The Value of Sustainability Initiatives

I recently participated in a panel at the IVAS-IVSC conference on Valuation, the topic of discussion was how to value sustainability efforts. It was an interesting question that I had been mulling over since I first began my own sustainability journey.

Value is subjective, much like beauty it is in the eyes of the beholder. So in valuing sustainability , one would have to determine who the valuation is for, and the scope thereof. One of the speakers also mentioned an added complexity, in that some companies have already incorporated sustainability into their strategy and thus teasing out the value of sustainability per se becomes tricky. In my work as a board director, over the past 18 months alone, I have come across at least 5 instances where sustainability has appeared as an intangible but powerful affect. Three would require valuation specialists, the other two, market forces.

The first is in the acquisition of a listed company, and the allocation of price for the premium paid. Still, accounting standards only required that a portion (the part of the initial offer) of the premium be priced. Next, the disposal of a listed company. Again, it was more art than science - in the eyes of the seller, it was a good sell and in the eyes of the buyer, it was a good buy. So, the valuation of intangibles came again into question because that company being sold was in an industry that was facing ESG pressures, however eventually, market forces determined that the acquired company became even more valuable. The third was an IPO, where ESG matters were initially not included, but subsequently added to the offering prospectus making it more attractive to cornerstone investors, learning from the experience of a similar listing elsewhere.

The fourth instance is where the market capitalisation of a company doubled within the period in question, largely to my mind due to its ability to operate sustainably and humanely with its primary focus on workers, employees and customers. It was rewarded by the grateful loyalty of customers and subsequently a strong order pipeline. The fifth instance is where it affects perception of customers in supporting the brand of the company. With its strong branding and very careful attention to sustainbility of products and activities, this company is the leader in its industry, with the highest stock price on the market.

The banks also price their loans according to their expectations. I have seen this in facility term sheets already.

Then there is the vexed question of carbon pricing - there is no single agreed price, and varies by industry and region. Singapore's prices carbon emissions at S$5 per metric ton whereas the average in Europe is $27.

No matter who you value for, whether for a seller, purchaser, customer, shareholder, the capital market, institutional investors or bankers, the methodology would need to take into account time horizon, technological advances and benchmarking, so that it is a robust, rigorous valuation.

I leave you with a takeaway. Have a look at LafargeHolcim's Integrated P&L 2020 and see what good looks like.

https://www.holcim.com/sites/holcim/files/atoms/files/55992_lafargeholcim_2020_ipl_statement_aw2_final.pdf