Valuation Essay On The Route Of Sustainability

Valuation essay on the Route of Sustainability

To be a comprehensive manager within a company, certain characteristics and skills must be developed and adapted to changes in the current panorama. These skills must incorporate the relationship of environmental, social and corporate governance factors that improve profitability levels and contribute to the well -being of the environment in which the company develops its operation.

This essay contemplates the summary of 3 scientific texts that collect research on the importance of social investment in the minds of investors, and finding the relationship that social investment has in investment processes, additionally collects the results of a study Based on the Sustainability Index of Dow Jones, where it seeks to examine the result of companies that decide to adopt corporate social responsibility in their operational activities and the effect of this on their financial results. In addition, research aims to review the impact of social investment in the valuation of companies defining them as non -financial activities and what is the impact of these on investment decisions by private investors. Finally, the essay gives a conclusion about these 3 scientific texts that highlights the greatest ideas and groups them highlighting the importance of social investment activities in financial, operational and business performance activities.

The first scientific text is an article published in the "Journal of Business Ethics", in this text the new criteria that investors now have in environmental, social and governmental aspects now, and as these aspects now mark the different investment decisions.

To define the criteria that investors take into account, an international survey was developed in order to find the most relevant aspects that investors have and differences were found from the cultural point of view among US and European investors. This new investment modality is now known as responsible investment which takes into account the social and environmental aspects in risk management when investing, this without losing the maximization horizon of profitability and generation of value for those who decide to invest their own money.

Responsible investment takes into account different non -financial dimensions to evaluate investment projects, or the purchase of some action or the decision to enter a financial asset portfolio. These dimensions are directly related to how the project, or the action of the company in which it is planned It develops.

The great reputation that a company reaches when demonstrating good social and environmental activities makes it attractive to include investment portfolios in a diversified and additionally helps comply with some minimum investment standards established by the market. Empirically it has been demonstrated that investments in companies or projects with high social responsibility rates have given better results for investors, and they generate more confidence and establish non -financial links that contribute to strengthening both investors and themselves Companies.

In order to measure the importance of social responsibility activities and their relevance when investing it is necessary to define this investment as “socially responsible investment” and unify this term among the different authors. Since there are several authors who focus only on the financial result of socially responsible investments, but this type of investments are never clearly defined. 

The research survey aims to analyze the investment decisions of conventional investors and are excluded from the investigation to the responsible and ethical funds. Since the investment intentions of these funds are already being discounted. Consequently, the research focuses on more than one hundred common professionals.

This survey has had some findings such as the following:

•  Many conventional fund managers have adopted responsible investment characteristics in their investment process.
•  Responsible investment is very similar to fundamental investment
•  Depending on the investment’s home, investment decisions have different expectations, investors in the United States do not have the same confidence as Europe’s investors, the latter have more credibility in responsible social investment.

Additionally, the study recognizes that social investment also adds a burden on the investment process since more expensive processes and a higher commission are taken into account in the funds committed to this type of investment. In some studies there is an average difference of 13 basic points with fundamental investments. However, we must remember that this type of investment also has a greater profitability than fundamental investment. For example, in a study conducted in 2005, it was found that the portfolios of actions with high scores in eco -efficiency (the economic added value in relation to the waste produced) obtain greater performances adjusted by risk than the portfolios with low scores in eco -efficiency.

Poll

This survey was conducted in 2013 to 251 investment fund administrators that were related to the TKP Investments company, this company was the sponsor of the study and is a leading pension fund manager in the Netherlands. A 50% response was obtained from the 251 investment fund administrators where the first step was to request a description of their own investment processes.

And then it was about defining the different aspects of responsible investment. For example, with respect to the environment, it was investigated if carbon emission, energy and water consumption and both organic and inorganic waste management were present.

Responsible for the social aspect, it is taken into account if investors evaluated critical factors such as employee satisfaction, inclusion and respect for human rights. And finally, the corporate governance factor where the administration policies and bureaucratic processes were taken into account in decision -making, in addition to questioning the relationship of management with the Board of Directors and the independence of these.

