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ESG has become a political, expansive, and often misunderstood topic. But behind the noise lies a deeper market inefficiency where M&A can capitalize on this disconnect. This joint perspective from Clearwater’s Joanna Daley and Grant Thornton Stax’s Anuj A. Shah unpack why ESG’s financial relevance has been obscured and how reframing it as a feature of enterprise value can reveal where real opportunity exists to sharpen competitive advantage.
ESG's Repositioning Creates a Market Opportunity
Over the past several years, ESG has expanded in many directions: as a political lightning rod in the US, a compliance obligation in the EU, and a global shorthand for everything from climate targets to workforce diversity. Somewhere along the way, however, its utility to investors and operators became obscured. Today, what often gets labelled “ESG” is either too broad to be decision-useful or too shallow to be material. That drift has created a pricing distortion – not because ESG doesn’t matter, but because it has been consistently misunderstood and misapplied.
This mispricing plays out most clearly in capital markets. In investor memorandums, board discussions, and equity stories, sustainability performance is often missing, muted, or misaligned to how value is actually created and measured. Many companies are making meaningful investments in emissions reduction, supply chain resiliency, product design, or workforce quality, and those efforts increasingly influence purchasing behaviour and shape competitive positioning. But because they are often reported through a framework-first lens, rather than tied to business fundamentals, they are excluded from underwriting and left out of the multiple.
That outcome is both predictable and avoidable. ESG only enhances value when it is approached as a byproduct of strong financial thinking and not as a replacement for it. Start with the business case — unit economics, growth capacity, risk management — and sustainability becomes a lens for detecting operational and strategic advantage. Start with ESG as the organizing principle and you risk chasing immaterial disclosures, spending defensively, confusing compliance with competitiveness, and getting caught in an overall cycle of administrative bureaucracy.
We believe this is the real opportunity: to reframe ESG not as a framework, but as a mispriced feature of enterprise value. And one that, when surfaced and communicated in investor-grade terms, can unlock strategic and financial upside.
How ESG Data Falls Out of the Model
ESG is not a standalone asset class or a group of siloed initiatives. It is a definable and narrow set of business model-specific signals that help measure how companies grow, compete, and manage downside risk. In practice, regulations and widely used frameworks often push companies to report a broader slate of metrics that aren’t decision-useful, diluting the value of those metrics. Indicators that move revenue, margin, cash conversion, or volatility can oftentimes be absent or buried inside compliance outputs. When the market cannot isolate the few material KPIs or the reporting doesn’t clearly demonstrate the connection between ESG KPIs and materiality, the financial performance they represent does not make it into underwriting nor will it show up in the multiple. The work is often being done but it’s not surfaced in a way that influences how value is assessed and communicated.
Historic mispricing often reflects the failure to fully integrate ESG factors into financial analysis. For years, UK and EU regulations relied on prescriptive, checklist-style disclosure requirements that produced breadth rather than depth flooding markets with data but not necessarily clarity. To correct for this, regulations should move toward principles-based frameworks that encourage companies to identify and disclose information most relevant to their business and stakeholders. Emerging rules, such as transition plan guidance and anti-greenwashing standards, point in this direction by emphasizing forward-looking and evidence-based disclosures. These targeted requirements help surface decision-useful data that investors can incorporate into pricing and risk models. When ESG insights are integrated with financial metrics, they reveal long-term cost structures and execution quality, reducing uncertainty and narrowing valuation spreads. By contrast, fragmented and contested rules in the US perpetuate the under-assessment of material sustainability risks, widening mispricing. The UK/EU experience underscores that better capital allocation depends on structured integration of relevant, material data – not simply more disclosure.
The core issue, therefore, is a translation gap. Many companies now generate high quality operational ESG metrics, but they are not mapped to the financial variables investors model: price, volume, mix, operating expense, capital intensity, working capital, and risk. Evidence that sits in appendices or standalone reports is not converted into cash-flow relevance, so upside (growth or margin lift) is underpriced and downside protection (lower volatility, smaller tail risks) is underestimated. Close that translation gap and the exact same performance will earn attention in valuation.
How Mispricing Shows Up in M&A and How It Can Be Fixed
Transactions compress time and focus attention on what can be underwritten. That makes the issues above – broad disclosure without materiality and precise metrics without investor grade proof – more quickly visible. Yet, as explained above, both fail to move price.
- What doesn’t work: Long catalogues of immaterial metrics, framework dumps, unaudited claims, and ESG sections detached from the equity story. These invite skepticism and keep sustainability performance out of the model.
- What works: A short list of material ESG KPIs tied to specific financial levers (e.g., energy intensity to gross margin, supplier reliability to revenue capture and inventory turns, incident reduction to loss ratios and insurance costs, workforce stability to retention-sensitive revenue and productivity). Show trend, causality, and repeatability, with evidence that withstands diligence and aligns with the operating plan.
- Why it matters at exit: When ESG performance is financially legible, it widens the buyer universe, speeds conviction, and can support stronger pricing. When it is not, capable companies leave value on the table and face slower, more conditional processes. The result is the mispricing the market is currently living with.
ESG’s Strategic Utility Is Growing
Capital markets are still in the process of recalibrating how they interpret sustainability-related performance. The term “ESG” may be under pressure politically, reputationally, and structurally, but the underlying business signals remain as relevant as ever. The challenge is not whether ESG data matters, but how, where, and when it’s applied.
In our work advising investors and companies, we’ve seen that the most useful ESG signals are those that help clarify financial outcomes: forecast confidence, operating risk, capital efficiency, or long-term growth. When approached as part of a broader exercise in business analysis, ESG becomes neither an obligation nor a differentiator on its own, but a tool for improving visibility into how value is created and sustained.
There’s no need to overcomplicate it. In fact, ESG tends to be most effective when the focus is narrowed, and attention is directed toward a few material factors that are tightly linked to how the business performs. And when those factors are surfaced in formats that capital markets understand, they are far more likely to be recognized and appropriately priced.
Viewed in this light, ESG’s future utility doesn’t depend on winning a narrative or surviving a backlash. It depends on disciplined execution grounded in what ultimately matters most: how businesses deliver value.
Joanna Daley is Director and Head of ESG and Impact at Clearwater, bringing two decades of sustainability expertise alongside transaction insight to ensure ESG is embedded in value creation. She advises corporates and investors on integrating ESG into business models to unlock commercial benefits and enhance brand positioning. Since joining Clearwater in 2022, Joanna has launched the firm’s multi award-winning ESG Advisory service—the first in mid-market corporate finance to integrate ESG directly into transactions. Her approach identifies and measures ESG risks and value drivers, so they inform valuations, diligence, and portfolio strategies. Recognised for aligning sustainability with financial performance, Joanna enables clients to capture growth opportunities and manage transition risk across the investment lifecycle.
In their respective roles, Joanna and Anuj work across markets and on both sides of transactions. Their view is simple: in commercial diligence and exit execution, ESG belongs in the core analysis; treating it as optional leaves value on the table.
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