Valuation of sustainable investment

Abstract

There is increasing recognition of the importance of including environmental, social and governance (ESG) assessments in business valuation to make informed investment decisions. This chapter discusses the valuation of sustainable investments, conventional business valuation and sustainable business valuation. The chapter provides an overview of Sustainable and Responsible Investment (SRI) and discusses the issue of ESG and value creation. The general process of sustainable valuation is not so much different from a traditional discounted cash flow (DCF) model. Thus, forecasts of economic benefit streams are estimated, and the future economic benefits are discounted by a factor that captures the risks associated with the entity being valued. The difference arises when ESG issues are captured during the cash flows and discount factor adjustments. Discount factors can capture ESG in terms of proprietary risk quantification arising from ESG metrics and ratings of companies. Adjustments to net cash flows can capture ESG factors in market share gained by a company from an increasingly ESG-conscious market of consumers or cost-cutting gains arising from energy-efficient investments.