Evaluating Economic Conditions via ESG-Valuation Frameworks

Evaluating Economic Conditions via ESG-valuation frameworks
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Evaluating Economic Conditions via ESG-valuation frameworks
Higher interest rates create value when a firm engages in environmental, social, and governance (ESG) activities due to the feasible scenario that good firms generate a sequence of positive impacts, thus augmenting the company’s value (Cornell & Damodaran, 2020). As the interest rates in the market increases, the customers reduce spending on the bad companies because they deem them unresponsive to their needs. Customers will purchase more from “good” firms leading to revenue growth. In this context, hard economic times drive customers and investors to spend their money based on convictions about where their interests are being considered.
Accordingly, market risk impacts the cost of equity financing and the cost of capital. Companies implementing the ESG framework can easily reduce costs significantly. This implies that rising risks in the equity market create value for the company because an effective ESG proposition enhances investment returns by enabling the firm to allocate capital to more sustainable and promising opportunities...