The Impact of ESG Rating on Capital-Value-Based Valuation of Companies

Abstract

The sustainability reporting is including a continuously growing part of the financial world, and it seems as it is still only the beginning. But how should an investor comprehend all this sustainability reporting and take it into account when investment decisions are made? This is obviously relevant for the investors, but also for the companies, as they depend on the funds provided by investors and therefore have an interest in being fit for being invested in. As an investor it is obviously relevant to know what mechanisms are in play and how strong a link there is between the performance in terms of sustainability and the actual value of the investment. Is sustainability reporting effecting the value of a company and therefore the investors decisions? If so – in what way, and to what degree? This thesis examines the relations between a high ESG-rating and the valuation of a company, where the ESG-rating serves as an indicator on the performance related to sustainability and sustainability reporting, and the valuation as the actual value of the investment. To engage in a valuable discussion on how the sustainability reporting affects the value of a company, it is necessary to set forth current legislation and analyze the intentions and objectives behind, and how it contributes to these effects. From there we can explore how the effects are martialized in the central value drivers in the valuation model, which is of high concern for the investors, as it plays a central part of the valuation of companies and therefore the decisions made. In that way a theoretical link is established between ESG-rating and the valuation of a company. Lastly the thesis is constructed as a comparative case study, where the same company in analyzed and valued at two different points in time. All the knowledge gained throughout the thesis, is used to create an example of how the investor can take sustainability reporting and ESG-rating into account when valuing a company, and from there give a qualified assessment of how much the performance in terms of sustainability has affected the development of the company value.