For the elaboration of the survey, the answers are classified in 4 classes, the first class contains respondents that do not have social investment integration. The second class has surveyed with social investment implicit in some financial numbers. The third class of respondents with qualitative social investment information and the fourth class are surveyed with policies and procedures integrated into their activities.

In the development of this survey, one of the fundamental questions was to question how social investment is integrated into investment processes and for example in some of the responses fund managers say that some valuation techniques such as discounted cash flows and financial ratios should now include social investment factors.

Therefore, it is necessary to identify whether within the assessment methodologies, environmental or social aspects are being used to define investment decisions and in turn identify whether any of the 3 aspects of social investment such as social variables; environmental or governmental are more important and impact on valuation than others. This taking into account that if social investment activities can be measured, these could be managed in a better way to maximize the positive impact, that is, maximizing social welfare and financial performance of the company in turn that minimizing costs of this.

To do this, it is necessary. For example, it can be evidenced whether the price of a market action has varied after the company has incorporated social investment activities within its organizational policy, or if the culture of collaborators has improved the financial assessment of the company within From the market.

Within the results of the survey, it can be identified that investors have a high interest in social responsibility activities and do not see it as an extra expense in their investment processes, but on the contrary, they highlight their importance when advancing the assessment. For example, in the structuring of investment processes, they give a high percentage of acceptance to those companies that have a high level of commitment in social, environmental and governmental activities.

It was found that investors in 2012 decided.

Additionally, if the price of the action of one of the highly responsible companies fell, it was possible. And 39% of the investors surveyed also did not buy shares that had a positive trend since these companies showed signals of negative social investment. That is, regardless of the behavior of the price of the action in which it was intended to invest the importance of social responsibility activities, it influences the investment and valuation processes that investors advance.

On the other hand, the survey also intends to analyze the impact on the integration of social responsibility activities and how they manage the risk in the valuation of the company by the market. Under these conditions, investors know that the processes of integration and implementation by parts of the companies in social responsibility activities will bring benefits and greater profitability in the long term, including if they give some negative results in the short term. Therefore, the expectation of good results in the future will always be maintained if the company implements these activities in its operation.

Another factor of importance is the information that investors receive about the activities advanced by the company, that is, the process of disseminating information about the activities that of social investment advanced and how it implements them. Therefore, in the survey I wonder about the type of information required by investors to make their investment decisions and most of them express that, apart from financial reports, the information is also positively valued that companies supply about their social responsibility activities, such as annual ESG reports, press releases and reports to suppliers, clients, shareholders and other interest groups. In this sense, it is concluded that if investors have access to a more detailed source of information on social responsibility activities, this will be very well valued by the market, which is a condition very similar to traditional and fundamental investment, where more information provided is a greater valuation of the company analyzed.

Individually it can also be concluded that governance activities are observed more detailed, in 60% of cases, that environmental and social activities that are observed more detailed in 43% of cases. And it was also identified that companies with a low level of social responsibility activities are cataloged by investors such as red flags within their investment portfolios, that is, they constitute assets that must be constantly monitored in their performance so as not to damage the Profitability of the investors themselves. 

However, another factor to consider in the survey was the nationality or domicile of investors, in this aspect it is important that the former are not so convinced of the relationship of social investment in the profitability of companies. What if they agree is that the governance aspects are even more important than social and environmental.

In conclusion of this study that involves the survey in the investment processes, and the integration of the social responsibility process in the purchase and sale decisions of the shares by the investors can be established that investors give it a great importance To social investment activities and use much of the information of these activities to make their decisions, since this information and how these activities are integrated into investment processes help reduce financial risk.

Therefore, investors prefer the analysis of companies that grant more information about their social responsibility activities, with governance activities above social and environmental activities. In addition, it can be concluded that social investment and fundamental investment in the fund have many similarities in their objectives since both seek to improve the profitability of investment portfolios, and therefore social investment only reinvents the concept of investment fundamental including non -financial activities within the assessment and investment decision -making.

Finally, it is possible to demonstrate that depending on the domicile of the investor or manager of the investment portfolios there are notable differences within which it can be highlighted that USA investors are less optimistic in the relationship that social responsibility activities influence the financial performance of companies and therefore have a lower impact on investment decisions.

