As professionals working at the intersection of business and sustainability, we often ask ourselves: Does what we do really move the needle on company valuation? And if so, how can we make the business case for environmental, social, and governance (ESG) performance to leadership teams who are focused on profitability and shareholder value? Below, I’ll walk through the evidence on how ESG performance drives long-term business value. Whether you’re building a sustainability roadmap or seeking internal buy-in for ESG investment, these are insights you can leverage.
Defining ESG performance and how we measure it
To establish a strong correlation between ESG performance and business value, we must first clarify what ESG performance entails and how it is measured.
The first step is identifying your key performance indicators (KPIs). These KPIs can vary based on your business and industry, but they must be both measurable and material. Frameworks like the Corporate Sustainability Reporting Directive (CSRD) will soon clarify these standards, but companies can begin with tools such as the Science Based Targets initiative (SBTi) or conduct a double materiality assessment today.
You can also use external ratings from ESG rating agencies and indices. While most are geared toward publicly traded companies, non-listed companies also have access to platforms like EcoVadis, which assess performance across ESG pillars.
In the absence of rating access, ESG audits conducted by reputable third-party firms are invaluable. These audits help companies identify what to measure and how to benchmark ESG performance. They provide third-party assurance that you’re prioritising the right topics in your industry and measuring them credibly.
However, one rule remains: if you can’t measure it, you can’t improve it. Whether it’s through ratings, stakeholder surveys, audits, or digital platforms – measurement is the starting point for progress.
Understanding Enterprise Value and the EV/EBITDA multiple
The Enterprise Value (EV) of a company is the total value of its equity plus financial commitments. Meanwhile, Earnings Before Interest, Taxes, Depreciation and Amortisation (EBITDA) is a widely accepted proxy for operating profitability.
The EV/EBITDA multiple is a ratio used in M&A transactions to value a company. If a company has an EBITDA of €250 million and its industry’s average multiple is 10, then the acquisition price might be €2.5 billion. This multiple helps investors assess whether a company is undervalued or overvalued compared to peers. This is where the correlation with ESG performance becomes powerful.
Does ESG performance impact valuation? The evidence says yes
A Deloitte study analysed 300+ publicly traded companies across various sectors to determine the link between ESG performance and valuation. Below is what they found.
ESG scores were grouped into four grades:
- A (score >75),
- B (50–75),
- C (25–50), and
- D (0–25).
These scores were benchmarked against each company’s EV/EBITDA multiple. What the data revealed was a clear positive correlation: companies with higher ESG scores tended to have higher valuation multiples.
More interestingly, the study uncovered that an increase in ESG score over time had an even greater effect on valuation than the score itself.
- A higher ESG score was associated with up to 1.2x increase in EV/EBITDA.
- An improvement in ESG score led to up to 1.8x increase in EV/EBITDA.
In other words, not only is ESG performance valued in the market, but it’s the improvement trajectory that buyers really value. It reflects management capability, long-term thinking, and reduced non-financial risk.
Putting theory into practice: a hypothetical case
To see how this plays out in a real-world scenario, I created a fictional mid-sized manufacturing company looking to be acquired in 2030. I modelled two scenarios:
Scenario 1: No ESG investment
- The company will grow revenue to €1 billion by 2030.
- However, ESG investment is minimal.
- Its EcoVadis score drops from Gold to Silver.
- The EV/EBITDA multiple drops to 6x.
- Valuation: €1.5 billion.
Scenario 2: ESG-focused investment
- Due to ESG investment, the company’s revenue is slightly lower (€900 million) because of product mix shifts and upfront costs.
- ESG score rises from Gold to Platinum.
- The EV/EBITDA multiple increases from 7x to 8x.
- Valuation: €1.6 billion.
Even though the ESG-focused company sells less and has slightly lower EBITDA, it’s worth more. Why? Because buyers are willing to pay a premium for ESG performance. This is what we refer to as the ESG premium.
So what does this mean for your business?
This isn’t just theory; it’s a strategic lever. For those of us working within companies trying to build the case for ESG investment, here’s what matters:
- You can justify sustainability spend not just on risk or compliance, but on value creation.
- Boards and investors increasingly factor ESG scores into capital allocation and acquisition decisions.
- Tools like external audits, rating agencies, and materiality assessments can feed into better performance tracking and valuation impact.
- ESG reporting frameworks, particularly CSRD, are driving greater standardisation and transparency, improving the comparability of ESG scores across markets.
Frequently asked questions
Here are some of the most common questions about ESG performance and company valuation answered.
1. Why do higher ESG scores increase valuation?
They reduce perceived risk (regulatory, reputational, operational) and signal strong governance. Buyers are more confident in the company’s long-term performance.
2. What role do third-party audits play in valuation?
They validate your KPIs and performance claims, especially for private companies without public disclosures. This enhances credibility with investors and buyers.
3. Can ESG ratings affect bank lending rates?
Yes. Many financial institutions now offer green or sustainable credit facilities where favourable ESG scores lead to lower interest rates.
4. What about executive compensation and ESG?
More companies are linking part of their leadership bonuses to ESG performance, though not always to the rating itself. As ESG metrics become standardised, this will likely increase.
5. Isn’t ESG investment just a cost centre?
Not necessarily. As shown, improved ESG scores can increase enterprise value, even when short-term revenues dip, proving it’s more than cost, but a long-term investment.
6. What’s the biggest challenge to improving ESG performance?
Supply chain complexity. For manufacturers, Scope 3 emissions and supplier data gaps pose major hurdles. But with time and transparency, these can be addressed.
Final thoughts
There is a demonstrable link between ESG performance and long-term enterprise value. The so-called ESG premium is not speculative; it’s backed by market data and investor behaviour.
So, if you’re championing ESG inside your organisation, don’t pitch it as just compliance or reputation management. Pitch it as value enhancement. Use the evidence. Build the business case because the companies that lead on ESG today will be the ones most valuable tomorrow.
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Michael Costello is Group Director of ESG at Stahl, leading the company’s drive for sustainability and industry collaboration on climate, chemical management, and supply chain transparency. With over 30 years’ experience in the chemical sector, he also serves as a board member of the ZDHC Foundation and sits on the advisory board of the Renewable Carbon Initiative.
