When we think of company valuation, we instinctively think of profitability, growth prospects and asset strength. Today, however, there is one factor that cannot be ignored by anyone wishing to value or acquire a company lucidly: climate change.
This is no longer a subject reserved for CSR experts or sustainability consultancies. Investors, banks, governments - and increasingly the markets - have integrated the risks and opportunities associated with the ecological transition into their decision-making. And this trend has a direct impact on a company's real value.
Between tougher regulations, rising resource costs, green taxation, physical exposure to climatic hazards and pressure from stakeholders, the impact of climate on valuation is becoming an economic criterion in its own right.
In this article, we review the major international studies on the subject, identify the typologies of risk to be included in a valuation analysis, present the impacts already measured in certain sectors, and explore the new methods to be mobilized to correctly value a company in this new context.
For any business owner contemplating an acquisition, or wondering about the long-term future of his or her own business assets, it's time to ask a central question:
Is thecompany I'm buying - or running - really ready for tomorrow's world?
1. An increasingly solid and international body of research
When tackling this subject, it's important to note that a number of resources exist that enable us to approach the potential impact of climate risk on business valuation, by "type of risk".
An overview of the main sources and reports on the subject:
a. Task Force on Climate-related Financial Disclosures (TCFD)
The TCFD provides an international framework for disclosing climate-related financial risks. It is widely adopted by companies and investors to assess and communicate their exposure to climate risks.
b. CDP (formerly Carbon Disclosure Project)
CDP is a not-for-profit organization that operates a global disclosure system to help investors, companies, cities, states and regions manage their environmental impact.
c. OECD - The economic consequences of climate change
The Organisation for Economic Co-operation and Development (OECD) has published a detailed report analyzing the economic costs of inaction on climate change, modeling the impacts on global economic growth.
đź”— O ECD report (PDF)
d. World Bank - Climate change
The World Bank provides analysis and data on the impacts of climate change, focusing on the implications for economic development and poverty reduction.
đź”— The World Bank's climate change page
e. Banque de France - Climate risk valuation of corporate bonds
The Banque de France has carried out a study on the effect of transition risk on the valuation of eurozone corporate bonds, focusing on the carbon intensity of issuers.Banque de France
f. European Central Bank (ECB) - Climate change
The ECB integrates climate risks into its macroeconomic analyses and monetary policies, notably by assessing the implications for financial stability.
g. Academic studies - Harvard, MIT, LSE
Renowned academic institutions such as Harvard, MIT and the London School of Economics (LSE) are conducting in-depth research into the links between climate change and the economy, exploring in particular the effects on company valuations.
- đź”— Harvard University - Environmental Economics
- đź”— MIT Climate Portal
- đź”— LSE - Grantham Research Institute on Climate Change and the Environment
2. Understanding climate risks: a key to assessing a company's real value
The impacts of climate change on valuation are not just theoretical. They are already taking concrete form in many sectors, directly affecting profitability, costs, assets, market perception and access to financing.
To integrate them properly into an assessment, it is essential to distinguish several typologies of climate risk, now recognized by the major financial institutions (TCFD, World Bank, ECB, etc.).
Each type has its own specific challenges... and measurable consequences. Here's a review of the main risks to be integrated into a company's value enhancement approach, illustrated by real or documented cases.
a. Physical risks: the direct impact of climate on the company
Physical risks correspond to damage caused by extreme climatic events or gradual climate change.
Concrete examples:
- An agri-business in southern Spain has seen its value fall by 20% in 3 years as a result of lower yields due to successive droughts (source: World Bank).
- Certain plants or warehouses located in flood-prone areas are now excluded from the acquisition strategies of major groups (e.g. logistics in northern Italy or south-west France).
Impact on valuation :
- Increased insurance or deinsurance costs.
- Need to invest in upgrading or relocation.
- Less attractive to buyers/investors.
b. Regulatory risks: increasing pressure from the legal framework
The legislative framework is evolving rapidly, under pressure from national and European climate commitments. This means compliance costs, and even operating bans.
Concrete examples:
- Building and civil engineering companies now have to comply with RE2020 regulations on energy performance, modifying their margins and structural costs.
- In 2023, a manufacturer of oil-fired boilers had to completely rethink its model after its products were banned from sale in France.
Impact on valuation :
- Impairment of obsolete or non-compliant assets.
- Mandatory regulatory investments to be included in business plans.
- Anticipated drop in profitability.
c. Transition risks: forced mutation of certain business models
The transition to a low-carbon economy directly affects value chains, production costs, supplies and commercial outlets.
