ESG Factors in Corporate Valuation – Relevance and Challenges

published on 25 March 2025 I reading time approx. 6 minutes

Sustainability is becoming increasingly important in the financial world – but how relevant are ESG factors (environmental, social, governance) in corporate valuation? Our survey of valuation experts shows: While ESG criteria are recognized as relevant, there is still a lack of practical integration into valuation models. A lack of standardization, insufficient data and methodological uncertainties are slowing down progress. You can find out the most important findings of our survey in this article.

ESG Factors in Corporate Valuation – Relevance and Challenges

The consideration of ESG factors is becoming increasingly important in corporate valuation. A survey of members of the European Association of Certified Valuators and Analysts (EACVA) conducted by us and published in the journal “Corporate Finance” shows, however, that ESG aspects have so far only been partially integrated into valuation models. This illustrates that despite the growing awareness of sustainability in the financial world, there is still a considerable need for development. Companies face the challenge of not just seeing ESG factors as an additional reporting obligation but actively integrating them into their valuation processes.

Key Findings of Our Survey

Limited ESG Integration
Only about half of the respondents consider ESG factors in Discounted Cash Flow (DCF) models, and merely 8% incorporate them into multiple valuations. Many valuators struggle to methodically integrate ESG factors into existing models. This is not only due to data availability but also uncertainties regarding the long-term financial impact of ESG initiatives.
Industry-Specific Differences
ESG is deemed particularly relevant in energy-intensive industries such as energy supply, chemicals, automotive, and metals. Companies in these sectors are often more affected by regulatory requirements, making ESG factors generally more significant in corporate valuation. In less regulated industries, however, there is still reluctance to integrate ESG considerations.
Challenges in Integration

Currently, there is a lack of transparent quantification of ESG factors. Particularly, varying ESG ratings, a lack of standardization, and the risk of double counting complicate their application. Furthermore, the available data is often insufficient, leading to uncertainties in valuation. There is also a lack of clear guidelines on how ESG factors should be incorporated into financial models.
Relevance for Company's Value

ESG factors primarily impact investments, energy costs, and revenues. While sustainable companies often achieve higher valuations, the overall effects remain difficult to predict. Some studies suggest that ESG criteria can lead to more stable earnings and lower risks in the long term. However, the extent to which investors actually monetize ESG aspects remains an open question.
Practical Implementation
Adjustments are currently primarily made to cash flows. However, the long-term effects on the terminal value are rarely modeled. Some valuators experiment with extended planning periods to adequately capture ESG factors. Additionally, there is uncertainty about whether ESG factors should be reflected in capital costs or treated as a separate risk factor.
ESG Ratings as a Measurement Tool
Many valuators use ESG ratings, often due to their availability rather than a well-founded methodology. Different assessment methods and a lack of transparency among rating agencies pose a particular challenge. This results in companies receiving vastly different ESG scores depending on the chosen rating agency.

Need for Action and Future Outlook

The results of the survey clearly show that there is a lack of a standardized approach for the integration of ESG into company valuation. Valuation practitioners increasingly call for standardized guidelines to consistently incorporate ESG factors. Expanding the ESG data foundation, establishing regulatory frameworks, and improving transparency in ESG ratings could be helpful steps. It is also necessary to develop methods that enable a more objective assessment of ESG factors in order to better quantify their influence on company value. The participants in the survey expect ESG criteria to play an even greater role in investment decisions and company valuations in future, and investors and stakeholders are also attaching greater importance to sustainable corporate practices. This is also likely to be reflected in valuation models in the medium to long term.

Conclusion

ESG factors not yet widely integrated into corporate valuations, but growing in importance. Standardizing valuation methods and improving quantification are essential to effectively incorporate ESG specifics into valuation practices. Given the growing regulatory requirements, companies and valuators should strategically incorporate ESG considerations into their analyses. Due to the lack of regulations and numerous challenges, a thorough analysis of the underlying data is crucial for successfully incorporating ESG factors into corporate valuation. The development of new valuation approaches will be key to permanently embedding them into business valuation practices.