WhatsUpp: how does ESG affect the value of my company?

ESG, what was that again?

ESG is short for Environmental, Social and Governance. Together, these three elements embrace all of your company’s sustainability efforts in the widest sense of the word:

• Environmental: the attention your company pays to the environment. For example, with regard to reducing your carbon emissions and waste production.
• Social: how you, as a company, approach your employees and the wider community in which you operate. Covering topics such as safety and inclusivity.
• Governance: the processes you apply to work as efficiently as possible, in accordance with regulations. Whether your company is duly diligent, in other words.

Why is ESG so important for my company?

These days, your approach to ESG has a serious impact on your image and the value of your organisation. If you don’t do it properly, you can suffer considerable damage in the short term. Like the beer brand Bud Light, which plummeted when using a transwoman in a marketing campaign for the conservative US. Despite the good intentions, the share value of parent company AB InBev dropped temporarily by 22 billion euros.

Demonstrating an intelligent ESG approach is more than likely to benefit the value of your company in the long term. McKinsey & Company states 5 ways in which you can reap the rewards of focusing on ESG in your organisation:

1. General growth: (potential) customers and other stakeholders will find you more attractive and team up with you more quickly. Vital for the growth of your organisation.
2. Lower costs: by critically assessing your operational cost structure from an ESG perspective you may save a lot of money and unlock sourcing opportunities.
3. Government support: smart ESG choices build confidence with the government. This means they will do less inspections of your company and be more willing to offer (financial) support – in the form of subsidies, for example. Many sectors depend strongly on government support and can therefore certainly not afford to ignore ESG.
4. Increased productivity: you will find it easier to attract and hold on to precious talent. Those employees will also be more motivated and productive because you respect them.
5. Smart investments: with awareness of ESG you are guided towards sustainable investments. An ESG perspective helps you to assess better whether certain investment spendings are still interesting in a fast-moving business world with radically evolving consumption behaviour.

What exactly is the impact of ESG on my business value?

There are different ways to calculate the value of a company. The most common is the discounted cashflow method (or DCF), with which you map the company’s anticipated income. The calculation is complex, but in principle very accurate because it is mainly founded on quantitative and objective criteria, such as your cashflow and expected growth percentage.

However, with the recent ESG, a qualitative, subjective and uncertain factor has now complicated this calculation. Your employees, your customers, your suppliers, the government, public opinion … These days they all have an opinion about ESG, and this opinion influences the value of your company. To what extent precisely? That is hard to say. Until you experience something similar to Bud Light.

How do I prevent ESG from driving down the value of my company?

Large organisations are a step ahead, because they have been obliged to report on their sustainability efforts for some time now. However, SMEs must catch up and be able to demonstrate that they take their ESG seriously.

While the E – for environment – was once what people were most critical of, the importance of S and G in ESG has grown in recent years. Switching entirely to an electric fleet, for example, will no longer have much impact on your company value. So, the right approach in terms of social and governance is even more essential for your future value.