Impact of ESG on Business Valuation

With the growing significance of ESG awareness and considerations and its pronounced impact on business valuation, namely International Valuation Standards (exposure draft in 2023 issued by the International Valuation Standards Council) which now requires the consideration of ESG factors in the business valuation process.[1]

This article delves into four key areas:

• How do ESG initiatives create value?
• Integrating ESG factors in the Income Approach.
• Integrating ESG factors in the Market Approach.
• Challenges in incorporating ESG in business valuations and difficulty in ESG data collection.

Climate Mitigation, a widely recognised environmental factor, focuses on reducing or preventing greenhouse gas (GHG) emissions. Companies play a crucial role in this effort by developing alternative fuels and green technologies, optimising energy use, leveraging automation and implementing smart technologies to reduce their emissions footprint.

Singapore’s carbon pricing scheme, implemented in 2019 as the first in Southeast Asia, incentivises companies to actively contribute to this goal. The steadily increasing carbon tax, will reach S$50 to S$80 per tCO₂e by 2030 (Exhibit 1). To help put things in perspective, Singapore’s largest public transport provider, i.e. Singapore Mass Rapid Transit (SMRT), produced 419,455 tCO₂e in 2023. At the current tax rate of S$5 per tCO₂e, it would amount to approximately S$2.1 million in carbon tax in comparison with SMRT reported net profit of S$42.5 million in 2023.[1] Assuming $50 per tCO₂e this would amount to c.S$21 million – wiping out almost half of the profits reported in 2023. With the potentially significant impact of carbon tax on profits, carbon tax will put significant pressure on companies to place a higher emphasis on lowering their greenhouse gas emissions.

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