ESG performance: What impact on company valuation?

The CSRD (Corporate Sustainability Reporting Directive) will impose new non-financial reporting obligations on around 50,000 European companies regarding their ESG (environmental, social and governance) performance. Although this measure is perceived as restrictive, it is intended to improve the transparency and comparability of companies’ obligations. However, the question of whether ESG performance actually has an impact on the financial valuation of companies remains controversial. Studies show that the correlations between ESG ratings and stock market valuations are inconsistent, due to heterogeneous rating methods and a lack of standardisation of evaluation criteria.

However, ESG investments are unavoidable and will pay off in the long run. First of all, the reputational stakes are high, with major consequences in terms of sales and human resources management. Added to this are regulatory changes that are already forcing some companies to rethink their business model. Finally, financing conditions are tightening and investors are increasingly taking ESG performance into account in their decisions. All these factors impact the future generation of cash flows, as well as the perception of risk by investors and lenders, and therefore the financial value of companies. The analysis of the stock market impact of ESG controversies confirms this, showing that companies are now being penalised much more harshly than before, and the effects last for several months.

While standardised measurement of ESG performance is still in its infancy, improved comparability will quickly highlight the strengths and weaknesses of different companies. It is now incumbent on valuation professionals to develop their models.

Editorial team : Sophie Carles, Thomas Karcher, Léna Riçois, Maxime Terracol

Read here the full version of this article published in Finance & Gestion (DFCG) on February,21 2025 (available in French).