Using Company-Specific Risk Premiums to Account for ESG in Valuations

For valuation professionals working with privately-held companies, the rise of ESG brings a new layer of complexity: how to reflect ESG-related factors in a company’s risk profile—and ultimately, its value.

While much attention is given to ESG’s potential impact on revenue and expenses, its influence on perceived risk is just as significant. One of the clearest ways to quantify this in a valuation is through the Company-Specific Risk Premium (CSRP).

What is CSRP?

In the Build-Up Method—a common approach used in business valuation—the CSRP adjusts for risks unique to the subject company that aren’t captured by broader market or industry risk data. These can include management quality, customer concentration, operational efficiency, and increasingly, ESG performance.

How ESG Affects Risk Perception

A company with strong ESG practices may demonstrate lower long-term risk. For instance:

• Robust internal controls reduce fraud potential

• Proactive compliance lowers regulatory exposure

• Sustainable supply chains improve continuity and reduce volatility

In these cases, the CSRP can be decreased to reflect a more favorable risk position. Conversely, if a business lacks transparency, engages in greenwashing, or is unable to meet emerging ESG standards, the CSRP may increase—potentially lowering the business’s value.

It’s Not One-Size-Fits-All

The key is context. Two businesses in the same industry may both implement ESG policies, but the quality, credibility, and scope of those policies can vary widely. That’s why it’s essential to conduct a qualitative assessment of how ESG is operationalized—not just whether it’s claimed.

What Valuation Professionals Should Consider:

• Has the company implemented ESG in a way that’s measurable and auditable?

• Are ESG-related risks mitigated through internal controls or third-party verification?

• Does the company’s ESG strategy materially affect its ability to access capital or attract customers?

Integrating ESG into CSRP isn’t about rewarding good intentions—it’s about accurately reflecting risk. When done thoughtfully, this approach can produce a valuation that aligns more closely with real-world dynamics.