The Relevance of Environmental, Social, and Governance Issues in Corporate Valuation: Concepts and Reflections

In this chapter, we present the theoretical value relevance of sustainability and ESG performance from a finance and investment point of view. The central concept is to figure out how ESG performance could be value-relevant information to financial markets and through what channels ESG could create value for companies and financial market investors. We also show the interaction between the real economy and financial markets through preferences shift. We discuss the idiosyncratic and systematic channels through which the ESG effect could be transmitted to value. Furthermore, we show the ESG cash flow drivers that potentially impact the value. And the systematic risk drivers through financial markets that affect the cost of capital and value. Finally, we establish a framework of Discounted Cash Flow (DCF), incorporating the real and financial sides of the economy in influencing the potential value effects from ESG.