Accounting for ESG Risks in the Discount Rate for Business Valuation

Abstract

The research is aimed at developing tools for determining and justifying specific ESG risks for the purpose of accounting for projected cash flows in the discount rate in business valuation. A study of modern methods, standards and publications in this area has been conducted, and the need for their refinement and development for practical use has been determined.

The research used the results of the works by foreign and domestic authors, as well as their own professional experience. The authors used general scientific methods of cognition, such as classification, logical and system analysis, typology and generalization.

The proposed tools are aimed at substantiating, supplementing and clarifying the discount rate model (CAPM) by introducing additional coefficients that take into account the influence of ESG factors. The article proposes a scoring model for assessing risks on a point scale and tools for their subsequent translation into correction coefficients using the method of expert assessments, which already allow them to be applied in practice today. The model of accounting for specific risks is based on data from literary sources, and demonstrated using a practical example.

The author’s tool is designed to provide analysts, appraisers and experts with a qualitative justification and calculation of specific risks associated with ESG factors when evaluating a business. It is also assumed that the proposed tools will serve as one of the criteria for managing business value, allowing for measures to reduce specific risks and increase company capitalization.