A client asks you to 'include ESG in the valuation'. What are the defensible ways to do that — and which popular approach do you push back on?

The defensible route is through the cash flows and scenarios, because that forces explicitness: quantify transition effects (carbon pricing on the cost base, required transition capex, demand shifts for affected products), physical-risk effects where material, and regulation-driven costs (CBAM, energy standards), each with a timeline and probability. Where effects are real but hard to time, scenario analysis with weighted outcomes beats a single adjusted number. The approach to push back on is the arbitrary discount-rate tweak — 'add 100bp for poor ESG' — because it hides the judgment, compounds forever in the terminal value, and double-counts risks already reflected in cash-flow scenarios. A rate adjustment is defensible only where evidence supports a financing-cost channel: demonstrably higher funding costs, or restricted investor demand for the sector. Also distinguish values-based screening from value-based analysis: excluding a sector is a mandate decision, not a valuation input. Document which channel every ESG effect flows through — cash flow, growth, or discount rate — and never the same effect through two channels.