ESG & ROCE: The Missing Links in Business Valuation

ESG And ROCE In Business Valuation

For years, EBITDA has dominated the M&A valuation landscape. But as businesses, investors, and regulators evolve, so too do the metrics that drive deal value. Two increasingly critical indicators—particularly in 2025 and beyond—are ESG (Environmental, Social, and Governance) performance and ROCE (Return on Capital Employed).

They reflect a deeper shift in what acquirers are looking for: long-term sustainability, ethical risk management, and capital efficiency. These measures go beyond operating profits and start to answer the question: “Is this business built to last?”

What Is ROCE—and Why Does It Matter?

Return on Capital Employed (ROCE) measures how efficiently a business uses its capital to generate operating profit. Unlike EBITDA, which is an absolute figure, ROCE is a ratio—and it brings in the balance sheet as well as the income statement.

Formula: ROCE = Operating Profit / Capital Employed

It rewards businesses that do more with less—using assets wisely, managing debt efficiently, and achieving strong returns without overextension. ROCE is particularly useful in:

• Capital-intensive industries (e.g. manufacturing, logistics)
• Growth vs. stability comparisons in due diligence
• Assessing how well a business turns investment into performance
  

A high ROCE can often justify a higher valuation multiple, even with modest EBITDA, because it signals disciplined, long-term operational quality.

ESG—From Reporting Burden to Deal Driver

While ESG was once dismissed as a box-ticking exercise, it’s now a frontline issue in risk mitigation, employee retention, supply chain resilience, and brand trust.

In private equity and trade deals alike, ESG credentials can now boost multiples, accelerate deal timelines, or serve as red flags for deal abandonment.

Buyers increasingly ask:

• Does the business have a net zero strategy or sustainability roadmap?
• Are there environmental or governance risks that could emerge post-acquisition?
• What’s the reputation of the leadership team, and how is it viewed by staff and customers?
  

A strong ESG profile often supports better access to capital, smoother integrations, and stronger brand equity—all of which reduce acquisition risk.

“Companies with higher ESG scores tend to deliver higher margins, lower volatility, and better long-term growth potential.” (HBR, 2023)

ROCE vs EBITDA vs ESG – A Valuation Perspective

Metric	What It Measures	Strengths	Weaknesses
EBITDA	Operating profit before financing/tax	Clean comparison across businesses	Ignores capital intensity and ESG factors
ROCE	Efficiency of capital deployment	Reflects operational discipline	Can be distorted by asset revaluation
ESG	Sustainability and governance performance	Aligns with modern investor expectations	Requires robust non-financial reporting

How Sellers Can Respond

If you’re preparing for a future sale, here’s how to build a value story that includes these emerging metrics:

1. Track your ROCE – Even if not required in reporting, calculate and monitor it as part of your investor story.
2. Integrate ESG metrics early – Demonstrate that you’re not just compliant, but strategically focused on sustainability and social impact.
3. Invest in measurement and transparency – Don’t rely on anecdotes. Collect verifiable data on emissions, governance, DEI, staff turnover, and supply chain risk.
4. Include ESG and ROCE narratives in pitch decks – Translate these metrics into a clear story: “We deliver performance andpurpose.”
   

Glossary of Key Terms

Term	Definition
EBITDA	Earnings Before Interest, Taxes, Depreciation, and Amortisation – a measure of operational profitability.
ROCE	Return on Capital Employed – a financial ratio measuring profit relative to total capital invested.
Capital Employed	The total capital used for operations, calculated as total assets minus current liabilities.
ESG	Environmental, Social, and Governance – a set of criteria used to evaluate ethical and sustainable business practices.
Due Diligence	The investigative process of evaluating a business before acquisition.
Net Zero Strategy	A formal plan to reduce and offset carbon emissions to achieve net zero.
Governance	The systems, rules, and processes by which a company is directed and controlled.
Valuation Multiple	A number applied to a metric (e.g. EBITDA or ROCE) to estimate company value.
Non-Financial Reporting	Disclosure of data such as carbon emissions, workforce diversity, or governance practices.

Discover how to use ROCE and ESG to your strategic advantage in M&A planning. Contact our team of experienced business consultants today for further guidance.