In the second reading “Sustainable Development and Corporate Performance: A Study Base Don The Dow Jones Sustainability Index” by the authors López; García and Rodríguez take into account an analysis in social responsibility activities with the performance of companies and for this the Dow Jones sustainability index is used as the key indicator of the entire study. For this, a sample of 2 groups of 55 companies was selected, some included in the Sustainability Index of Dow Jones and others that were not included and financial indicators were observed during the 1998 until 2004 to find the relationship between financial performance and the adoption of social responsibility practices. 

Within the context of competitiveness that develops the current business world is as a priority to develop competitive advantages that allow the generation of long -term value. Under these conditions, companies have developed a new way of doing business thought about social welfare and the impact on communities, which allow a relationship with all their long -term interest groups, these good practices involve responsibility activities social, which have been evaluated by the sustainability index of the Dow Jones.

This particular study wants to demonstrate that there are marked differences in the financial performance of companies among those that have a high level of social responsibility compared to those that do not meet social responsibility requirements, and therefore 110 distributed companies were selected In 2 groups of 55 each, where the companies of a group are included in the sustainability index and others that do not meet the requirements, this in order to find significant differences in the financial indicators of the 2 groups.

Within the objectives of the study, there are the needs that companies have to differentiate themselves from their competitors and thus develop competitive advantages that allow generating long -term value. It is often argued that the adoption of sustainability strategies from companies should grant competitive advantages over companies that do not adopt them.

At present, social responsibility activities are related to the quality of environmental management, the reputation of brands, corporate ethics and talent retention, these activities must be incorporated into the organizational strategy to develop competitive advantages, this to their time should contribute to improve their profitability. In addition, these social responsibility activities allow to develop internal control systems and decrease in some expenses. Therefore, they translate into value creation since it allows the generation of financial returns and the satisfaction of their different interest groups, such as clients, suppliers, investors and society in general.

Based on the above that can be an empirically proven statement, researchers gave the task of identifying the relationship and establishing the link between performance indicators (economic and financial) with social responsibility practices. To understand what is the impact that these activities have on the financial performance of companies, also know if this relationship becomes more evident in the short or long term.

This relationship must be compared to companies that do not develop social responsibility activities, to identify whether the differences that arise are to incorporate these activities into the organizational strategy of companies and if they last over time. This was done through the evolution of performance indicators over time. Therefore, indicators are not analyzed in the short term since a change in financial results is evident, but an analysis is necessary in long periods of time to include in the analysis the implementation and integration of policies in The organizational strategy.

This study focuses on European companies where social responsibility policies focus on environmental and human resources activities, unlike social responsibility in the US. UU is related to the consumption of alcohol, tobacco and random games. And to a lesser extent with environmental and human rights aspects. However, in Europe the implementation of social responsibility policies is even more recent, and therefore there are still no studies that demonstrate the relationship between adopting social responsibility policies and the financial performance of the signatures, in addition that it is necessary to contrast The results with previous research in the United States to find similarities and differences in this process of cultural transformation in the business world.

Within the theoretical framework where research is advanced, aspects must be identified as the evolution of classical economic theory to sustainable economic development, which has as its main idea to go beyond maximizing the interests of shareholders to contribute to the activities of the company to the development of society. Therefore, companies must direct their processes and activities to contribute to society with services and products taking into account the financial viability of the business.

These activities cannot become a fashion in which all companies are applying, but should be internalized in organizational culture and be dynamic when establishing them taking into account that market variations and technological development should be modified , social and environmental of the environment where they are.

In addition, only with dynamic policies and open policies is that you can aim for sustained growth in the long term, adapting to technological and social advances, through training processes to all their interest groups. The management of these factors takes concrete form in sustainable development strategies and is certain that these strategies constitute a way of creating value (Blyth, 2005) and increasing the value of a company.

To measure social sustainability, it must be recognized that these activities are a set of multidimensional activities that several authors have tried to define and measure in various ways. Which has yielded to contradictory results. Therefore, it is very difficult to measure and relate social responsibility activities with different previous studies. However, an index manages to collect the necessary factors in this research which is the Sustainability Index of Dow Jones (DJSI) for its acronym in English which is based on economic, environmental and social indicators.

