The Influence of ESG on Valuation and Derivation of Fair/Market Values for Accounting and Analysis Purposes
The Influence of ESG on Valuation and Derivation of Fair/Market Values for Accounting and Analysis Purposes

Author(s): Kalina Kavaldjieva
Subject(s): Politics / Political Sciences, Economy, Business Economy / Management, Governance, Accounting - Business Administration, Socio-Economic Research
Published by: Университет за национално и световно стопанство (УНСС)
Keywords: fair value; ESG; sustainability; financial reports; capital valuation
Summary/Abstract: In the modern economy, the concept of ESG (Environmental, Social, Governance) is gaining increasing importance. ESG factors represent sustainability indicators that measure companies' performance in three key areas: environmental, social, and governance. These factors are no longer just an ethical add-on but a fundamental tool for analyzing corporate value. Fair Value and ESG – Fair value is a concept used in accounting and finance to determine the actual market value of an asset or liability. The impact of ESG on fair values is becoming increasingly evident as sustainable practices reduce risks and enhance corporate reputation. The primary question is how ESG metrics transform traditional valuation methodologies and contribute to deriving accurate fair values. Financial Reporting Implications – In companies' annual financial reports, assumptions are made regarding developments and the risk of material adjustments (IAS 1) in relation to the fair value adopted for the balance sheet values of assets and liabilities for the upcoming financial year. Here, disclosures related to climate issues, social issues, and governance matters are reflected, particularly when such issues create uncertainties affecting the assumptions used in preparing estimates – for example, projections of future cash flows in an impairment test for an asset or the best estimate of costs needed to fulfill a decommissioning obligation. Transparency and Investor Communication – Companies must present these disclosures in a way that helps investors understand the judgments made by management about the future. While the nature and scope of the information provided may vary, it could include, for example: The nature of the assumptions; The sensitivity of fair values to the methods, assumptions, and estimates used in their calculation; The reasons behind such sensitivity.

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