Valuation, 7th Edition

6Valuation of ESG and Digital Initiatives

As we write this book at the beginning of 2020, two items on any executive’s agenda are noteworthy for their emerging importance in creating value and their slipperiness when it comes to valuing them. One is managing the intertwined elements of environmental, social, and governance (ESG) concerns. The other is grappling with the myriad manifestations of technological improvement or transformation commonly referred to as “digital.”

The principles of corporate valuation do not include simple prescriptions for assigning values to various approaches to ESG or individual digital assets or strategies. Today, for even the most proficient analyst seeking a corporate valuation, there is only so much that can be done with these elusive elements. Many services publish various ESG ratings, for example, but researchers have found that the ratings are uncorrelated across different services, because work is still in progress on how to identify robust metrics of their success.

This chapter offers instead a way to think about how to value strategies and decisions related to ESG and digital initiatives. Our view is that companies should focus on the few areas that make a difference in their industry—for example, water consumption for beverage makers, supply chain management for apparel companies, or carbon emissions for many industries. It’s also important, particularly at times of rapid technological change, to fix a gimlet eye on the risks of embracing—or ...