In addition, some authors have identified that good social responsibility policies have endured in time as long as they are alienated within the organizational strategy, in order to promote the creation of new processes or improvements in existing ones. In order for CSR policies to last, they must be strategic, be integrated into the policies and key issues of business and be present at each important decision made by the company. Only in this way will they allow the management and control of inherent risks and will achieve lasting positive consequences.

Several indexes involving sustainability have been considered investors such as the Dow Jones sustainability index or the FTSE4Good index or the Domini Index, which have been developed by high prestige and credibility institution, where standards are established Of social responsibility that companies must comply with this index, these practices allow a projection of the performance of companies that meet these standards has a high probability of generating long -term value and allows you to manage risk in their investments.

Within the standards established by the DJSI, social responsibility criteria associated with the management of human capital within organizations, strategic plans and corporate governance are established, as well as the relationship with investors generating detailed social responsibility reports that the same Market evaluates. In addition, criteria are established in 3 areas: Environment and Society Economy which are defined and weighted, to which a qualification is assigned to each company and are classified to identify the leaders in each sector.

Additionally, it can be identified that the companies that are part of the indices are those that comply with the established criteria or standards, and for this the companies must be willing to disseminate the information regarding their social responsibility activities. These practices are those that will make better investment and financing decisions by the company’s interest groups in the market. Taking into account these positive repercussions on the performance of the organization is where companies strive to carry out great impact activities and are responsible for communicating them in the most transparent way possible.

For the selection of the study sample, signatures were selected that are part of the DSJI since the creation of the index and found in Europe, and other firms that are not in said index, but reported their reports in the same period of time that the first group. In addition, it was segment the sample to companies that were in similar sectors and that are of similar size to make the sample as homogeneous as possible. Now, the financial information of the AMADEUS database is collected from 1998 to 2004.

Among the financial variables that are taken into account of the selected companies, the profit is identified before taxes, the growth of sales, the amount of assets; The amount of capital and the gross margin, additionally the ROE and ROA profitability indicators and the cost of capital are taken into account.

For the elaboration of the study, a regression analysis was made between the financial indicators described above and the possible link with social responsibility activities. And then I identify if these results last over time.

The model as such, takes into account the growth of profit before taxes as dependent variable and social responsibility income and activities as independent variables. In addition, sector size and risk are included as control variables to maintain constant factors within the company. For size, the value of the assets was taken into account and for the risk of the sector the model is included because the results can be varied since this variable has a lot of impact on the usefulness before taxes.

As a result of the regressions and temporary analysis it was established that in some periods of time there was no big difference between the two groups and their financial performance, this period of time corresponded to 1991 – 2001. However, in the period in which great differences were given in financial performance was 2002 – 2004 and there was a strong relationship between the sales growth variable and the profit before taxes.

Therefore, in periods where there were no differences in financial results, a statistically significant relationship between the growth of profit and social responsibility activities could not be established. Therefore, the correlation indicator was negative. But in the 2002-2004 period if there is a direct relationship, social responsibility activities and financial performance of companies enter. However, in the group of companies belonging to the DJSI index the relationship is negative between social responsibility activities and financial performance. This is due to the fact that making the decision to advance social responsibility activities implies some extra costs that directly affect the statement of companies, in addition to the development of market reports regarding their work in corporate social sustainability.

Some expenses associated with the above are the training of the personnel, the improvement in processes, the quality and the change of policies to improve. However, over time these efforts are rewarded since sales growth then significantly exceeds the growth of expenses.

In the formal presentation of the investigation, hypothesis tests were established to accept or reject the null hypothesis with a high level of trust. For this, the following hypotheses were established.

Hypothesis1: There are no significant differences related to income trends between DJSI and DJGI companies.

Hypothesis2: There are no significant differences between DJSI and DJGI companies regarding profitability trends

To reject the first hypothesis there are strong conceptual arguments such as that changes in social responsibility activities bring great changes in the results state for example, producing a greater number of businesses, increasing sales, since the goods or services offered by companies of high social responsibility have an advantage among their clients against those who do not have it. However, for customers to perce. This is why the results cannot be observed in the short term. However, a negative impact on bad practices if it affects much faster the result status and feels in the short term in a decrease in sales.

