Measuring ESG
Determining corporate value has never been an exact science. But the growing practice of including non-financial factors has made valuation even more complex. For many investors, so-called ESG (environment, social, and governance) issues are now being considered along with discounted cash flows and asset valuation, as is evident by the ESG questions posed in the last analyst earnings calls of 25 percent of companies in the S&P 500. “But,” says Wharton management professor Witold Henisz, “at the same time, people don’t feel they have the data and the insight to know how to measure it.”
If you’re a director or senior executive, that means those ESG questions, which are also being asked by employees and other stakeholders, can be very difficult to answer. “We are still developing the tools, the systems, and the processes to value ESG,” says Henisz. “Being tempted by a simplistic answer today can be an expensive mistake. But that doesn’t mean you can’t address ESG concerns and be able to convey your progress to those asking the questions.”
The History of ESG Measurement
Henisz explains that thus far, measuring ESG has been about two different types of ratings. The first simply identifies and creates a checklist of “good” and “bad” companies to help investors who want to avoid specific things like landmines and fossil fuels in their portfolio.
