Integrating ESG into Valuation Models and Investment Decisions: The Value Driver Adjustment Approach

12 Pages Posted: 19 Mar 2016

See all articles by Willem Schramade

Willem Schramade

NN Investment Partners; RSM Erasmus University

Date Written: February 22, 2016

Abstract

True ESG integration means ESG factors are systematically fed into the valuation models and investment decisions of analysts and PMs. However, most ESG approaches fail to do this. As a result, sustainable investing is much less an application success than a marketing success. Our Value Driver Adjustment (VDA) approach is different: it ties into traditional valuation approaches by linking ESG issues to value drivers via their impact on business models and competitive positions. For equities, the initial results find that the average target price impact of ESG factors is 5% overall, and 10% conditional on non-zero adjustments; dispersion is wide as target price changes ranged from -23% to 71%. The investment team has experienced a pay-off in terms of more in-depth analysis of companies, a clearer view on risk and better informed decisions.

Keywords: sustainable investing, ESG integration, equities investing, materiality, valuation

Suggested Citation

Schramade, Willem, Integrating ESG into Valuation Models and Investment Decisions: The Value Driver Adjustment Approach (February 22, 2016). Available at SSRN: https://ssrn.com/abstract=2749626 or http://dx.doi.org/10.2139/ssrn.2749626

Willem Schramade (Contact Author)

NN Investment Partners ( email )

Schenkkade 65
Den Haag, 2565 AS
Netherlands
0031615521385 (Phone)

RSM Erasmus University ( email )

P.O. Box 1738
Room T09-53
3000 DR Rotterdam
Netherlands

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