Investors willing to pay price premium for companies with high ESG scores
Companies shall break the traditional valuation model and unlock ESG opportunities
SHANGHAI, January 11, 2022 – According to JLL's latest research ESG Impacts on Business Valuations, investors are proactively incorporating Environment, Social and Governance (ESG) factors into their investment analysis and strategy, and willing to pay a price premium for companies with high ESG scores.
Sylvia Lau, Head of Valuations, JLL Greater China, says, “incorporating ESG factors into analysis can help investors gain a more holistic view of the companies’ material risks, growth opportunities, and profit margin. In general, better ESG performing companies are associated with lower risks and higher returns, which can be reflected in the company’s value.”
ESG on the Regulatory Front
The ESG reporting and investing landscape are evolving rapidly, with both social pressures and regulatory requirements fueling the integration of ESG matters into the valuation framework. To date, 60 over the 110 stock exchanges have already published ESG reporting guidance for their listed companies.
More stringent ESG disclosure requirements are imposed among Asian regulatory authorities: starting from 2016, ESG reporting becomes mandatory for all listing companies in the Stock Exchange of Hong Kong Limited (HKEX), and the Singapore Exchange (SGX) also introduced sustainability reporting of ESG factors on a “comply or explain” basis in the same year. Meanwhile, the China Securities Regulatory Commission (CSRC) formulated new guidelines in 2018 to enforce publicly listed companies to disclose ESG performance for the first time.
“ESG is not a new concept, but general view has been that ESG is passively accepted by companies. Actually, it is the key to achieve a win-win situation for both shareholders and stakeholders. Taking ESG into consideration will become a core principle in the capital allocation decisions for both investors and companies.” Sylvia Lau added.
Adjusting the Business Valuation Approach
In the traditional valuation model, ESG factors are not under consideration. However, the growing appetite for ESG highlights the importance of the incorporation of ESG factors into the valuation process to give out a more integrative view for investors.
In the report, JLL analyzed the ESG performance of 60 Hong Kong-listed property developers, the result reveals a positive relationship between the ESG disclosure score and companies’ P/B ratios.
Investors are more willing to pay a price premium for companies with high ESG scores. Within the real estate developer sector, when ESG disclosure score increases by 20 units, P/B ratios approximately rise 0.13 accordingly, assuming other factors are constant.
Source: Bloomberg [data extracted in October 2021]
Kevin Chan, Senior Director of Valuations, JLL, explains, “Companies need to adjust their traditional valuation model, from a governance-centric way that sees ESG factors as an non-financial criteria, to an updated approach that considers ESG factors as pre-financial information while emphasizing the environmental and social value creation or degradation. We suggest industry leaders making concerted efforts together with the regulators in expediting the progress to develop a more comprehensive and internationalized valuation model.”
Download the JLL ESG Impacts on Business Valuations (English version) here
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