09 November 2023

Why sustainability matters across the entire value chain

by Kelly Goelens

Putting sustainability at the top of the agenda is essential not only for your company's reputation, but also for its revenue. ESG factors can have a significant impact on a company's valuation.

At present, we cannot (yet) build a mathematical model to quantify the impact of ESG and sustainability on a company's valuation. However, increased attention and vigilance in the valuation process is important.

For example, factors such as the environment can affect a company's reputation and long-term viability. A company that violates environmental laws can face huge fines or penalties, as well as negative publicity that can lead to reduced sales. Such loss of revenue or increased costs will undoubtedly lead to a lower valuation. On the other hand, a company with a strong environmental reputation may find it easier to attract investors and receive positive media coverage, resulting in higher revenues and a higher valuation.

The same is true for companies with a sustainable human resources strategy. In fact, a sustainable human resources policy also has a positive impact on valuation. Companies with such policies are in a better position to attract qualified employees in the long term, even when the labour market is tight. This translates into future revenue streams. On the other hand, companies with a negative reputation will lose the war for talent, which in turn will have a negative impact and lead to a loss of revenue.

Additional investment

Companies that prioritise ESG now will be prepared for the long-term risks. By addressing these risks now, companies can limit the impact on their cash flows and even improve their long-term viability. While the impact of ESG may vary by sector, companies will undoubtedly need to make additional investments to make the transition to ESG. The investment required should be quantified so that it can be taken into account in the valuation process.

Another element affecting valuation is the cost of debt. Recent research shows that companies with higher ESG scores have significantly easier access to finance. This leads to a lower cost of capital and therefore a higher valuation.

We can conclude that ESG does indeed have a significant impact on the valuation of companies. After all, valuation reflects the expected future cash flows that a company will generate. Companies that prioritise sustainability and ESG are expected to be less exposed to long-term risks and therefore have higher earnings. On the other hand, companies that do not build a sustainable business model and do not adapt to the ESG revolution are likely to face additional costs, negative publicity, missed revenues and therefore a lower valuation.

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