Why different sustainability investors may see different values in the same business — and when those differences actually matter.
Can a less profitable business be worth more than a financially stronger competitor?
The answer takes us back to a fundamental concept developed by Robert T. Slee in his 2004 paper, Business Owners Choose a Transfer Value.
One business, multiple values
Slee argued that privately owned businesses do not have one universally correct value. Instead, their value depends on the purpose of the appraisal and the circumstances of a potential transfer.
He introduced the concept of value worlds: different perspectives on value, each with its own objectives, methods and governing conventions.
These value worlds are connected to an owner’s transfer motives.
An entrepreneur seeking to preserve a family legacy may pursue a different transfer route from one seeking to maximise sale proceeds in a public auction. A transfer to employees may produce a different valuation outcome from a competitive sale to strategic buyers.
The owner’s objectives influence the transfer route, which in turn influences the relevant value world.
But what happens when we introduce sustainability?
Not one ESG value world, but many
It is tempting to speak of an ESG valuation premium as though sustainability investors share a common view of what makes a business valuable.
In reality, their objectives can differ considerably.
Consider four investment strategies:
- Circular economy funds may favour businesses that reduce resource consumption, extend product lifetimes or enable material reuse.
- Social impact funds may prioritise affordable services, employment opportunities, financial inclusion or measurable improvements in social outcomes.
- Climate-transition funds may seek businesses enabling decarbonisation, including companies operating in traditionally high-emitting sectors.
- ESG integration funds may focus on how environmental, social and governance factors influence financial risks, cash flows and long-term returns.
There are hundreds of different sustainability strategies being deployed in the markets today. And each strategy can lead investors to assess the same business differently.
A recycling company might be particularly attractive to a circular-economy investor, but less relevant to a social-impact fund. An industrial manufacturer investing heavily in decarbonisation could appeal to a transition investor while remaining excluded from a fund focused on already-low-carbon activities.
Even within these categories, mandates differ. Some funds require measurable impact, some exclude certain activities, and others focus exclusively on financial materiality.
There is no single ESG investor, and therefore no single ESG value world.
Strictly speaking, these ESG value worlds may represent different forms of investment value within Slee’s original framework, rather than entirely new valuation standards. Nevertheless, the distinction is important for understanding how different sustainability objectives influence investment decisions.
An example: The value of circularity
Imagine two French packaging SMEs.
Conventional Packaging SAS generates €2 million in annual EBITDA, with established customers and predictable earnings.
Circular Packaging SAS generates €1.5 million in EBITDA, but produces reusable packaging that demonstrably reduces virgin material consumption and waste.
A conventional investor applying a 6x EBITDA multiple might initially value the businesses at €12 million and €9 million respectively.
Now consider a dedicated circular-economy fund.
It may recognise the same financial fundamentals but also place particular importance on Circular Packaging’s environmental contribution.
There are two ways this could influence its valuation:
- First, the fund might expect stronger future financial performance because of regulation, customer demand or competitive positioning. This is conventional financial value creation through sustainability.
- Second, the fund may be willing to accept a somewhat lower financial return because the investment contributes directly to its impact objectives.
Suppose this leads the fund to consider an enterprise valuation of €12 million for Circular Packaging, equivalent to 8x EBITDA.
Suddenly, the less profitable business could command the same valuation as its financially stronger competitor.
The example is hypothetical, and the difference cannot automatically be attributed to environmental impact. But it illustrates the principle:
The underlying business has not changed. The investor’s objectives and willingness to pay have.
Financial sustainability still matters
Of course, an ESG value world does not eliminate the need for financial sustainability.
Even impact investors face minimum return requirements, capital constraints and portfolio obligations.
As discussed in our earlier article, environmental or social impact is not a substitute for a viable business model. It may, however, influence what certain investors are willing to pay for one.
When does an ESG value world become a market price for a business owner?
The more consequential question is when those investor-specific valuations influence the price a business can actually achieve.
Here, Slee’s emphasis on transfer motives becomes particularly relevant.
1. Family succession
The owner wishes to transfer the business to the next generation. The valuation may be driven by family arrangements, financing capacity and applicable tax or legal requirements.
A circular-economy fund’s willingness to pay a premium may have limited relevance to the valuation required for that transfer.
2. Growth financing
The owner wants to raise €5 million to expand a circular manufacturing business while retaining control.
If dedicated circular-economy funds are the most willing and capable providers of that capital, their investment criteria may become central to the financing valuation.
3. M&A
The owner seeks the highest achievable sale price.
If conventional strategic buyers can pay substantially more than impact funds, sustainability preferences may have little effect on the final price. Conversely, if impact-oriented buyers have sufficient capital and the highest willingness to pay, their preferences could become decisive.
An ESG value world only translates into a transaction price when investors with that perspective have both the mandate and the financial capacity to compete for — or effectively set the terms of — the relevant transfer.
In a competitive auction, even a relatively small investor group can influence pricing if its members are credible highest bidders. In a financing market with few alternatives, a specialised fund may effectively set the terms.
Implications for SME owners and appraisers
For SME owners, this creates an interesting strategic question.
Rather than asking only, “What is my business worth?”, it may be equally important to ask:
“To whom might my business be most valuable, and for what purpose?”
A company delivering measurable environmental or social outcomes may have access to investors whose mandates make it particularly attractive.
But that does not justify simply adding an arbitrary ESG premium to a valuation. Such premiums must be supported by credible evidence of financial benefits, investor preferences or actual market pricing.
The appraiser must distinguish between sustainability characteristics that improve expected financial performance, investor-specific preferences that affect willingness to pay, and prices that can realistically be achieved in the relevant market.
For valuations undertaken for tax, accounting or legal purposes, the applicable basis of value remains paramount. A particular investor’s willingness to pay does not automatically determine the appropriate valuation.
Understanding the interaction between investor objectives, transfer motives and available capital is therefore essential.
A new dimension to private capital markets?
Slee showed how an owner’s transfer motives can influence the value ultimately realised. Sustainability adds another dimension: different pools of capital may attach different values to the same business.
But those differences only matter commercially when investors have the mandate, willingness and capital to act on them.
The question is therefore not simply what your business is worth, but to whom it is worth the most — and whether they can afford to pay for it.
References and further reading
- Slee, R.T. (2004). Business Owners Choose a Transfer Value. Journal of Financial Planning, June 2004, pp. 66–73.