ESG in the Valuation Process

IVS (Effective 31^st January 2025) defines Environmental, Social and Governance (ESG) in the Glossary as “the criteria that together establish the framework for assessing the impact of the sustainability and ethical practices, financial performance or operations of a company, asset, or liability. ESG comprises three pillars: environmental, social and governance, all of which may collectively impact performance, the wider markets and society.”

IVS 104 Data and Inputs Appendix states that “the valuer should be aware of relevant legislation and frameworks in relation to the environmental, social and governance factors impacting a valuation.”

The IVS104 Data and Inputs Appendix further states that “the impact of significant ESG factors should be considered in determining the value of a company, asset or liability” and that “ESG factors may impact valuations both from a qualitative and quantitative perspective and may pose risks or opportunities that should be considered”.

Examples of environmental factors may include but are not limited to the following:

• air and water pollution,
• biodiversity,
• climate change (current, transition and future risks),
• clean water and sanitation,
• carbon and other gas emissions,
• deforestation,
• natural disaster,
• resource scarcity or efficiency (eg, energy, water and raw materials),
• waste management.

Examples of social factors may include but are not limited to the following:

• community relations,
• conflict,
• customer satisfaction,
• data protection and privacy,
• development of human capital (health & education),
• employee engagement,
• gender equality and racial equality,
• good health and well-being,
• human rights,
• working conditions,
• working environment.

Examples of governance factors may include but are not limited to the following:

• audit committee structure,
• board diversity and structure,
• bribery and corruption,
• corporate governance,
• donations,
• ESG reporting standards and regulatory costs,
• executive remuneration,
• institutional strength,
• management succession planning,
• partnerships,
• political lobbying,
• rule of law,
• transparency,
• whistle-blower schemes.

In addition, the Appendix states that “ESG factors and the ESG regulatory environment should be considered in valuations to the extent that they are measurable and would be considered reasonable by a valuer applying professional judgement.”

Over the past year the consideration of ESG factors within the valuation process across all specialisms (business valuation, financial instruments, and tangible assets) has continued to gain greater attention across all markets, though it should be noted that not all markets are moving at the same pace.

The requirement for greater consideration of ESG is in part due to renewed global commitments to environmental sustainability and managing carbon emissions to an eventual “net zero” goal (as established by the Paris Agreement in 2015), the growing influence of intangibles on valuations, and greater investor, regulatory and public scrutiny of ESG components within the valuation process.

As a result, the explicit consideration of ESG within the valuation process has continued to be a key topic for the IVSC, as not only is it in the global public interest, but also meets a market need, particularly as more standards and regulations are incorporating specific reporting requirements for ESG.

In order to better understand evolving market needs, the ESG Working Group carried out a survey of investors, businesses, and valuers in 2022 in order to gain an understanding of their consideration of ESG components within valuations.

As stated in the previous IVSC ESG Survey Results perspective paper section on next steps “IVSC is planning to run a survey tracking the uptake of ESG considerations within the valuations and the valuation process on an annual basis”. It should be noted that publication of last year’s ESG Survey was delayed while the IVSC Standards Review Board and its Technical Boards (Business Valuation Board, Financial Instruments Board and Tangible Assets Board) focussed on the Publication of IVS (Effective 31 January 2025.

The IVSC will continue to issue ESG related Perspectives Papers during 2024 to further explore the consideration of ESG and its components within the valuation process. These Papers will also aid in providing transparency and may act as a precursor to more explicit ESG requirements in future editions of IVS. Perspectives Papers can also facilitate and shape wider discussion and debate on the importance of ESG/ components in the valuation process.

• BEI: Building Energy Index (Used for BELS)
• BELS: Building-Housing Energy-efficiency Labelling System (Japan)
• BREAM: Building Research Establishment’s Environmental Assessment Method
• CASBEE: Comprehensive Assessment System for Built Environment Efficiency
• CDP: Carbon Disclosure Project (currently, only the CDP abbreviation is used)
• CDSB: Climate Disclosure Standards Board
• CERES: Coalition of Environmentally Responsible Companies
• COP: Conference of Parties
• CRREM: Carbon Risk Real Estate Monitor
• CRREM Tool: Carbon Risk Real Estate Monitor Tool (EU Only)
• CSRD: Corporate Sustainability Reporting Directive
• D&B: Dun & Bradstreet
• EFRAG: European Financial Reporting Advisory Group
• Energy Star: joint program of the Environmental Protection Agency (EPA) and the Department of Energy (DOE)
• EPRA: European Public Real Estate Association
• ESG: Environmental, Social, and Governance
• ESRS: European Sustainability Reporting Standards
• EU Taxonomy: The taxonomy is a classification system that defines criteria for economic activities that are aligned with a net zero trajectory by 2050 and the broader environmental goals other than climate.
• Fitwel: Fitwel is a certification system committed to building health for all. Fitwel was originally created by the U.S. Centres for Disease Control (CDC) and Prevention and U.S. General Services Administration
• GHG: Greenhouse Gas
• GICS: Global Industry Classification Standard
• Green Mark: Green Mark accreditation provides a classification for business operations across the UK in relation to long term environmental sustainability
• Green Star: An internationally recognised Australian sustainability rating and certification system
• GRESB: An industry-led organization that provides actionable and transparent environmental, social and governance (ESG) data to financial markets.
• GRI: Global Reporting Initiative
• HQE: French equivalent of BREAM or LEED. HQE certifications apply to buildings, development and infrastructure.
• IAASB: International Auditing and Assurance Standards Board
• IASB: International Accounting Standards Board
• IBOS: International Building Operations Standard
• IFRS: International Financial Reporting Standards
• IPCC: Intergovernmental Panel on Climate Change
• IRF: Integrated Reporting Framework (now part of IFRS Foundation)
• ISSB: International Sustainability Standards Board
• NFRD/CSRD: Non-Financial Reporting Directive/Corporate Sustainability Reporting Directive
• LEED: Leadership in Energy and Environmental Design
• NABERS: National Australian Built Environment Rating System (also operates in NZ and UK)
• PRI: Principles for Responsible Investing
• S&P Global: Standard & Poor’s Global
• SASB: Sustainability Accounting Standards Board (now part of IFRS Foundation)
• SBTi: Science Based Targets Initiative
• SFRD: Sustainable Finance Disclosure Regulation
• SRI: Socially Responsible Investing
• TCFD: Taskforce on Climate-Related Financial Disclosures (now part of IFRS Foundation)
• UN SDG: United Nations Sustainable Development Goals
• UNEP: United Nations Environment Programme
• UNFCC: United Nations Framework Convention on Climate Change
• WELL: https://www.wellcertified.com/certification/v2/
• ZEB: A Net Zero Energy Building (Japan)