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The Importance of ESG in Company Valuation: A Guide for Investment Banks

The Importance of ESG in Company Valuation: A Guide for Investment Banks

Investment banks must consider a broad and multi-faceted range of factors in the normal course of business. Recent years have seen even more emphasis on a company’s impact on the environment and society as a whole. Beyond this, there is also a growing emphasis in the area of governance; specifically, an organization’s policies and practices as they relate to the environment and social factors — better known as ESG

ESG can have a tremendous impact on a company’s overall value, with investors flocking to organizations with a robust ESG strategy. Meanwhile, companies that have failed to deploy pro-environment and socially-friendly policies and practices are seeing falling valuations.    

What is ESG? – Environment, Social, and Governance Pillars

The three pillars of environment, social, and governance — better known as ESG — have emerged as key factors in the business world, specifically as it relates to investments. An increasing number of younger investors have entered the marketplace in recent years. With this new generation, we have seen a rising emphasis among investors and business leaders alike in terms of the role ESG plays in their investment strategies.

These three pillars are used to develop ESG frameworks, which companies leverage in conjunction with their risk management efforts. ESG is typically considered under the broad umbrella of risk management since a lack of perceived social consciousness and environmental consciousness can result in a number of adverse consequences including the following. 

  • A company may be viewed as non-progressive and non-forward-thinking, which reduces investor appeal and consumer appeal. 
  • ESG addresses non-financial risks related to social and environmental factors. By failing to pursue ESG-related initiatives, a company may fail to address potentially costly risk factors and vulnerabilities. 
  • A business may be excluded from various organizations and groups, which leads to reduced exposure and fewer opportunities for collaboration and growth. 
  • Your business could be subject to fines and penalties if they fail to meet reporting mandates. 

Companies in a wide variety of industries and business sectors use ESG frameworks to guide their reporting. This includes reporting for prospective investors and the mandatory reporting that is required by various oversight groups and regulatory bodies.

ESG reporting can take many forms, but generally, there is a focus on policies, procedures, and operational protocols that involve some sort of impact on the environment and society. For example, a logistics and shipping company may deploy a program whereby the business transitions to the exclusive use of eco-friendly vehicles. This measure may be in addition to other initiatives such as incentivizing volunteer work amongst employees and sponsoring socially-conscious programs. It’s also commonplace for an ESG-focused business to integrate these principles into their company policies, procedures, and business strategies. 

Why ESG is Important for Investment Banks in Terms of Company Valuation? 

While social consciousness and environmental consciousness are all well and good, you may be left wondering precisely how ESG impacts a business as a whole, its attractiveness to prospective investors (or lack thereof, as the case may be), and its overall valuation. Let’s examine how ESG impacts companies in a variety of industries and business sectors. 

ESG is a Major Consideration for Investors

Today’s newest generation of investors is placing great emphasis on ESG. As a result, investment banks and others across the industry have started setting these businesses apart. It is not uncommon to see investment banks that specialize in ESG as they seek to cater to investors. This results in more exposure for ESG-centric companies. 

ESG Signals Progressive Thinking

Companies with a robust ESG strategy and ESG-related programs/initiatives in place are typically viewed as being more forward-thinking and progressive. A progressive company is more likely to be adaptable, which is a trait that we see in the most successful businesses. This progressive, forward-thinking approach appeals to the newest, younger demographic of investors — perhaps the most active of all investor segments. This, in turn, increases a company’s overall valuation. 

ESG Principles Align With Those of Investors

Environmental, social, and governance principles usually reflect those that are held by a majority of investors. Therefore, by aligning your business strategy, operations, and company strategies with ESG-related principles, you are improving your company’s image and its perception amongst prospective investors. An individual is far more likely to invest in a company that aligns with their own values and priorities. The same is true of consumers. A consumer is far more likely to make a purchase from a business that supports values and principles that align with their own. This increases a company’s valuation by boosting profits. 

An investment bank will usually find that understanding the dynamics of how ESG affects company valuation is critical to success. When you know what matters to a prospective investor, you are better equipped to present investment opportunities that are likely to resonate with an individual. 

How Can ESG Software Help a Business? 

ESG reporting can be rather complex since companies must pull data from a variety of different systems and sources. Pulling this data manually can be very time-consuming. A well-architected ESG software platform integrates with a company’s various enterprise software, data platforms, and third-party systems. 

These integrations allow data to flow into the ESG software interface where it can be audited, used to generate reports, and rendered in data visualizations such as graphs and charts. These tools can be extremely useful for mandatory ESG reporting, dramatically cutting down on the amount of time it takes to meet these requirements. 

Some of the more detailed ESG frameworks also offer guidance in terms of what data ought to be included in these reports. This is crucial because ESG reporting has a major impact on the public’s perception of a company, its transparency, and its overall integrity. 

Investing in the Right Technology to Support Your Company’s ESG Initiatives

Today’s business leaders are faced with a slew of reporting requirements, all while wrangling risk management and mitigation-related issues, maintaining regulatory compliance, and formulating a solid business strategy that drives a company forward toward success. It’s no small feat to juggle all this and more, without dropping the ball. Enter ESG software. 

A well-built ESG software platform is built with an ESG framework at the core. Frameworks such as this provide centralization, guidance, and structure for those who are charged with overseeing ESG initiatives and related ESG reporting. ESG frameworks are even being integrated into some risk management software platforms since a perceived lack of environmental- and social consciousness can be a detriment — a detriment that impairs and limits a company’s appeal to consumers and investors alike. 

A basic ESG framework can make a big difference for a company. But a more fleshed-out and well-rounded ESG software system offers additional tools that streamline and simplify ESG-related tasks such as reporting. But it’s rare that you’ll find everything you need in one platform and that’s where the team at iTech can help. 

Our innovative team works with investment banks and others in the financial sector, amongst a variety of industries. We take the time to get to know your company and its unique needs. Then, we’ll architect a solution that will work for you both today and well into the future. We invite you to contact the iTech team today. Let’s begin a dialogue about your business and its needs surrounding ESG software and risk management as a whole.