Case Study 2 – Analyzing and Modeling ESG Led Investing

A little primer

Sustainable Development Goals (SDGs) and Environmental, Social, and Governance (ESG) criteria,
along with corporate social responsibility (CSR), are crucial concepts in modern corporate
strategy. The SDGs, set by the United Nations in 2015, along other aspects, mainly aim to
marginally end poverty, protect the planet, and ensure peace and prosperity for all by 2030. ESG
criteria are used by investors to evaluate a company's performance on environmental, social,
and governance issues, while corporate social responsibility refers to a company's ethical and
socially responsible operations that have a positive impact on society and the environment.

The integration of ESG criteria and corporate social responsibility into a company's strategy is
essential in today's business landscape. The SDGs provide a framework for the ESG criteria, and
aligning their ESG performance with the SDGs demonstrates a company's commitment to
sustainable development. The importance of ESG and corporate social responsibility cannot be
overstated as it addresses sustainability challenges, builds a positive reputation with
stakeholders, and potentially improves financial performance.

In short, the SDGs, ESG criteria, and CSR serve as a guide for companies to ensure their business
practices are sustainable, responsible, and contribute to a better world for all. By prioritizing
these concepts in their strategy, companies can fulfil their social and environmental obligations
and demonstrate their commitment to creating a sustainable future.

Linking SDGs and ESG – A Paths to a Sustainable Future

# Sustainable Development Goal Environmental Social Governance
1: End Poverty ◆
2: Zero Hunger ◆
3: Good Health and Well-Being ⚫ ◆
4: Quality Education ◆ ◼
5: Gender Equality ◆ ◼
6: Clean Water and Sanitation ⚫ ◆
7: Affordable and Clean Energy ⚫ ◆
8: Decent Work and Economic Growth ⚫ ◆ ◼
9: Industry, Innovation, and Infrastructure ⚫ ◆
10: Reduced Inequalities ◆ ◼
11: Sustainable Cities and Communities ⚫ ◆
12: Responsible Consumption and Production ⚫ ◆ ◼
13: Climate Action ⚫ ◼
14: Life Below Water ⚫
15: Life on Land ⚫
16: Peace, Justice, and Strong Institutions ◆ ◼
17: Partnerships for the Goals ◼
The impact of ESG and CSR on Corporate Strategy and Investment Decisions

The integration of Environmental, Social, and Governance (ESG) criteria and social corporate
responsibility into a company's strategy is not only crucial for the company itself but also for their
end-users across the value chain, investors and other third-party stakeholders. By aligning ESG
strategies with SDGs, business entities demonstrate their commitment to sustainable
development.

Investors and other stakeholders are increasingly prioritizing ESG criteria in their decision-
making process and are more likely to invest in companies that have a strong ESG performance.
Companies that prioritize ESG and social corporate responsibility in their strategy not only
address sustainability challenges and build a positive reputation with stakeholders but also
potentially improve financial performance, making them more attractive to investors.

Large investment banks typically treat firms that invest into ESG (Environmental, Social, and
Governance) favourably as there is a growing demand from investors for companies that
prioritize ESG issues. In recent years, the trend of socially responsible investing has grown, and
investment banks are increasingly taking notice and incorporating ESG analysis into their
investment processes.

In 2020, BlackRock, the world's largest asset manager, made a significant announcement
regarding its ESG focus. The firm stated that it would put sustainability at the center of its
investment philosophy and make it a priority across all its investment offerings. BlackRock also
announced that it would use its voting power to hold corporate leaders accountable on ESG
issues and engage with companies on ESG performance. This move by BlackRock highlights the
growing importance of ESG in investment decision-making and the increasing influence of
investment banks on corporate ESG practices.

In conclusion, large investment banks are increasingly recognizing the importance of ESG in
investment decision-making and are taking steps to prioritize ESG analysis in their processes.
The announcement by BlackRock in 2020 is just one example of how investment banks are
incorporating ESG considerations into their investment philosophy and holding corporate
leaders accountable for ESG performance.
Global Risks Landscape

The Global Risks Landscape is an annual publication produced by the World Economic Forum,
which provides insights on the most pressing global risks in terms of likelihood and impact. The
report covers a wide range of risks, including economic, environmental, geopolitical, societal, and
technological risks. The Global Risks Landscape provides a comprehensive overview of the risks
that pose the greatest threat to the world and highlights the interconnections and
interdependencies between these risks. The report serves as a valuable resource for
policymakers, business leaders, and the general public, helping to drive informed decision-
making and build a more resilient and sustainable world.