On the other hand, for the second hypothesis it is believed that companies that enter the DJSI index is because they have complied with certain evaluation criteria and although it has had to incur some higher costs and expenses to meet these standards, there is certainty that is certain that the certainty is certain In the long term this investment will bring greater economic benefits. It could also be established that the financial performance of the companies was similar in the years prior to 2001 but since 2002 the companies with better levels of social responsibility obtained greater growth in their financial performance indicators.

It is worth rescuing that in the 7 years of the period of studies, exogenous variations should be excluded to the model as technological advances, inclusion of new products, new organizational processes, and even a change in organizational culture that lead to a great differentiation between some of the companies analyzed analyzed. Therefore, the inclusion of social responsibility activities is not seen in financial performance in the short term, but instead in the long term. This, however, is not constant over time, and does not represent a competitive advantage since companies that did not apply social responsibility activities then applied new initiatives in a competitiveness environment. In addition to the above, it must be recognized that social responsibility activities are easily imitable, or the consumer changes the perception of it over time about these policies. Finally it was found that there are no long -term differences within the 2 groups analyzed, in variables such as capital and income assets. And that investment decisions are not mainly taken by social responsibility practices established by the Dow Jones Sustainability Index.

In conclusion, it can be established that both companies and investors have social responsibility criteria, the first to improve their reputation within the market and their financial performance, while the latter have it in accounts in their investment decisions. Therefore, organizations have supplied sustainability indices that allow their best evaluation in financial markets.

In the study carried out, signatures belonging to the Dow Jones Sustainability Index were selected to analyze if there was any link between financial performance and social responsibility rates, which allowed to demonstrate that in the first years there is a negative link due to the high costs involved implementing these initiatives. However, in the long term these companies demonstrated better yields than those that were not within the index, but the difference or advantage obtained could not be maintained over time.

However, it is evident that the implementation of good social responsibility policies is very well valued by investors and by the market and brings with it a high score reputations for companies that properly disseminate their intentions with the environment and society. And the cultural change that is presented to this type of activities make them more and more present as demands of the interest groups themselves. Therefore, in the current panorama companies must integrate their objectives with social responsibility practices and reinvent their strategies to generate benefits for both their shareholders and their society.

In the third reading "The Price of Environmental, Social and Government Practical Disclosure: An Experiment with Professional Private Equity Investors" wants to identify the impact of the dissemination of social responsibility practices in financing with shareholders. Therefore, the authors present a field experiment where several investors participate in auctions to acquire fictitious companies, and it was identified that the dissemination of non -financial activities if they affect the valuation of the company and the decisions to invest. This taking into account that investors also receive information on poor social responsibility practices and these affect investment decisions and assessment by market agents. 

The authors of the research have recognized that economic development and business success have been made at the expense of sacrifices in environmental degradation. However, investors currently value investment policies in green projects, and many investors decide to invest in these types of projects, so access to capital becomes even more attractive. This process has become an allocation by institutional capital investors in socially responsible activities. Within the theoretical framework, authors such as (Margolis, Elfenbein, & Walsh, 2009) have also been taken into account that conclude on the existence of a small, positive and significant relationship between the financial and social performance of the company. This document argues that the reaction of the rental market variable to the dissemination of the socially responsible orientation of companies will probably be oriented towards benefits. Therefore, it is crucial to understand how investors perceive corporate social performance in terms of value creation. As Humphrey emphasizes the question from the investor’s perspective is whether environmental, social and governance analysis helps identify companies that are good investments. 

The good ESG practices are well seen by the market, while bad practices demonstrate irresponsibility by companies and are punished hard by investors. However, from the point of view of dissemination, good practices of ESE can contribute to generate value while bad practices can destroy the value and reputation of a firm. Therefore, it is necessary. Regardless of the original motivations, investors can have a solid reason to know if they involve their company in its portfolio and if this action will create or destroy its market value.

