealbreaker.

The impact of ESG on due diligence

The focus on ESG factors has, of course, an impact on due diligence processes. Potential buyers want to be able to identify ESG risks that have an impact on the operation of the company, or with a potential reputational damage, before making their purchase. At Moore, "mapping" those risks in acquisitions, investment decisions, mergers and corporate transactions has become an important part of due diligence.

Today, many of those risks are no longer just linked to intrinsic financial factors. They are directly linked to environmental factors or elements that are hard to quantify. Again, Moore recommends to start implementing an ESG policy as soon as possible. It is clear that the lack of adequate ESG processes has become a red flag. If these processes are not in place, there’s a very high risk of violating new regulations and/or causing reputational damage in today's ESG climate. The focus on adequate ESG processes in a due diligence process makes sense: when a company that applies specific standards regarding environment, social responsibility and good governance acquires a company that does not or cannot meet those same standards, it weakens its own ESG position with all the risks that entails.

Moore’s due diligence practice shows that you have an important advantage when involved in a capital transaction if you can document and report on relevant ESG factors in a substantiated way.

ESG due diligence covers a wide range, but in broad terms, Moore experts help formulate answers to the following questions:

• Where does the company stand with regard to current regulations?
• How is the company doing with regard to buyers' internal regulations?
• How does the company compare to similar players in the market?

This helps a company achieve a relevant ESG score, an indicator that becomes an important component in both company valuation and due diligence.

Game changer on many levels

In the short term, implementing ESG processes and reporting comes at a cost. In practice, this means that companies have to commit to extra people, new IT systems, consultancy, different means of communication or even a completely different strategy. These costs should be seen as necessary investments. After all, a well-thought-out ESG policy pays off and adds value to a company on many levels.

In the longer term, Moore remarks - in addition to the direct impact of ESG on company valuation - three other important evolutions:

• Reporting ESG factors allows a company to detect new opportunities much faster (innovation boost).
• ESG helps companies make the right investments faster and get returns from them.
• Employers who put their ESG policy front and centre are better placed to attract the right employees. And thus secure their continuity.

These are important topics that our experts would like to discuss with you. In any case, it’s clear that ESG has a major impact on companies, on due diligence processes and on valuation. Are you curious about the impact of ESG on the valuation of your company? Our experts would be happy to assist you.