DCF Model Improvement Scheme Based On ESG Perspective

With the improvement of the concept of national investment and the proposal of China’s double carbon target,investors pay more attention to the social impact of investment targets,and the ESG performance of enterprises has increasingly become an important factor affecting the value of enterprises.In this context,ESG-themed financial products are constantly emerging,which has triggered more and more investment demand.However,due to the existence of positive and negative external effects,the estimation results calculated by the existing DCF model are quite different.Therefore,it is of practical significance to study the improvement of DCF model based on ESG.In order to improve the deficiency of DCF model,this paper combines Fama and French(1993)to take external factors into account to improve the three-factor model,making the estimation more accurate,and accordingly designs the improvement scheme of DCF model.Specifically,firstly,it sorts out the influence of ESG factors on enterprise value in the existing literature,which provides a theoretical basis for the improvement of the three-factor model;Secondly,the paper puts forward the improvement scheme of equity capital cost in the weighted average cost of capital,and makes an empirical test on the improved model with the data of China.Finally,taking Midea Group as a case,the improved discounted cash flow method model is used for valuation to verify its rationality.The results show that:(1)Through literature research,it is found that there is a significant positive correlation between ESG performance and enterprise value,and it is reasonable to improve DCF model based on ESG perspective.(2)Through empirical analysis,it is found that the variables of the improved three-factor model are significant at the level of 1% significance,which is more powerful and scientific than the existing asset pricing models and three-factor models.(3)By taking Midea Group as a case study,it is found that the improved discounted cash flow method model is used for valuation.The results show that the deviation of stock price estimated by the improved three-factor model is 45.3% lower than that by the asset pricing model,which verifies the effectiveness of the model.By improving the DCF model based on ESG,we can get the following enlightenment:(1)From the perspective of financial institutions,in order to make the valuation more accurate,financial institutions need to take the ESG performance factors into consideration when valuing enterprises to increase the accuracy of valuation.(2)From the perspective of enterprises,while making business decisions,enterprises should regard ESG as an important factor to improve the rationality of enterprise decision-making and improve the safety margin of enterprises.(3)From the perspective of regulators,the government can guide investors and financial institutions to evaluate DCF model based on ESG,so as to guide enterprises to perform better in ESG,thus increasing their contribution to the environment and society.