ESG and business valuation: Research needs

Abstract

In the context of mergers and acquisitions (M&A), the environmental, social, and corporate governance (ESG) score is becoming increasingly important. According to a study, 73% of the companies surveyed take the ESG score into account during due diligence and 91% say non-financial performance has played a key role in their investment decisions over the past 12 months (Rogl & Gehmayr, 2020). According to another study, companies with higher ESG scores achieve a higher enterprise value in a transaction (KPMG, 2022, p. 6) or a higher announcement yield (Rehm et al., 2012). The enterprise value in dependence on the ESG score represents a relevant field of investigation. In principle, a firm valuation or price determination for a transaction can be carried out using various methods. The most common method is the discounted cash flow method, whereby future cash flows of the company are discounted with its weighted capital costs (WACC) (Hasler, 2011, p. 213).