Investors love it. Regulators desire it. Progressive startups (and listed companies facing reputational damage) promote it.
More importantly, as reported by Saba Palizi at Macfarlanes LLP, 45 of the FTSE 100 firms have added ESG measures to their long-term incentive or executive bonus compensation schemes. One of the latest firms to link 15% of their bonus plan to an “Agenda for Change” is the retailer Boohoo, primarily to help counter the £1 billion reduction in share value they suffered in 2020 when allegations of supply chain abuses surfaced.
But do the expensive new environment, social, and governance ratings Refinitiv and CapIQ heavily promote offer any tangible benefits for business valuation? BVWire—UK is not aware of a single business valuation report that uses an ESG rating to change a concluded value.
So the IVSC perspectives paper released last week, “A Famework to Assess ESG Value Creation,” written by Kevin Prall, starts the debate. Prall envisions ESG-generated adjustments to value along six (generally) intangible pathways:
- Brand strength;
- Intangible asset “intensity”;
- Lack of proprietary technology;
- Reliance on human capital;
- Premium to “book” value; and
- Customer relationships.
The law firm Squire Patton Boggs is hosting a webinar on 23 June on risks of nonfinancial disclosure requirements, which addresses the lack of standards for reporting ESG issues. The question of how to apply these ratings to the value of small and medium enterprises remains up to the individual valuer.