In the dialogue between investors and companies, market value is the most obvious focus. We have also explored the constituent elements of market value and the relationship to concepts of brand value and accounting value. The diagram below serves to illustrate this.

Brand value is the long-term, beyond current discount 5-year earnings, element of market value. While longer-term earnings will account for a significant proportion, this earnings potential is subject to less controllable influences. It is more about investors’ perception of the company’s ability to manage the factors they will view as material to earnings maintenance and, where brand value is greatest, earnings growth. That is non-financial factors such as human capital, customer relations, partnerships, corporate governance and so on.

Accounting value is a reflection of the asset value of companies. This comprises both tangible and intangible assets. Accounting convention recognises the importance of many classes of intangible assets and these are included in company balance sheets which, in turn, influence investors’ valuations. However, some classes of intangible are not recognised and their influence on investor perception will be more closely related to the degree to which companies can persuade investors as to their materiality. It is in this second class of intangibles that non-financial, CSR or ESG factors are likely to be represented.

The conclusion is: by better informing and demonstrating to investors the company’s performance in managing non-financial issues, the more likely investors are to factor them into increased market value, creating what we have defined as extra-financial performance. That is the higher rating by investors that is at the root of our central proposition.