Our findings support the existence of such an ESG value premium.
Using regression analysis, we find that a 10-point higher ESG score is associated with an approximate 1.2x higher EV/EBITDA multiple. Furthermore, we also find that a company that increases its ESG score by 10 points experiences an increase of approximately 1.8x in its EV/EBITDA multiple.
This leads to the conclusion that investing to deliver better ESG performance can drive value upside for a business beyond the associated net financial costs.
Discover our detailed analysis below to see how ESG scores have a statistically significant impact on a firm’s EV/EBITDA multiple, and that market values respond positively to improvements in a company’s ESG score.
Do ESG investments generate value?
ESG-related investments have a direct cost implication for organisations. However, the impact on value creation is less clear. Some outcomes, such as cost savings due to minimising energy or water usage, can be readily measured. But for other ESG-related efforts which do not have a direct P&L impact, it is more difficult to quantify the value creation potential.
Recent changes to the regulatory landscape, such as the Sustainable Finance Disclosure Regulation (SFDR) and Taxonomy Regulation, are leading to additional scrutiny of sustainability issues, and it is likely that achieving the required degree of regulatory compliance will entail additional costs for companies.
However, a core focus of our analysis is to assess whether costs associated with ESG compliance could translate into investments that create value for corporates.
In order to capture the potential of ESG performance on market value beyond its P&L impact, we have analysed the value creation effect of ESG performance on EV/EBITDA multiples.
How is an ESG score assessed?
Several commercial organisations have developed ESG scoring methodologies, which are used to provide periodic assessments of ESG scores for listed companies. These providers include Bloomberg, S&P, MSCI, Sustainalytics and Refinitiv. For the purpose of our analysis, given their global coverage and granular assessment criteria, we have used Refinitiv as the basis for our ESG scores.
Refinitiv captures and calculates over 500 company-level ESG key performance indicators (KPIs). The selected KPIs are then grouped into 10 categories to create three pillar scores: