How is ESG relevant in valuations?
ESG is relevant in valuations for several reasons, not only do companies enhance their reputation through ESG measures, but they can mitigate future risks, attract a more diverse talent pool, and also potentially tap into new markets and opportunities.
To address the role of ESG in determining the value of a business, Valutico have developed ValutECO, a cutting-edge tool to help practitioners take these business factors into account when estimating a company’s value.
How does ValutECO work?
ValutECO utilises a streamlined ESG evaluation process tailored for small and medium-sized enterprises (SMEs) and simplified to facilitate easier reporting. The tool allows analysts to pinpoint key areas for improvement, such as reducing greenhouse gas emissions, managing water usage, and enhancing recycling rates.
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Supporting business conversations
As discussions on how to address sustainability in finance continue, ValutECO provides a means to initiate conversations with business leaders and decision-makers.
Utilising a concise 29-question assessment, users can easily evaluate various essential ESG factors and discuss specific areas that may impact the value of their business, whether presently or in the future.
For example, does the company have a policy to reduce greenhouse gas emissions? This question measures the company's commitment to reducing its carbon footprint, which is becoming increasingly important in the face of climate change. An accountant can advise an SME to set targets to reduce greenhouse gas emissions by, for example, improving energy efficiency in their facilities, investing in renewable energy sources or optimising their logistics processes .Incorporating an ESG score into a valuation.
Incorporating an ESG score into a valuation
After obtaining an overall ESG score, further divided into environmental, social, and governance sub-scores, users of ValutECO can choose to incorporate the ESG score’s impact into the overall valuation. By doing so, businesses can quickly determine the financial implications of implementing sustainable practices and plan for the future accordingly.
Valutico's proprietary algorithm adjusts the Cost of Capital based on a company's ESG score. A higher ESG score results in a greater Cost of Capital discount, which lowers the overall Cost of Capital and, consequently, boosts the company's valuation. This makes the company more attractive to potential investors and buyers. On the other hand, the algorithm applies a Cost of Capital premium for companies with low ESG scores, which increases the overall Cost of Capital and reduces the valuation.
Using software to support ESG advice
ValutECO enables accountants to have these conversations more seamlessly in their advisory services. Valutico has created this tool, currently in its alpha stage, to facilitate these crucial discussions and encourage constructive dialogue on the significance of sustainability in both business and valuations.
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The future of finance is increasingly focused on sustainability, and companies that fail to prioritize ESG considerations risk falling behind. As the global challenges of climate change, social inequality, and corporate ethics continue to dominate headlines, businesses must take proactive steps to evaluate their ESG practices and develop comprehensive ESG strategies that align with their values and objectives.
