Quantifying ESG

How ESG implementation impacts key valuation metrics

Stakeholders require prioritising ESG and research has shown that organisations will benefit. But can those benefits be quantified? In this paper, we show how an improved ESG rating does not just benefit the company’s reputation, but can also translate into a significant positive impact on value.

When researching ESG implementations, Deloitte Switzerland found a positive relationship between the ESG rating and the EV/EBITDA multiple. Building upon this recent research, this study by Deloitte Belgium focuses on cost of equity and cost of debt and applies its findings to a hypothetical discounted cash flow (DCF) scenario.

We wanted to validate whether actual financial metrics, such as the beta (a key measure of the riskiness of a financial investment), would reflect the decrease in risk resulting from an ESG implementation.

The ESG score seems to be relevant and is correlated with a decrease in the cost of debt and the beta. In respect of individual pillars, only social and environment appear to impact financial metrics. However, this may be due to sample size being too small considering the lower frequency (but potentially higher impact) of governance issues.

In essence, this study exhibits evidence of a positive impact on key factors driving enterprise value due to ESG implementation. This is a result of the beta heavily influencing the cost of equity in the capital asset pricing model (CAPM) and the cost of debt impacting the weighted average cost of capital (WACC). These factors therefore affect enterprise and equity value.

It should, however, be mentioned that these findings are presented without the consideration of the cost of investments required to achieve an improved ESG rating.

To learn more, we invite you to read our paper.

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