Enterprises are social organisations that follow a purpose. For a long time, this purpose was capital-oriented. Accordingly, most business valuation models are cash flow oriented and show the return on investment from the owner’s point of view. However, the total value of a company is made up of financial, social, environmental and governance-related values. This means that in order to calculate the value of a company in the economy and society, all value dimensions must be included in a calculation. Accordingly, the company valuation models (ESG ratings) must be expanded and all value dimensions must be included in the valuation.
The following value dimensions (ESG rating dimensions) form the basis of the assessment: economic, social, environmental and governance. These value dimensions allow for an overall corporate view of the company and provide the opportunity to comprehensively analyse a company:
- The value dimension “Economy” describes and evaluates the financial sustainable performance of a company.
- The value dimension “Social” describes and evaluates the internal and external employee-related corporate activities as well as the corporate culture, especially in relation to current social issues (e.g. women’s quota, employment of over-50s, etc.).
- The value dimension “Environment” describes and evaluates the company’s handling of natural resources, in particular the resource-conserving and energy-efficient use of production factors.
- The “Governance” value dimension describes and evaluates the quality of a company’s compliance with rules of conduct and laws. This process-oriented value dimension assesses whether a company has given itself an adequate organisational form with appropriate rules and whether it operates within the framework of the applicable laws at home and abroad.
The benefits and ESG factors are assessed separately for each value dimension, with the following characteristics being assessed in each of the four value dimensions (see also the questionnaire here):
- Development of sustainable key figures over the last three years: The key figures are focused on the respective value dimension and assess the sustainable development as well as the benefit for the company and society in a broader sense.
- Sustainable measures and initiatives (soft factors): The measures and initiatives assess the number and quality of measures taken to increase or improve sustainable development in the company or for society.
- Quality of sustainability documentation and reporting: The quality of the reporting and documentation is assessed on the basis of the published sustainability information (scope, integrated report or separate sustainability report, according to which international regulations was the report prepared, etc.).
- The economic relevance of the company: The criterion of economic relevance evaluates the financial, social and environmental and governance-relevant “dividends” of the company to the stakeholders of the respective value dimension. The “dividend” of a company is therefore not only defined by the profit distributions of a company, but also by the returns generated by the company in all four value dimensions:
- Dividend Value dimension Economy: Defines the financial value of the company by valuing the dividend distributed to owners.
- Dividend Value dimension Social: Defines the social value of the company by assessing the dividend distributed to employees and society (stakeholders).
- Dividend Value dimension Environment: Defines the ecological value of the company by assessing the dividend distributed to the environment and society (stakeholders).
- Dividend Value dimension Governance: Defines the governance value of the company by assessing the dividend distributed to society (stakeholders) (e.g. avoidance of corruption).
The indicators on which the assessment is based are sustainability-oriented and can be evaluated from published sustainability reports (which are, for example, prepared according to the principles of the Global Reporting Initiative). For each indicator, an evaluation rule was defined that focuses on sustainable, economic and social relevance.
The valuation concept for an ESG rating is an overall business valuation concept and not only determines the benefit (dividend) for a shareholder participating in the capital, but also evaluates the benefit and sustainability of the company in all value dimensions for the company itself and for the respective stakeholders.
The economic and social value of a company is calculated as follows:
- + valued benefit and evaluated sustainability of the value dimension Economy
- + valued benefit and evaluated sustainability of the Social value dimension
- + valued benefit and evaluated sustainability of the value dimension Environment
- + valued benefit and evaluated sustainability of the value dimension Governance
= economic and social value of the company (total value)
An assessment has to be carried out according to a standardised evaluation process in all its value dimensions (economic, social, environmental and governance). By assessing market positioning, economic environment, environmental impact, human resources developments, positioning in society, financial parameters such as earning power, planning quality, and governance issues such as corruption, corporate information for investors and stakeholders is improved. At the same time, the possibility is created to communicate comprehensively about the company’s performance.
The key figures on which the valuation is based should be reported in a corporate report (financial reports and sustainability reports). If companies do not publish data, this automatically has a negative impact on the company value. This is because it is also essential for the valuation whether or in what form a company publishes sustainability data. Contact us to start your ESG rating.