We are often asked around the importance of ESG data in company valuations. When does sustainability come out most prominently in valuation assignments?
It is typically one of two types of companies:
- ESG Leaders: In these cases the sustainability narrative is a clear valuation-positive. The firm is amongst the greener companies in its sector and hence expected to win market share and less prone to regulatory fines or sizeable “catchup” capex
- ESG Laggards: Here the inverse is true. These “browner” firms run the risk of loosing out to cleaner competitors without major investments in their products and services. They may also struggle to get financing and hence face higher costs of capital
There are likely also firms that are middle of the pack, in between 1 and 2. For them ESG data points are helpful to understand, but unlikely to be a financially material driver of the equity or credit story and hence overall valuation.
And there is no clear cut-off point defining which firms belong to the categories – whether that is the top 5 / 10 or 25% for instance for type 1. This will depend on the specificities of the sector and geographic footprint of the company.