It looks like you are in United States. Go to the United States site Arrow right icon

×
ESG and the Value of Your Business

Business Value Acceleration

ESG and the Value of Your Business

By , July 5, 2023
esg

Environmental, Social and Governance (ESG ) has become a hot topic. Investors, buyers and lenders are all aware of the importance of ESG when making investment decisions. As a result, companies must pay attention to improving their ESG performance. Researchers have also shown there is a relationship between ESG ratings of companies and their valuation.

ESG represents that corporations should take more interest in society and nature rather than just generating profits, and that a genuine ESG strategy and approach can improve profits. The significance of ESG has been widely popularised, and regulators are increasingly concerned about ESG-related disclosures. At a more practical level, SMEs that deal with government (as a supplier), larger corporates, investors (including buyers) and lenders (most banks will now include an ESG rating as part of their risk profile and, therefore, pricing matrix) must address ESG or miss out on the contract renewal, the investment, or the finance they seek.

MSCI uses an ESG rating model that uses 10 ESG rating themes from three dimensions – environment, social responsibility and corporate governance, and further refines them, dividing them into 37 key issues as shown below.

A new study published in the Journal of Portfolio Management reveals that a company’s ESG information, as provided by the channels in the MSCI ESG rating data, has a direct impact on its performance and valuation. The research shows that ESG information affects a company’s systematic risk profile, which leads to lower capital costs and higher valuations, as well as its idiosyncratic risk profile, resulting in higher profitability and lower risk exposure. This suggests that a company’s ESG characteristics are a valuable financial indicator that can be incorporated into policy benchmarks and financial analysis.

According to the Pitcher Partners Business Radar Report, Understanding the Businesses that Drive Australia’s Economy, mid-market businesses are simply not up to speed:

We are about to release an update to our Capitaliz software which will include an ESG rating system and scorecard so you can assess your business performance and identify areas where poor ESG performance may affect your business.

Craig West

Dr Craig West

Founder & Chairman | Succession Plus

Dr Craig West is a strategic accountant who has over 20 years of experience advising business owners.

With a background as an accountant in practice and two master’s degrees, Craig formed a strong view that the majority of business owners (and often their advisers) were unprepared and unaware of the steps required to prepare for exit. He then designed and documented a unique 21-Step Business Succession and Exit Planning process to assist owners and their advisers in navigating this process.

Craig now acts as a strategic business and financial mentor for mid-market business owners. Craig has written four critically acclaimed books educating business owners on employee incentives, succession planning, asset protection, and exit strategies. Additionally, he has completed doctoral research on Employee Share Ownership Plans (ESOPs) for succession.

Craig is a Member of the Forbes Business Council where he leverages his extensive experience to contribute valuable insights on helping business leaders navigate the complexities of growing and exiting their businesses.

In April 2024, the Exit Planning Institute admitted Craig to the International Exit Planning Circle of Excellence.