The 2021 Global Risks Landscape has been a key concern for corporations as it poses a range of
potential threats to their operations and financial stability. In response, many corporations have
taken proactive measures to assess and mitigate their exposure to these risks. This often involves
conducting risk assessments and developing contingency plans, as well as making investments
in risk management technologies and processes. Additionally, many corporations have increased
their focus on environmental, social, and governance (ESG) issues, recognizing the potential
impact these risks may have on their business and reputation. Some corporations are also
engaging with stakeholders, such as investors and regulators, to better understand the risks and
collaborate on risk management strategies. By taking these proactive steps, corporations aim to
minimize the impact of global risks and ensure long-term sustainability and success.

Frameworks for Corporate Use

Respectively, the global risks landscape has had a significant impact on investor behavior and
decision-making. With increasing concerns over pandemic, climate change, and geopolitical
tensions, investors have become more cautious and focused on risk management. Many are
looking for investments that provide resilience in the face of uncertainty and are prioritizing
companies with strong environmental, social, and governance (ESG) performance. In response,
companies are integrating ESG criteria into their strategies and reporting practices to meet the
growing demand for socially responsible investments. Additionally, investment banks are
incorporating ESG analysis into their investment processes, recognizing the growing importance
of ESG in investment decision-making. As a result, there is a trend of socially responsible
investing and a growing interest in sustainable investments, particularly in sectors related to
environmental solutions and technology
 Figure 1 - 2021 Global Risk Landscape1

1
Source: World Economic Forum
ESG Rating Agencies

ESG (Environmental, Social, and Governance) rating agencies evaluate a company's performance
in relation to environmental, social and governance factors and provide a rating that reflects their
level of ESG performance. These ratings are meant to provide a comprehensive assessment of a
company's sustainability and responsibility practices and help investors make informed
investment decisions. The ESG ratings help investors understand the potential risks and
opportunities associated with a company, as well as its commitment to sustainability and social
responsibility. The ratings can influence investor decisions by providing valuable information on
a company's ESG performance and helping investors assess the long-term viability of a company.

Moreover, ESG ratings can also influence corporate strategy by providing companies with
feedback on their sustainability practices. Companies that receive low ESG ratings may be
motivated to improve their performance in order to attract investment and demonstrate their
commitment to sustainability and social responsibility. On the other hand, companies that
receive high ESG ratings may be better positioned to attract investment and potentially improve
their financial performance. Therefore, ESG ratings play a crucial role in shaping the ESG
practices of companies and influencing investment decisions in the financial market.

Some of the most renowned ESG Rating Agencies include:

 Business and Data Analytics - Case Study 2

Introduction

ESG Led Investing has become paramount in the recent years. In this case study, you will be
tasked to quantify 4 ESG related investments and their impact on an arbitrary corporation’s
valuation.

1- Green House Gas reduction

2- Supply chain and business resilience
3- DI&E and Labor Rights
4- Sustainable Cities and Responsible Production

The corporation is a publicly traded entity who’s business model mainly revolves around B2B
production. More information will be presented by the instructor with the progression of the
financial valuation.

Task

As a financial analyst, you’ll need to build and compete a valuation of the company with each of
the 4 ESG led investments. Management wants to see their impact on the entity’s valuation
separately. Hence, you’ll need to build the model in such way that enables end-user versatility
and ease of control.

Method

Carry on by completing the respective assumptions and model derivers, build and link the 3
financial statements dynamically and perform a DCF valuation. Visualize the impacts of these
investments and reflect both on their strategic importance and change in share price.

Purpose of the case study

This case study is designed to showcase how ESG integration in financial modeling and valuation
is important as it helps to consider the long-term impact of a company's environmental, social,
and governance practices on its financial performance. By considering ESG factors, financial
models can more accurately predict future risks and opportunities, leading to more informed
investment decisions. This can also help companies to identify and address ESG risks and
improve their overall sustainability performance. Additionally, the integration of ESG factors into
financial models can increase transparency and accountability, making companies more
attractive to investors who prioritize ESG in their investment decisions.

All information and assumptions are present in the accompanying Excel Workbook