How your ESG report can affect your company’s valuation

Despite the current malaise in global stock markets, retail and institutional investors are still seeking returns across the board.

one area that has come to the fore for many investors over the past few years has been the ESG rating for a company, or indeed an industry.

As the ESG factor has become more important, assessing it comprehensively has become a key investment criterion for many asset managers, especially many based in Asia and the USA.

And a good ESG valuation can often be the difference for investors.

There are many large corporations that provide ESG ratings, such as Sustainalytics, MSCI ESG Research, and ESGI.

But not all ratings are created equal.

“There has been much excellent development on the Environmental aspect of ESG over recent years. But, the development of the Social side has somewhat fallen behind”, said Serena Mak, Head of ESG Funding Asia at Home Credit

It seems we are slowly evolving from the pseudo-CSR mentality, with environmental concerns being the most prominent amongst investors. The standards for Social reporting differ greatly across the various rating vendors, and this can often be neglected by potential investors.

By default, unless an investor actually looks into how the ESG report is constructed, its methodologies, and data analysis, it is possible that they are not seeing the entire story.

The need to have a more balanced view across all three components is critical in assessing the true value of a company or corporation.

“Whereas 10 years ago we looked at the financial data for a target company or investment, today we have a much more holistic approach to a company valuation,” said Bien Wong,Section Head/ Manager of Corporate Affairs, ESG and Mainland Business Strategy of The Hong Kong and China Gas Company (Towngas)

The evolution of risk measurement models, together with the impact of (Climate-Related Financial Disclosures) TCFD regulations on companies has ushered in a new era of worst-case scenarios and transition risk models to supplement financial models as a mainstay of investment strategy.

This can only be a good thing. As more and more investors look deeper into potential target companies, the fast-evolving ESG space is one to watch for the future.

Will we see a universal global stand that everybody follows within the next 5 years? Possibly, but it is something we all should be striving for as ultimately it will create value for a company.