When sustainability becomes a factor in valuation

Bron
McKinsey

Sustainability efforts are material to investors only to the extent they affect cash flows. What matters depends on the industry. Investors and other stakeholders seeking to understand companies’ risks and opportunities increasingly demand to know more about their performance related to sustainability concerns—or more specifically, environmental, social, and governance issues. Companies generally disclose variables that have a material effect on their value, according to financial accounting standards. But a one-size-fits-all approach to disclosure misses meaningful differences among industries.

In this December 2016 interview, excerpted from a conversation at the inaugural symposium of the Sustainability Accounting Standards Board (SASB), McKinsey’s Tim Koller joined alumnus Jonathan Bailey to discuss how accepted principles of valuation apply. Koller, an author of Valuation: Measuring and Managing the Value of Companies, has argued that “creating shareholder value is not the same as maximizing short-term profits—and companies that confuse the two often put both shareholder value and stakeholder interests at risk.” In this conversation, Bailey and Koller dig into the issues related to how sustainability affects value, the asymmetry of information between companies and their investors, and how companies communicate about that information.

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