Concrete examples:
- In the transport sector, the scheduled increase in carbon taxes and restrictions on the use of combustion-powered vehicles are driving down the value of certain fleets.
- A textile company dependent on Indian cotton has seen its margins squeezed by rising raw material prices linked to droughts.
Impact on valuation :
- More volatile or structurally reduced margins.
- Need to reinvest in low-carbon production tools.
- Risk of loss of competitiveness if adaptation is delayed.
d. Reputation and social acceptability risks
Even without regulatory change, a company can lose value if it is perceived as incompatible with societal or environmental expectations.
Concrete examples:
- A food company criticized for overexploiting groundwater saw its stock market value plummet by 12% in 15 days (case observed in the USA).
- Some investment funds now exclude companies that use non-recyclable plastics or do not publish extra-financial reports.
Impact on valuation :
- Reduced access to financing or certain markets.
- Risk of losing customers or partners.
- Valuation penalized by ESG criteria of buyers or investors.
e. Climate opportunities: new levers for value creation
In the face of these risks, certain sectors or well-positioned companies may, on the contrary, benefit from an economic windfall effect linked to the climate transition.
Concrete examples:
- Companies in the energy renovation or renewable energies sector are experiencing valuation multiples 1.5 to 2 times higher than the market average.
- A French SME specializing in recycling solutions has seen its EBITDA multiply by 3 in five years, attracting European investors and boosting its valuation.
Impact on valuation :
- Investment premium linked to model sustainability.
- Easier access to public and private financing (green bonds, subsidies, etc.).
- Differentiating positioning in growth markets.
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3. Already measurable impacts on company valuations
For a long time, climate risks were perceived as remote and difficult to quantify, and therefore rarely integrated into valuation models. This is no longer the case.
Numerous studies - including those by central banks, universities and analysts - show that climate directly influences a company's value, through its exposure to physical risks, its dependence on fossil fuels, its alignment (or not) with environmental standards, or its perception by investors.
Here are a few key figures and telling examples.
A "climate discount" applied to exposed companies
-
Banque de France study (2023): Carbon-intensive corporate bonds carry a significant risk premium on financial markets.
This means that companies perceived as being poorly aligned with the ecological transition have to offer a higher yield to attract investors... which translates into a lower valuation. - BlackRock - MSCI (2022) study: Companies in the energy or industrial sector with a high exposure to GHG emissions are valued on average 20-30% below their "low-carbon" equivalents at equivalent economic scope.
Brown assets are increasingly discounted
Assets not aligned with the transition (highly emissive factories, non-renovated buildings, combustion-powered vehicles, polluting fleets, etc.) are increasingly perceived as "stranded assets" - i.e. assets at risk of rapidly losing all economic value.
Examples:
- In Germany, several coal-fired power plants have been sold at token prices in anticipation of their closure.
- In the real estate sector, homes rated F or G now sell for up to 15% less than higher-rated properties (source: Notaires de France, 2023).
Conversely, low-carbon models valued with a premium
Companies that have anticipated the challenges of climate change and integrated a transition strategy obtain a valuation premium from investment funds, banks or when they are floated on the stock market.
Examples:
- Companies in the clean tech sector are valued at EBITDA multiples of 10 to 12, compared with 5 to 6 for the industrial average.
- A French company specializing in biobased materials has raised funds at a valuation x3 in two years, highlighting its environmental performance.
Impact on financing and applied rates
- Financial institutions now apply a climate assessment grid when granting credit.
âžś A company exposed to or with a poor ESG rating may see its cost of financing (bank credit or bond financing) increase. - Impact or ESG investment funds are excluding more and more activities (oil, fast fashion, intensive agro-industry), which reduces the number of potential buyers... and therefore the valuation.
Cascading effects on sales price or transmission capacity
When a company is sold, the valuation is directly affected by :
- the level of investment required to "green" the business;
- the company's image in the eyes of the public or potential buyers;
- the presence (or absence) of reassuring extra-financial reporting.
In some of the cases we have handled at XVAL, we have observed up to a 30% difference in valuation between two comparable companies, solely due to :
- poor positioning with regard to climate issues,
- the absence of a credible transition plan.
4. Towards new valuation methods integrating climate risks and opportunities
Traditional valuation methods (DCF, multiples, asset valuation, etc.) remain fundamental, but today they need to be supplemented or adjusted to incorporate a variable that has become inescapable: climate.
Why? Because assumptions about future returns, risks or even asset values can no longer be made independently of the ecological transition or future climate shocks.
New tools are emerging, while others are adapting. Here are the main approaches that valuation professionals - including XVAL - are beginning to integrate into their analyses.
a. Climate-adjusted Discounted Cash Flow (CA-DCF)
An evolution of the classic DCF, integrating climate impacts into future cash flows and the discount rate.