This research involves private capital investors, this for 3 reasons:

•  The investor business is to value to maximize benefits by reducing the risk with the asymmetry of information to the maximum
•  Identify the non -financial criteria taken into account in the long -term assessment
•  Many small and medium enterprises resort to private capital investors to access financing

Therefore, the analysis of whether responsible and irresponsible ES Private capital. In this experiment the experience of investors is inferred and only the issue of dissemination of ESG is evaluated with the assessment by them.

The study design is framed in 3 dimensions the GSE factor, the sign (positive or negative) and the quality (soft or difficult). 33 investors met, and they were invited to compete for the acquisition of fictitious firms based on case studies to make them as credible as possible. Then accounting and financial information is supplied, together with non -financial activities with good and bad practices of ESG.

330 observations were made and it can be determined that the dissemination of non -financial activities is significant in the investment process. Therefore, the valuation of a company has a great dependence on the good practices that it performs, and the way in which it is disclosed.

In addition, the heterogeneity of the different investors was controlled, concluding that irresponsible corporate policies can both prevent capital financing and increase their cost, since the dissemination of ESG performance consists of a defensive strategy to protect the value of The company and access to capital.

The study scenarios contemplate an efficient market, where investors have perfect information and can easily predict their behavior against good and bad practices of Esg. The second important question of the research is to answer if there would be a differentiated impact of information on socially responsible corporate practices and socially irresponsible corporate practices in the assessment of companies. The third scenario is asymmetry to identify the good and bad practices of Esg. These arguments are related to investor’s behavior biases.

Therefore, the main objective of the investigation is to identify whether the dissemination of good and bad practices of ESG affects the assessment of investors and if the good and bad information is treated uniformly.

The experiment was built and carried out in association with professionals to guarantee the external validity of the results, that is, to guarantee realism, credible context and investor participation. They contacted by email and were cited for the evaluation of different companies with good and bad practices of ESE in addition to a series of incentives for their participation.

Among the results obtained, it is worth highlighting the consistency of the company’s valuation between sessions, which demonstrated the experience of the participants, and the efficiency of the auction mechanism with the solidity of the results, which show that the dissemination of bad ESG practices significantly decreases the value of the company, while the dissemination of good practices increases significantly.

The study hypotheses are:

• Hypothesis 1: The dissemination of ESG practices does not provide relevant information for the valuation of the company
• Hypothesis 2: The impact on the value of the dissemination of the practice ESG reflects its real financial yields
• Hypothesis 3: The valuation of the company is more affected by the information is negative than by the positive information
• Hypothesis4: Investors introduce a risk premium for all social irresponsibility practices information

Hypothesis 1 and 2 are rejected since the dissemination of information if it is relevant for the assessment of companies while it was possible to verify that hypothesis 3 can be accepted because bad practices are more influential in the valuation than good practices. They also support the existence of an irresponsibility risk premium: and therefore the variation in the assessment is greater when negative information is received.

In conclusion, the dissemination of ESG corporate practices has an impact on the valuation of the signing of private investors and the investment decision. However, the good and bad practices of ESG asymmetrically affect private capital financing. We also observe that investors care about the content of social responsibility policy such as environmental, social and governance issues. However, some investors presented some objections to the experiment since it is mentioned that if any company had bad practices of ESG, before lowering its assessment was requested even more information to the management of these companies and no value judgments were issued in such a way fast.

The consequences for entrepreneurs were also taken into account. Where socially irresponsible practices are likely to prevent access to private capital financing, especially when they represent a sufficient risk to threaten the main business.

In general conclusion of the 3 articles it is very important to highlight the importance of social responsibility in any environment and environment, since good practices have a close relationship with the financial performance of firms. For example, companies with good social investment practices improve their market assessment, are even more adaptive and can offer a greater generation of value to investors.

On the other hand, it must be recognized that in the short term implement these social responsibility activities can be very costs since training, implementation and integration of the new processes in the organizational strategy should be incurred. But these efforts bring better results and long -term reputation. Additionally, it must be rescued that investors are increasingly taking into account the values ​​of governance, society and environmental when assessing.

Therefore, a current businessman must understand the vital importance of corporate social responsibility activities in order to improve the valuation of his own companies and the most important thing to generate value for the entire surrounding environment.

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