Finding the balance between results, transparency, social interests and the environment is called ESG. Harvard research shows that ESG pays off: companies that pay attention to their ESG performance deliver better financial performance and also create more value for their business.
ESG stands for Environment, Social and Governance. In Dutch, this translates to Environment, Society and Good Corporate Governance. Environment includes issues such as climate change strategy, water and energy efficiency. Society includes health and safety, equal opportunities and customer and product responsibility . Good corporate governance focuses on business ethics, legal and regulatory compliance, and board independence.
With increasing pressure from laws and regulations imposed by the Paris Climate Summit, ESG is becoming an increasingly important factor in business. New strict rules and guidelines will soon be introduced in Europe to meet the targets. The "Green Deal" by our own EU Commissioner Frans Timmermans is intended to encourage businesses to communicate the extent to which their activities contribute to the European ambition of emitting 55% less CO2 in 2030 compared to 1990. By 2050, the goal is even to be completely energy neutral.
The increasing focus on sustainability issues also shows in consumer buying behavior. For example, research by McKinsey shows that 70% of consumers are willing to pay 5% more for purchased products if they are sustainable. This leads to higher revenues for businesses. In addition, research from the same organization indicates that top-level management is willing to pay a 10% acquisition premium for a business with a positive ESG reputation. Investors also increasingly value ESG criteria.
Sustainability profile
Identifying the opportunities of a good ESG policy within an organization can be complicated because ESG is tested in many different disciplines. A sustainability profile provides a good representation of where an organization stands with respect to sustainability.
The sustainability profile is usually linked to the Sustainable Development Goals (SDGs), an overview of strengths and opportunities for improvement helps entrepreneurs prioritize. Clear recommendations show how scores can be further improved.
For example, recommendations can be made based on the sustainability profile, such as advice on the energy label C that offices must have from Jan. 1, 2023. Should this not be the case, an office may no longer be used as workspace. The profile is a good basis for creating or improving a sustainability policy and communication with employees and the outside world.
Value creation
When a good ESG policy is implemented, it can lead to value creation. Revenue can increase as a result of a positive ESG policy, thus strengthening market value and increasing the chances of finding new customers or markets by broadening the target group.
It can also lead to a decrease in costs due to lower energy and water consumption and motivates (potential) employees who find ESG important. They are more likely to join an organization or want to keep their place there if ESG is highly valued. Taking into account the laws and regulations imposed by the government and Europe provides room to do business without being held back by measures.
DCF method
The traditional DCF method is a common way to determine the value of a company. In the DCF method, future cash flows are identified and discounted (discounted to present value) at the cost of capital (WACC). According to the UN Principles of Responsible Investing, factors such as human capital, social resources and natural capital should be included as part of the cost of capital.
In other words, better ESG performance leads to a lower risk profile, therefore a lower WACC and therefore also a lower discount rate when it comes to discounting future cash flows. Companies that score well on ESG are thus in all likelihood valued higher and will be more popular with investors.
