Impact Of ESG Rating On Valuation Of Listed Companies-based On Cash Flow Discount Model

In recent years,the United Nations Global Compact Organization(UNFCI)has put forward the "sustainable investment concept" and incorporated it into the financial field,that is,financial institutions should not only consider the traditional stock return,but also comprehensively consider the company’s future profitability and risk bearing,so as to provide investors with more complete information.At the same time,China’s "14th Five-Year Plan" clearly put forward the concept of high-quality economic development,the "double carbon" strategy is also continuously promoted,and the development trend of listed companies ESG is becoming more and more obvious.Under this background,under the condition of market economy,it is vital to activate the endogenous impetus of listed companies and promote the development and progress of ESG rating system in our country to strengthen our capacity of sustainable development.ESG(Environment Social and Governance)is an important index to evaluate the sustainable development of enterprises from three aspects: natural environment,social responsibility and corporate governance,which can help enterprises better realize socialist values.It is an evaluation mechanism jointly established by business and non-profit organizations to measure whether the commitment,performance,business models and structures of companies meet the requirements of sustainable development and whether they can achieve sustainable development goals.Based on the data of China’s A-share listed companies from 2011 to 2021,this paper discusses the impact of ESG rating on valuation and the mechanism of such impact from the perspective of DCF model.However,most of the existing studies focus on the perspective of how ESG rating directly affects company valuation,while there are few studies based on valuation models.Therefore,on the basis of testing the impact of ESG rating on company valuation,this paper uses the free cash flow per shareholder instead of the dividend rate to represent the expected cash flow per share,and the cost of equity capital to represent the discount rate.Through mechanism analysis,it not only further clarifies the significant influence of ESG rating on company valuation,but also clarifies the transmission path and influence mechanism of ESG rating on company valuation,so as to provide a more comprehensive explanation of the influence of ESG rating on market valuation of listed companies in China.This paper draws the following conclusions through theoretical analysis and empirical research: first,a higher ESG rating of a company is conducive to improving the company’s valuation;Second,the level of equity free cash flow can be used as a mechanism variable for ESG rating to affect company valuation,that is,a higher ESG rating of a company can improve the market valuation of a company by improving the level of equity free cash flow.Third,the cost of equity capital can be used as a mechanism variable for ESG rating to affect corporate valuation.A higher ESG rating can improve the market valuation of a company by reducing the cost of equity capital;Fourth,compared with companies in non-heavily polluting industries,the upgrading of ESG rating of companies in heavily polluting industries has a more significant positive impact on company valuation;Fifth,compared with the western region,the upgrade of ESG rating of companies in the eastern and central regions has a more obvious positive impact on company valuation.Accordingly,the corresponding suggestions are put forward to the regulatory agencies and financial institutions respectively.