The Sustainability Delta: Considering Sustainability Opportunities in Firm Valuation

Abstract

In this paper we present the Sustainability Delta model as an improvement over existing environmental, social and governance (ESG) methodologies used in firm valuation. Starting from the question of how banks should integrate sustainability criteria into their valuation methods, we find that ESG methodologies currently do not consider the potential to generate higher future revenues due to sustainable innovations, and also lack consideration of different scenarios such as higher standards in legislation or consumer demand. To address these shortcomings the Sustainability Delta model is developed. Simulation results on the sugar manufacturing industry in Brazil demonstrate that by using the Sustainability Delta we estimate an improved firm value of 1.24%. The Sustainability Delta would allow for a more accurate valuation of firms as well as for the more effective allocation of capital for investors, which should bring market pressure to improve sustainability practices and thus contribute to sustainable development. Copyright © 2015 John Wiley & Sons, Ltd and ERP Environment

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