Damodaran’s strong feelings about ESG

BVWireIssue #228-3
September 22, 2021

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

A year ago, Professor Aswath Damodaran (New York University Stern School of Business) called it “the most overhyped, oversold concept in the history of business.” He was talking about environmental, social, and governance (ESG) factors. He got some pushback and felt a “little guilty” of hyperbole, so he kept an open mind about it. Over the past year, he read all of the arguments in favor of it and heard from people who disagree with him. Has Damodaran changed his tune? “I am more convinced than ever that ESG is not just overhyped and oversold, but it’s become a gravy train for all the people who make money on ESG, and none of those people are in the groups that ESG is supposed to help.” In a recent blog post, he argued that the difficulty of determining whether a company or fund was “good” in terms of ESG makes the measure difficult to apply. Plus, he contends that the practical benefits of a strong focus on ESG in terms of metrics such as the cost of capital are “muddled.” You can read his blog post and watch his video on ESG if you click here.

Extra: ESG ratings have issues. Read the article “Warning to Business Valuers Looking to Use New ESG Ratings” in the October issue of Business Valuation Update.

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