Last month, I had the privilege of joining my colleagues Karyl Van Tassel, CPA/CFF, Richard Donohoe, and Nicole McTernan for a fireside chat regarding the expected impacts of looming Securities and Exchange Commission (SEC) regulations on Environmental, Social, and Governance (ESG) disclosures from multiple perspectives – accounting, technical, intellectual property (IP), and valuation. In a previous post, I discussed the impact of the emerging regulations on IP development. Now, I will touch on the likely impacts on valuation broadly speaking.
Although the valuation fundamentals likely won’t change, they will definitely be impacted. ESG factors will have to be taken into consideration even more when assessing positive and negative effects on cash flows and risk. While this is already being done to various extents, the new rules will likely accelerate the trend.
As we mentioned in a previous post on impact as an intangible asset, it is important to recognize that there will be a vast amount of data generated from these disclosures. These data will serve as inputs into the valuation process. Keep in mind this is on top of the already vast and growing amount of ESG data out there as a result of voluntary disclosures, required disclosures in other jurisdictions globally, and third-party research providers.
In addition to the pure volume of data, however, the other piece that is perhaps even more important is standardization. Even though over 90% of the S&P 500 and 70% of the Russell 1000 published some sustainability data in 2020 (those numbers have likely gone up), there is a huge lack of standardization and consistency, which the SEC and Chairman Gensler have stated is the primary impetus for these rules.
Going back to the valuation point, firms and investors will have to be looking at the impact that new information has on the two valuation levers mentioned in earlier posts : cash flows and risk. Anyone that has been involved in a valuation exercise to any extent knows that after defining the purpose of the valuation the very next step is information gathering, and this has the potential to affect it in a big way.
Noor Al-Banna is a Director with the Valuation practice, working from the Chicago Office of Ocean Tomo, a part of J.S. Held. The practice area appraises intellectual property and various intangible assets for acquisitions and divestitures, bankruptcy and restructuring, establishment of intellectual property monetization strategies including licensing, mergers and joint venture/partnership formations, litigation support, and financial reporting and tax matters. The practice also has experience valuing business enterprises and equity interests for litigation support purposes that includes expert testimony experience in state and federal courts that includes Delaware Chancery Court.
To explore this topic and how it could impact your business, please contact: Noor Al-Banna, CFA at [email protected] or +1 312 327 4434.