In concrete terms :
- Visit future cash flows (cash flows) are adjusted for :
- additional transition costs (regulatory investments, carbon tax, adaptation, etc.),
- potential losses (lower sales, higher raw materials costs, etc.),
- green" revenue opportunities (new markets, subsidies, etc.).
- Visit discount rate is adjusted to reflect :
- climatic uncertainties,
- market perception of climate risk.
Advantage :
Allows a company to be assessed dynamically according to different climate scenarios (e.g. +1.5°C vs. +4°C), as recommended by the TCFD.
b. Climate Value-at-Risk (Climate VaR)
A measure of a company's risk of devaluation under different climate scenarios for 2030 or 2050.
In concrete terms :
- The estimated potential loss of value a company related to :
- physical risks (site flooding, rising insurance costs, etc.),
- transition risks (regulatory bans, carbon taxes, changing customer preferences).
- We apply IPCC or NGFS scenarios to model these losses.
Advantage :
Useful for identifying assets at risk of rapid devaluation or companies poorly positioned for the transition.
c. Green CAPM (Climate-adjusted Capital Asset Pricing Model)
A "green" version of the CAPM model used to estimate the cost of equity capital.
In concrete terms :
- A climate risk premium is included in the calculation of the cost of capital.
- This premium is higher for companies exposed to "brown" sectors (fossil fuels, thermal transport, agro-industry, etc.), and lower for those with good ESG ratings.
Advantage :
Better reflects a company's true cost of capital in an environment where investors are increasingly sensitive to climate risk.
d. Scenario and climate stress-testing applied to valuation
An analysis method based on the examination of several possible futures to test the resilience of the company's business model.
In concrete terms :
- Several forward-looking scenarios are constructed (rapid transition, strict policy, inaction, etc.).
- For each scenario, we reassess flows, margins and profitability.
- We identify the breaking points or "zones of fragility" in value enhancement.
Advantage :
Highlight weak points or levers for adaptation to guide a purchasing decision or strategic transformation.
e. Asset approach adjusted for exposed physical assets
Asset discounting method integrating future climatic costs linked to the assets held.
In concrete terms :
- A valuation based on net asset value includes :
- mandatory energy renovation costs,
- Discounts for environmental inaction (F-rated housing, polluted wasteland, etc.),
- higher operating costs (insurance, maintenance, local taxes, etc.).
Advantage :
Prevents the value of fixed assets from being overestimated in the face of medium-term regulatory or physical changes.
5. Integrating climate to protect value - XVAL leads the way with an innovative sector index
A company's valuation can no longer ignore the profound changes brought about by climate change. Physical risks, regulatory pressure, the energy transition, societal expectations...: all these factors have a measurable impact on the value of a business asset, whether it's being bought, sold or passed on.
For an entrepreneur, this raises fundamental questions:
- Is my company resilient?
- Is the company I'm thinking of buying aligned with tomorrow's requirements?
- Do I need to review my profitability projections, fixed assets and investment plans?
At XVAL, we have chosen to integrate these issues into our valuation methods. We do not consider climate as a secondary variable, but as a structuring lever for valuation, whether negative (risks) or positive (opportunities).
A XVAL sector index to help managers see things more clearly
In order to provide more concrete support to company managers in this process, we are currently developing a sectoral climate risk exposure index.
The purpose of this tool is to :
- classify business sectors according to their level of sensitivity to climate change;
- identify potential impacts on costs, profitability, valuation or market perception;
- propose customized scenarios and analysis grids for each sector.
From catering to construction, from personal services to industry, from accountancy to transport, each sector is analyzed according to a number of criteria:
- exposure to physical risks,
- dependence on energy or certain resources,
- vulnerability to environmental regulations,
- societal perceptions and changes in customer behavior.
Customized support to anticipate and adapt
This index is designed as a strategic management tool. It is designed to help managers :
- integrate the right parameters into their valuation,
- prepare a sale or acquisition in full awareness of climate issues,
- or simply to preserve their company's long-term value.
We believe thata well-informed business leader is a stronger, more agilebusiness leader, better equipped to face the economic changes ahead.
Next step: publish the first sector-by-sector results
In the coming months, we'll be publishing the first results of our sector index, with factsheets for each profession, quantified exposure levels, and concrete avenues for adaptation.
This will be an invaluable resource for any company wishing to invest, transfer, or simply adapt in the long term.
If you would like to receive a preview of these results or discuss them with our experts: www.xval.fr
We are at your side to build a valuation that takes into account reality... including that of the climate. Request a quote :
