ESG Integration into Company Valuation: Case Study of PT Surya Energi Indotama

: The commitment of Indonesia to the Paris Agreement has prompted the government to issue regulations supporting the development of renewable energy in the country. Utilizing Environmental, Social, and Governance (ESG) criteria allows investors to align their values with their investments and effectively evaluate a company's risk management capabilities. Companies that prioritize ESG principles, particularly those involved in renewable energy production, can seize opportunities arising from this situation. PT Surya Energi Indotama (SEI), a company that has not engaged in equity funding before, aims to capitalize on these opportunities. To assess the value of PT SEI, both absolute valuation and relative valuation methods are employed. Recognizing the potential of ESG factors to enhance company value, the author implements the Value Driven Adjustment approach and incorporates the SASB industry ESG standard. The valuation analysis reveals a potential valuation increase of up to 30%.

ESG disclosure enables the identification of opportunities and risks, helping investors focus on sustainability to avoid financially risky companies with poor environmental practices and controversial business behaviors. Integrating ESG factors into risk analysis enhances understanding of a company's operating environment, identifies risks, and aligns with stakeholder expectations (Quintiliani, 2022) [6]. Quintiliani's research also supports the positive correlation between a company's ESG score and financial performance, as indicated by metrics like levered free cash flow, ROE, current ratio, and quick ratio. (Aydoğmuş et al., 2022) [7] conducted a study that further reinforces this correlation by examining the impact of ESG performance on firm value and profitability. The results show a positive and significant relationship between the combined ESG score and firm value. Social and Governance scores also exhibit positive and significant relationships, while the Environment score does not show a significant relationship with firm value. Conversely, the combined ESG score, along with the individual Environment, Social, and Governance scores, have positive and significant relationships with firm profitability. These findings suggest that investing in companies with high ESG performance can lead to financial benefits in terms of value and profitability.
Many ESG strategies do not effectively incorporate ESG factors into company valuation models. Schramade (2016) [8] suggests a value-driven adjustment approach that links ESG issues to value drivers by considering their impact on a company's business model and competitive position. To identify the relevant ESG factors for company valuation, Consolandi et al., (2022) [9] propose following the materiality classification established by the Sustainability Accounting Standards Board (SASB). The SASB Standards provide a framework for companies to disclose financially significant sustainability information to investors. These standards allow businesses to communicate the risks and opportunities that impact their value from an industry-specific perspective. In 2022, the IFRS Foundation took over the responsibility for the SASB Standards after merging with the Value Reporting Foundation, which previously managed the standards. These guidelines cover 77 different industries and highlight the critical environmental, social, and governance issues that have the greatest impact on financial performance within each industry.

III. METHODOLOGY
This study focused on PT Surya Energi Indotama (SEI) as the research subject, with the aim of valuing PT SEI to capitalize on the growing potential of the renewable energy market in Indonesia. The valuation methods employed were absolute valuation using the discounted cash flow (DCF) method, as well as relative valuation using P/E and EV/EBITDA multiples. The author attempted to integrate ESG topics into the valuation process using the Value-Driven Adjustment (VDA) approach. The ESG topics used in the VDA were identified based on industry specific ESG issues in the solar PV sector, following the SASB Standards.
The data required for this research can be categorized into primary and secondary data. Primary data was obtained directly by the author and includes information on the company's policy direction from management, as well as data related to ESG topics within the company, such as energy consumption and energy mix. Secondary data comprises financial reports of PT SEI from 2019 to 2021, data on peer companies, market risk premium, risk-free rate, country risk premium, and other relevant market data.

IV. RESULT AND DISCUSSION
SASB provides a materiality map that identifies the sustainability-related risks and opportunities that are most likely to impact cash flows, access to finance, and the cost of capital across different industries. PT SEI is an Engineering, Procurement, and Construction company specializing in renewable energy, particularly solar PV. Based on its business focus, PT 6,978,853,964,499 using the P/E ratio multiple. As the DCF method heavily relies on input assumptions, the author conducted a sensitivity analysis to identify the factors that most significantly affect the valuation results. It was determined that revenue, riskfree rate, and market risk premium were the factors with the highest impact. After obtaining the key input factors affecting the DCF valuation, the author performed scenario analysis to assess extreme valuation outcomes. Additionally, the author conducted 1000 Monte Carlo simulations to examine the distribution of possible valuation results using the DCF method resulting in relatively small standard deviation meaning that the simulation results clustered around the mean.
To incorporate the VDA effect into valuation, the author examines various subjects and evaluates how company performance is impacted, whether the implementation has already occurred or is planned. In the context of Energy Management in Manufacturing, the cost of revenue is reduced by mitigating the increase in electricity tariffs. Hazardous Waste Management leads to an increase in terminal Capex as the company needs to allocate more capital for waste management in the future. By leveraging the Management of Energy Infrastructure Integration & Related Regulations, PT SEI can seize business opportunities and new sources of revenue, such as carbon credit trading. The International Renewable Energy Agency (IRENA) [10] suggests that the preferred approach for PV waste management is to sequentially reduce, reuse, and recycle. Solar energy technology has significantly advanced and become more affordable. By reducing reliance on outdated technologies and utilizing the latest ones for installations, the cost of revenue can be reduced while maintaining energy production. IRENA also acknowledges the existence of a market for used solar PV materials, which can be pursued for its business potential. As for recycling, there is currently no technology available to recycle the main components of solar PV, particularly solar modules, so the author is unable to quantify this aspect. Similarly, when it comes to structural integrity and safety, compliance with regulations in these areas aims not to enhance business opportunities but to protect against potential expenses. The author conducted a valuation due to the growing stakeholder awareness of Environmental, Social, and Governance (ESG) factors in investment activities. The Value Driver Approach (VDA) had a 32.53% influence on the enterprise value of PT SEI, although results may vary depending on the model used. Careful examination is required when applying the relative valuation method, as finding identical companies for benchmarking is challenging. PT SEI operates in the renewable energy field and hopes to see more companies joining this sector in the future.
The valuation of PT SEI considered future projected cash flows, including uncertain elements influenced by the VDA. Using more efficient solar panels to reduce the cost of revenue may increase cost efficiency, but local content regulations may conflict with this