Integrating Environmental, Social and Governance (ESG) factors into mineral asset valuation is a key factor for sustainable investments. Traditionally, valuations focus on technical areas like exploration and mining, often not prioritising the ESG aspects, which can lead to ESG risks and potentially nullifying financial gains.
Many mining companies do not integrate ESG into their valuations due to the difficulty of quantifying ESG considerations into the valuation cost inputs. Frameworks like the Sustainability Accounting Standards Board offer guidance, but applying them can be time-consuming and costly. The challenge lies in translating abstract ESG impacts into specific cost implications.
To address these challenges, two simpler methods from the International Valuation Standards Council can be employed. The first is the market approach. This approach involves comparing ESG factors from similar companies and adjusting market inputs accordingly. By assessing the ESG performance of comparable companies, one can calibrate market inputs to reflect the target company’s ESG performance. This method allows for a comparable valuation based on industry benchmarks and peer performance.
The second method is the income approach. This approach has been developed for several adjusted methods, and among these, two key methods are more straightforward:
- Future cash flow adjustments by risk matrix: This method uses a risk matrix to evaluate ESG risks by combining the likelihood and impact of various factors. These assessments are integrated into cash flow models to reflect potential ESG-related costs and benefits. After obtaining the risk matrix numbers, these figures are factored into the cash flow adjustments, which is an inevitably subjective process, although those factors are evaluated by relevant experts.
- Discount rate adjustments by ESG ratings: This method adjusts the discount rate based on ESG ratings from agencies such as Moody’s, MSCI and S&P Global. Higher ESG risks lead to increased discount rates, reducing the present value of future cash flows. These ratings provide a structured way to assess ESG risks and quantify their financial impact; however, ESG ratings are usually an overall assessment of corporate performance rather than individual projects.
Despite the complexities and potential downsides, integrating ESG factors is crucial for mineral asset valuations going forward. It not only supports risk mitigation but also enhances the overall sustainability of the business.
