Adjusting WACC for ESG: ±100 basis points proposed

BVWireIssue #251-4
August 23, 2023

valuation methods & approaches
cost of capital, income approach, risk analysis, cash flow, discounted cash flow (DCF)

When assessing environmental, social, and governance (ESG) factors on valuation, unless there is an impact to cash flow, risk, or growth, ESG has no effect on business value. But what if the analyst determines that there is an impact and it can’t be quantified in the numerator of the valuation equation? How much of an adjustment should be made to the subject company’s weighted average cost of capital (WACC)? A new book gives some guidance.

Proposed range: “We propose that the total WACC adjustment should not be adjusted beyond ±100 basis points (bp). Furthermore, the magnitude of the adjustment should be based on the importance of the ESG issue being considered. For example, a meaningful issue might warrant an adjustment of ±50 bp but a minor or distant one, only ±10 bp.” This quote is taken from a chapter written by Frédéric Le Meaux, senior European equity portfolio manager at Amundi, a leading European asset manager, in a new book, Valuation and Sustainability—A Guide to Include Environmental, Social, and Governance Data in Business Valuation. The chapter gives some case study examples of integrating ESG into the valuation process.

The book was edited by Dejan Glavas (ESSCA, School of Management, Boulogne-Billancourt, France), who also wrote several chapters. The book is available if you click here.

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